INTRODUCTION

Although online video entertainment dates back to the mid-1990s, its revenue models, market structure, and programming content continue to evolve. Driving these changes have been dramatic technological advances, accompanied by rapid broadband Internet adoption, from about 3 percent of households in 2000, to about two-thirds of households only a decade later (Pew Research Center, 2011), and by a growing migration of consum­ers from offline to online media delivery systems.

In this chapter we address some broad questions about this industry to provide a framework for thinking about its economic future. Has Internet distribution of video entertainment created real economic value for consumers, relative to established ‘offline’ media? How are its market structure and revenue models evolving? How does Internet entertainment programming differ from offline media? While our answers are necessarily incomplete, patterns of market organization, income sources, programming content, and other characteristics of this industry have now emerged.

For our purposes, we consider online video entertainment to be the streaming or downloading of videos to a personal computer or other Internet-connected media device. Our main focus is on professionally produced content, but user-generated video is a remarkable part of the online video entertainment landscape, and is also part of this study. Video games and music videos are an important part of online commercial entertainment as well, but their online business patterns are distinct from those of online video. We thus focus on television, movies, and similar forms of video entertainment, or what has been widely regarded as the ‘over-the-top’ (OTT) video industry. Finally, our geographic focus is on the United States, although we recognize that Internet technology fells international boundaries, and that parallel changes to those in the USA are occur­ring in many other countries (Fontaine et al., 2010; Simon, 2012).

A number of scholarly works on the economics of online media provide a founda­tion for this chapter. Among earlier works, Owen (1999) addressed the economic and technological potential of the Internet for television delivery. Shapiro and Varian (1999) discussed how firms could utilize economic and technological advantages of digital technologies, including the Internet. Several authors contributing to a volume edited by Kahin and Varian (2000) discussed economic and legal aspects of Internet media deliv­ery. A Harvard Business Case (Eisenmann and Brown, 2000) identified basic economic characteristics of online content providers and how they could potentially create value for consumers. A National Research Council (2000) report, The Digital Dilemma, ana­lyzed the economics and technology of the Internet from the standpoint of copyright and other government policy questions. Among more recent works, several edited books, notably Noam et al. (2004),¹ Gerbarg (2009), Noam (2008) and Gannes (2009) have addressed the emerging technologies, economics, and content of Internet television and

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video, including the economics of peer-to-peer (P2P) file sharing. Several recent Harvard Business Cases (e.g., Yao et al., 2008; Elberse and Gupta, 2010a, 2010b; Brochet et al., 2012), as well as Screen Digest and publications by SNL Kagan Media Research and the Federal Communications Commission provide extensive data and insightful discussion of economic and technological features of Internet television in a business or regulatory context.

We begin in section 22.2 with a review of the US-oriented history and current state of the online video industry. In section 22.3 we turn to the subject of value creation by comparing the economics and technology of online and offline media delivery systems. Then in sections 22.4 and 22.5 we explore empirical development of online video, first in relation to content aggregation and market structure, then revenue models and program­ming. In sections 22.6 and 22.7 we briefly discuss the industry’s economic future and some directions for research.

22.2