Yesterday, Apple announced that shortly they will start selling HD quality movies for download from the iTunes store. While it sounds like a great idea, the business model is completely flawed and clearly the movie studios are living in a bubble. As I have mentioned in the past, how on earth can the studios continue to charge more for a digital download than a physical DVD?

I really don't get the thinking from the studios when they think they can make a business model out of charging $19.99 to download Quantum of Solace from iTunes when the average price to buy the physical DVD, from retailers like Amazon, is $16.99.

With digital downloads, studios don't have to pay to produce the DVD or any of the packaging. The bandwidth cost to download a two hour movie costs pennies and online promotion of digital content is a lot less expensive than other forms of marketing. Yet even with all those savings, the studios charge more for digital downloads. While one could say this is an iTunes issue, it's not. Looking at CinemaNow or any of the other online movie services and you'll see that digital movies cost between $3-$5 more than buying the actual DVD.

Why is no one questioning this? How can this be the future business model for the online consumption of entertainment? Many of us have waited a long time to get to the point we are at today
with broadband connections capable of getting movies and having
multiple devices to play them back on. Yet even with all the progress
we have made, studios will keep the business models from being
successful. Part of me really wants to see all the studios fail just so they learn their lesson. I know it would not be good for the online video industry but studios continue to run their business on one simple principle – greed.

For over four years now I've been a happy customer of Verizon's for their FiOS broadband service, deployed to my home. In that time, I'd be hard pressed to find any other technology product that has made as bigger of an impact on my consumption of online video. For all the talk of capping by ISPs and throttling of bandwidth, I can't help but think that none of this would be an issue if everyone had the ability to get Verizon's FiOS service. Last year I wrote that "Verizon's FiOS Service Will Change The Game For Video Delivery" and I think they already have.

Whenever discussions take place about ISPs capping users, it's always from ISPs and networks that have broadband services that were not built to truly handle video. Comcast and others never anticipated that their network would have to scale as quick as is now required or have to carry as much video as they are today. Verizon's FiOS service was built for video from day one, with a focus on pushing as many high-quality bits as possible directly over fiber.

Five years ago I had a 10MB connection and since then, Verizon has upgraded the speed to 20MB at no additional cost. I pay Verizon $95.99 a month for broadband, TV and phone combined and would never think of cutting my service. You see lots of folks talking about cutting cable and using the Internet for watching videos but I have to wonder, are any of these folks paying for TV and Internet from the same company? Because if you are, then your TV service is not $75 a month with the discount you get for multiple services. With FiOS, I think paying what averages out to be $32 per service, per month is quite fair.

I know that many folks can't get FiOS where they live so it's not an option for them today. But as Verizon continues to get more and more customers each quarter and as more competitive services like AT&T's U-verse get adopted, the whole debate of capping users should not be a big deal in a couple of years. Right now, many want to get upset over the capping that ISPs are doing but I have yet to hear one person who is complaining because they have gone over their cap. In addition, many of the ISPs have said that they will raise the caps over time as the market demand increases. I also wonder how many of those users complaining about capping can get FiOS but haven't. If they can get it but haven't, then why are they complaining about capping?

I've been writing about FiOS for a few years and still, the service amazes me. I've never had a single outage, the quality of the TV signal beats any cable company hands down and believe it or not, the support Verizon provides for FiOS is excellent. You don't get some phone company tech person on the line, you get someone from the FiOS group who knows the hardware, the service and even how it works with Mac users. It's no wonder Verizon continues to see good subscriber growth quarter after quarter.

For all the talk of how far behind the U.S. is with broadband, I think a lot of that is hype. The average broadband speed in the U.S. is 3.2Mbps. That's not slow and while it's not enough to stream HD movies to the TV, no one has a content service today that has a real business model to even support it. The problem is not the technology or the infrastructure, it's the business model. If we use the average broadband speed of 3.2Mbps, which means every content owner could encode their content for at least 2Mbps. So why aren't they? Simple, the business model does not work. Blame the business model, not the broadband infrastructure.

The bottom line is that FiOS is a product we've been waiting on for years and for many, it is here today. The service works as advertised, it's affordable, and it has no limitations. Not to mention, while I have the 20Mbps package, it's capable of up to 50Mbps if you want to spend more money or need it for a business location. For those that can't get FiOS in their area, I feel for you. But keep in mind one of the biggest hurdles Verizon has faced in their expansion is from the cable companies who have tried to do everything in their power to make it hard for Verizon; clear proof that the service really is that much better than what the cable companies offer. As Verizon continues to win more franchise licenses in more towns, FiOS will become available to a wider audience. When that time comes, get it, you won't be disappointed.

While Netflix is not yet giving out a lot of details on their costs associated with their streaming video service, they have given out enough data for us to have a pretty good idea of their costs when it comes to their streaming delivery costs for the Xbox 360 and other devices. Here's what we do and don't know and how it all breaks down.

We know that the average encoding rate for video streamed to the Xbox 360 is about 2000Kbps. That means one person watching a two hour movie would transfer roughly 1.8GB of data. For high definition movies, the average encoding bitrate is around 3200Kbps and one user would transfer about 3GB of data. Based on the high volume of movies Netflix is doing each month, they are getting a very good rate in the market. I estimate they are paying on average about $0.03 per GB delivered across Limelight and Level 3 and potentially have even a slightly lower rate.

Based on the three cents per GB assumption, that means it would cost Netflix about $0.06 to deliver one SD movie and $0.09 to deliver one HD movie. Those numbers would be about 25% lower if the length of the movie were ninety minutes instead of two hours. It would also be a little lower or higher depending on the exact bitrate since some movies are streamed higher and some lower and Netflix only has about 400 movies available in HD. Taking all that into consideration the average cost to Netflix to stream to the XBOX 360 is about five cents per movie. Streaming to the PC is a lot cheaper, about half that cost, as the bitrates are much lower.

Based on those numbers, their streaming offering looks like it would save them tons of money and make them a lot more profitable since Netflix spends about 78 cents out and back for standard pre-sort first class mailing of their DVDs. But the one problem is that these streaming costs do not yet include the licensing costs from the content owners. It's the costs associated with licensing the content that really makes or breaks their streaming service, not the cost of bandwidth.

I don't know what Netflix is paying to license content and many of their licensing deals are all at different prices. In other online video offerings I have seen content owners charge a one-time flat fee per video, a fee each time the video has been watched, a one time licensing charge for a specific number of plays or many various other licensing models. I've seen licensing costs as high as $4 per movie, per play, and I've seen pricing on the other end of the spectrum at a few pennies per play. That's why many of the content licensing deals Netflix has in place are a one time cost no matter how many movies are watched. While that works great for Netflix today, most of those licensing deals are not with major studios for first-run content. It's also interesting to note that Netflix's recommendation algorithm takes into account which movies have a cheaper licensing cost and makes those movies show up as recommendations more often.

One of the major reasons that Netflix does not have a lot of new content in their streaming offering is the fact that the licensing costs for new content is so high. Studios are still greedy and Netflix simply can't afford to pay the costs associated with first run movies.  Netflix's CEO had said many times that they are going to spend a lot of money this year to license content where the costs are "reasonable". That comment goes to show that much of the newer content is simply out of reach for Netflix, as well as others and that studios simply want too much cash. Over time, you would think the studios would get on board with this and license some newer content faster, but so far, they don't seem to want to. At some point, one of the major studios is going to break from the pack and give it a shot and test the waters, making it affordable for Netflix to offer some newer, first-run content. But right now, the studios think they don't need Netflix.

I would not agree with that, but looking at the penetration rate Netflix has, it is very small. Netflix has ten million subscribers and while they and Microsoft said last month that "1 million Xbox LIVE Gold members have downloaded and activated the groundbreaking Xbox LIVE application from Netflix", they didn't say if those are paying Netflix members. With 48 hours free trail cards showing up in Xbox 360 games, we don't truly know how many paying customers are using the service. And as of January of this year, Microsoft had sold 11.2 million Xbox 360 consoles in North America. (Source: NPD) So if the penetration rate is only one million today, it's going to take years before it truly scales. And that's really what the movie studios care about, a large audience. I think it is short-sided thinking on the studios part, but I don't think anyone would disagree with me if I said it's not the first time the studios didn't get it.

But the question remains, what is the total cost to Netflix to stream a movie? For some content Netflix has today, it's clearly cheaper than mailing out a DVD, but for other content, it's still more expensive based on the licensing costs. And with all the talk lately of Netflix wanting to some day offer a streaming only service, probably this year, running the numbers for such a service does not make a lot of economical sense. Lets say the average cost to stream and license a movie is $0.50. All it takes is one user streaming ten movies a month and Netflix's cost is five bucks. And with their cheapest DVD offering with unlimited streaming being $8.99 a month, how much can Netflix realistically charge for a streaming only service? Maybe $5.99? So far, the economics of a streaming only service don't work unless Netflix can get very good licensing terms and hope that users who don't stream a ton of movies each month make up for the ones that do. At this point it's a guessing game, although Netflix is already compiling some great data on what users are doing with streaming and what their consumption habits are.

For now and some time to come, Netflix's streaming service is not going to generate revenue. Yes, Netflix does expect it to help retain customers and if that is all it does, that alone is worth the cost. With Netflix's churn being 4% last quarter, anything that helps keep churn down from their core business is very valuable and can generate a return. While Netflix said it spent around $40M for their online video offering in 2007 and most folks I spoke to said they thought Netflix spent twice that last year, clearly it appears as if Netflix is ramping up to spend close to $100M in 2009.

The key thing I think people are missing is that Netflix's streaming service is not a substitute for their DVD business; it's a complement to it. Over time, many years from now when broadband enabled TVs and Blu-ray players get some install base, things may change. But for the next few years, Netflix is not going to make money from their streaming service unless the financial benefit comes as a result to their core business.

That said, what Netflix is doing is exciting and I love the streaming service on my Xbox 360. Netflix is laying the ground work for the future and it's going to be really fun to see where they take this service a few years from now. We're all keeping a close eye on the financial impact streaming movies could have on their overall business. Studios, give them a chance! License some decent content already.

Image Credit: Soft-Co.com

While most of the vendors in the online video industry has fared ok in these economic times, vendors selling broadcast video based hardware are taking a beating. While many of these vendors said they saw a big decline in sales in Q4, the real impact has been taking place nearly all of last year. Combined with the aggressive-competition driven pricing pressures, companies like Sony, Panasonic, Avid and Thomson are really feeling the pinch.

Today, many broadcasters are looking for low-cost software based solutions that cost a fraction of their existing equipment. As a result, the broadcast equipment makers have all been required to look at alternate potential markets where they can divert their energies to make up for the losses, especially the prosumer and non-broadcast enterprise segments.

In an environment where the next 12 months will have several large broadcasters optimizing their assets instead of new investments, these large companies will have to diversify their efforts further to reach out to newer markets or re-innovate their business models around services and upgrades.

Companies like Thomson are currently looking at selling off their Grass Valley business and many of the other vendors can't be too far behind. In Thomson's year end report, they stated that the decline of the Grass Vally business was due to conditions that were worse than expected and that they have already started the divestment process for the Grass Valley unit.

While the retail price on many video based hardware units has come down, it's still a big CAPEX expense that many companies simply can't afford with the smaller budgets. This is not only the case for broadcast video hardware, but also for webcasting based hardware, video conferencing gear and many other pieces of hardware in the video ecosystem. This is going to be a tough year for the hardware manufactures and we can expect to see more companies like Thomson get out of the broadcast hardware business.

Vidya Nath, Senior Industry Analyst, Digital Media, Frost & Sullivan contributed to this post.

I'm happy to announce that the program agenda for our new one day show, Content Delivery Summit, taking place Monday, May 11th, in NYC is now complete. We'll be updating the summit website this week with the agenda and speakers and I have included the program below.

If you use CDNs to deliver your video and are a customer of one or multiple CDNs and are interested in speaking at the show, please contact me ASAP. If you are a vendor and want to suggest one of your customers as a speaker, better contact me right away. We have around 50 speaking spots at the show and more than half of them are already filled.

Content Delivery Summit Agenda:

The CDN Market Grows Up: Here Come The Telcos
In the past twelve months we've seen additional telcos like Deutsche Telekom, TeliaSonera, Pacnet and others enter the CDN market. What used to be a service only offered by pure-play CDNs is now starting to see a serious push by the major carriers with varying CDN strategies. But with the size of the video delivery market still small, what's in it for them? Can they truly achieve cost savings and pass them along to customers if they own the network? Can they focus enough to understand what it takes to run a CDN that does more than just push bits? Hear answers to these questions directly from the carriers and learn whether or not they plan to acquire smaller CDN players to speed their time to market.

CDN Best Practices: From Contracts To Total Cost Of Ownership
As IP-based video traffic grows, the cost, quality, and operational issues associated with maintaining effective delivery continue to present a challenge to content owners. This session will discuss some of the nuts and bolts best practices for managing video content delivery today, and how best to handle it going forward in a world of traffic growth, changing vendor landscapes, and new consumer viewing platforms. Learn how to evaluate the total cost of ownership, the ways in which media formats affect cost, and how operations and contracts can be best structured to suit the customer.

CDN Research Data: Market Sizing and Pricing Trends
This presentation will present the latest data on the current revenues for the video content delivery market as well as expected growth forecasts relevant to both a poor and robust economy. Attendees will also learn the current pricing points for video delivery services and hear about the market drivers and trends that will determine what customers pay for video delivery services in the future. There will also be an extensive Q&A session, so this is your chance to ask any questions pertaining to your CDN contract and pricing terms.

CDN Technology Impacts: HTTP, HD, Multi-Bitrate, and Live Broadcasting
With all the new and existing CDN technology in the market, which new features and functionality should you take advantage of? What's the value of multi-bitrate delivery, and what impact can it have on your content business? Will new services like HTTP-based Smooth Streaming reduce your bandwidth costs and enable live events to scale to larger audiences? What exactly constitutes HD video, and what's the total cost of ownership for deployment? These and other questions will be answered as we break down when these technologies should be used and what real impact they can have on your online video business.

Monetization And Video Advertising: Waiting for the Tipping Point
For all the buzz about online video advertising, most content owners have yet to be able to turn their online video from cost center to profit center. Still, strong signals suggest that video monetization is around the corner, provided content owners don't pull back in today's tight economy. When will we reach that tipping point, and what direct cost and revenue impact will it have on the CDNs?

Enterprise CDN: Moving Past Consumer Applications
Many enterprise corporations reply on their own internal CDN for essential video business communications. But with that comes various unique challenges deploying and managing video inside the firewall. A host of IT considerations—such as network capacity, access control, tracking, and myriad hardware and software issues—can make the integration complex. In this session you'll hear directly from some enterprises who are having success today and learn what video applications are being delivered across their network. Hear how can you leverage your existing infrastructure and learn some of the pros and cons of a “build versus buy” strategy.

CDN Economics: Consolidation And Evaluation
Analysts have widely speculated that we're going to soon see merger and acquisition activity grow in the CDN space, but to date, little has taken place. CDNs continue to raise large amounts of VC money, and each quarter more CDNs enter the market. What are the current valuations for CDN companies, and where will VC money be directed in the future? What types of deals are being pitched to bankers, which ones are they having the most success selling, and what are the characteristics of the ones they are searching for. Come hear speakers discuss the current M&A and VC environment  and assess whether the economics of the CDN industry make it ripe for rapid consolidation.

The CDN Ecosystem: Moving From Bit Delivery To Media Management
Content owners are now demanding that delivery networks do more than simply push bits across the Internet. Other pieces of the content ecosystem that enable the capture, transcoding, and management of video are the true solutions that allow for the monetization of content. But today, far too many CDN vendors simply try to sell a technical service at the lowest price, and three or four vendors still own most of the market share. This session will discuss how the CDN market needs to evolve to address customer demands and will offer thoughts on how CDNs are working to address this demand.

Consumer Devices and CDNs: Opportunities and Challenges
With devices such as the Xbox, Roku, TiVo, and PS3—along with soon-to-be-released broadband-enabled TVs and Blu-ray players—consumers have more ways than ever to get their video fix. This means CDNs are delivering not only more content but higher-quality content. What's the long-term impact of these devices on CDNs, and what effect will adding more network capacity and scalability have on CDNs' costs? This session will discuss whether the proliferation of these devices might enable CDNs to generate profit faster by taking advantage of the economics of scale, or if it will only increase the cost to CDNs to grow and scale their network.

CDN Demos: Reporting and Analytics
One of the most frequent complaints by content owners is that most CDNs' reporting and analytics packages simply don't provide the data they really need. Many times these web-based reporting tools don't give out enough details on video consumption and typically don't provide the customer with much flexibility and opportunity for customization. Every CDN offers some degree of web-based reporting, but some offerings are clearly better than others. This special session will feature demos from different CDNs sho
wcasing their reporting and analytics offerings and will conclude with a Q&A session surrounding the topic of online video reporting.

The Future of CDNs
This wrap-up session will be an open discussion highlighting some of the growing trends in the CDN market and examining how the business of content delivery will change over the coming years. Does cloud computing have any real impact? Will all video delivery eventually become commoditized? Will enough applications be built in the ecosystem to support rapid monetization? Come debate where the market is going, where the real opportunities are and what the disruptors will be, good and bad, for the CDN industry moving forward.

About two weeks ago, StreamingMedia.com hosted a nearly 90 minute webinar with Rhozet on the subject of transcoding. The information presented was excellent and the slide deck Rhozet used has tons of info on many different aspect of transcoding with lots of technical details. We had hundreds of questions sent in by attendees and Rhozet spent almost 30 minutes answering dozens and dozens of questions.

If you want to know anything about the subject of transcoding, check out the on-demand archives of the webinar and download the slide deck from the presentation.

Cotendo, a newly formed CDN focusing on application delivery and dynamic site acceleration came out of beta this morning and launched their product offering into the market. I originally profiled the company back in October and since that time, Cotendo has raised a second round of funding in February for $7M bringing their two round total to about $10M. Backers include Sequoia Capital and Benchmark Capital.

While I would be the first one to say we don't need another CDN vendor to enter what is an already overcrowded market, Cotendo focus is not on video. While most other CDNs all want to fight over the same video business, Cotendo has developed a purpose-built CDN for app delivery, dynamic site acceleration, and a load balancing application for customers who have a multi-source CDN strategy. That's not to say that Cotendo can't delivery video, they are more than happy to handle HTTP based downloads, but they don't plan to target that business and aren't built for streaming or live events.

Cotendo is looking to address a segment of the industry that most CDNs aren't targeting today, app delivery, and a market that is only just starting to grow. The clear leader in the app delivery business is Akamai, which did a run rate of about $60M last year after doing $40M in 2007. The app delivery market is still very small, but has great potential for growth and has high margins, something very hard to come by with video delivery.

While Cotendo is well aware of Akamai's leadership position in the market, their expectations are pretty realistic. They plan to attack the "medium sized market" and go after strategic customers who understand the value of app delivery and small object caching. I really like their approach as they understand that for the type of content they plan to deliver, the real value to their offering is the software layer and not simply a bunch of boxes deployed on the network. Unlike video, app delivery and dynamic site acceleration requires a much more sophisticated level of flexibility and performance monitoring.