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The Dream of Streaming

21 May, 2009 By: Erik Gruenwedel


Movies and television programming delivered via the Web on an HDTV in 1080p resolution is considered by many the new Holy Grail in home entertainment.

The proliferation of digital video players from Roku and Vudu, Internet-enabled Blu-ray Disc players and stalwarts such as YouTube, Apple TV, Xbox 360, PlayStation 3 and TiVo portend a burgeoning consumer base eager to ditch disc for digital content.

Hulu, co-founded by NBC Universal and News Corp., has become the media darling for free repurposed entertainment. Users can watch repeats of favorite TV shows (often within hours of their network broadcast), select movies and trailers.

The site recorded 42 million viewers in March, according to comScore. Those figures were challenged last week by Nielsen Online, which said the site generated only 8.9 million viewers and actually lost viewers in April.

Scottsdale, Ariz.-based In-Stat said 40% of young adult U.S. households now view Internet video on the TV at least once per month. Within five years, the number of domestic broadband households viewing Web-based entertainment will grow to 24 million, according to In-Stat.

Then again, independent analyst Bruce Leichtman, in a survey, found that just 8% of respondents (including teens) watch repurposed TV shows online.

“It’s still the wild, wild West,” Rob Davis with Ogilvy Interactive told the New York Times regarding online audience measurement.

Show me the money

While the appeal of electronic distribution of video content is growing, is anyone actually making money delivering it? Or is electronic distribution more about establishing a beachhead in a market that has yet to be defined?

Edward Woo, analyst with Wedbush Morgan Securities in Los Angeles, doubts any of the standalone services — including Hulu — generate income, though he said some do produce revenue.

“My guess is that it’s still a small part of most companies’ revenue, and the investments they are making are based on goals to be a leader in the market when streaming does become a big business,” Woo said.

Les Moonves, president and CEO CBS Corp., whose network hits include the “CSI” franchise, “The Mentalist”, “NCIS” and “Two and a Half Men,” said he understood the Hulu fascination but hoped repurposed online programming wasn’t cannibalizing broadcast revenue.

“It’s a quandary we think about everyday,” Moonves said.

At a recent advertising summit, John Stratton, EVP and CMO with Verizon Communications, warned content creators that evolving technology could circumvent traditional distribution models, including subscription-based TV and VOD, and that they had better react accordingly.

“If customers find new ways to find content, habits will form and those [lower-margin] habits will be very difficult to break,” Stratton said.

Laura Martin, media analyst with Soleil-Media Metrics, said media companies walk a fine line giving away content online in an attempt to secure a future distribution channel.

“If you give away your premium content for free, you are basically hastening your own demise,” Martin told the Los Angeles Times. “There is a choice that companies have to make.”

Peter Chernin, president and COO of News Corp., said the growth in online video advertising on streaming sites showed promise with spots being sold for higher CPMs (cost per thousand viewers) than for network ads.

The online market

CBS recently switched broadcast nights for “Harper’s Island”, citing the program’s popularity via second-day streaming and playback on a digital video recorder (DVR). Andrew Lipsman, senior analyst with comScore, said he wouldn’t be surprised to see more networks move prime-time programming based on online popularity.

“There are some shows that certainly have more of a cult following or are just more popular online,” Lipsman said. “That opens up avenues to monetize a show’s audience through different channels.”

He said “Arrested Development” and “Family Guy,” if available online during their initial broadcasts, might have experienced extended life. Ironically, “Family Guy” did experience a rebirth on DVD, much in the way original seasons of “24” generated wider followings when released on packaged media.

The analyst said data tracking of online video ads suggested a high ROI (return on investment) compared to standard banner ads. He said that if further tests demonstrate the value of online video ads, increased dollars would flow to the medium.

“They are certainly promising,” Lipsman said.

Weighing the costs for streams

Netflix this year will reportedly spend about $100 million upgrading content selection (about 16,000 titles) for its Watch Instantly streaming service despite apparently being in no hurry to monetize the format.

CFO Barry McCarthy, during an analyst presentation, said Netflix viewed streaming as a value-added proposition to drive by-mail DVD subscriber growth. He said the subscription business to date greatly exceeded alternative online models, including pay-per-view and ad-supported.

“The big question around Apple and Amazon is not what are they going to do in the pay-per-view space, it is what are they going to do when they realize they are not being very successful,” McCarthy said. “And [theirs is] all new-release content. Something else is going on.”

Jason Helfstein, analyst with Oppenheimer & Co., believes that kind of thinking could become detrimental to Netflix when the majority of its streaming license deals expire in 2012.

“A large streaming catalog is necessary to drive gross margin expansion and drive down rising postage/packaging expenses, as well [to] secure [its] competitive position,” Helfstein wrote in a note. “The risk is that the studios either limit access to content for streaming, or alternatively, that the studios will charge more and hurt the company’s margins.”

The analyst believes the current recession and receding DVD revenue could persuade studios to pursue bigger margins in revenue-sharing agreements with rental companies, as well as higher licensing fees from streaming and VOD content providers.

Richard Doherty, director of The Envisioneering Group in Seaford, N.Y., said there is speculation Netflix’s streaming is being subsidized to give it a stronger negotiating hand with studios and other content owners.

“In that case, [streaming] is a loss leader to get to their end goal, which is to be the No. 1 video rental distributor,” Doherty said.

Cable VOD makes the most digital money, which last year totaled about $1.5 billion in revenue — about half the $2.9 billion in global revenue Blu-ray movies are projected to generate this year, according to research firm Media Control GfK International.

Bandwith a block for HD

Claims by Hulu and others about streaming content in high-definition, including 1080p resolution, should not be confused with Blu-ray picture quality, cautioned experts.

“Blu-ray has richer color depth than [streaming] can deliver,” Doherty said.

That’s only part of it.

Hulu, Xbox 360, Roku and Netflix all stream HD fare in lower 720p resolution, while TV.com and CBS.com claim streams in 1080p. Vudu warns consumers on its site that households must have a minimum bandwidth of 4Mbps to receive 720p or risk delays and skipping.

With the average U.S. broadband household receiving anywhere from 1Mbps to 3Mbps bandwidth, the ability to watch uninterrupted streams in 720p resolution, let alone 1080p, on a PC or HDTV is extremely limited, said Andy Parsons, SVP, industrial solutions business group, with Pioneer Electronics.

Parsons said a local cable provider offering 10Mbps bandwidth would have difficulty streaming content in 720p. A typical DSL connection offers 760Kbps (less than 1Mbps). He said streaming at 24 frames-per-second (or Blu-ray quality) becomes even more problematic at lower bit rates.

“I would be very skeptical they could provide Blu-ray quality in streaming,” Parsons said.

He said Blu-ray Disc, which accommodates 40Mbps just for video, offers 1080p/24 resolution due to 35mm motion pictures being shot at 24 frames-per-second. The BD player then converts the 1080p/24 signal for 1080i and lower resolution HDTVs.

“With that capacity, Blu-ray can afford to provide a lot of attention to the encoding of a signal and eradicating every last [imperfection],” Parsons said. “Streaming just doesn’t work like that.”

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