Internet Television
The Economics of Webcasting
By D.M. Schwartz, Jim Newcomb, Leonard Kain, Sue Ann von Kaeppler, and Abe Matar.

Draft dated 14 March 2000

Overview
According to many industry sources, high bandwidth connections is one of the Internet's fastest growing segments. By the end of this year, it is estimated that there will be over 4 million connections at 300 kbps (300,000 bits per second) or higher, worldwide. Each of these connections represents at least two actual "viewers", for a potential audience of at least 8 million of the world's most affluent, influential, and technically oriented people. Most of this audience accesses the Internet from their homes, and the rest from their workplaces. The prevalence of T1 connections to corporate facilities is the reason for saying "at least" 8 million viewers, since every employee in a local area network served by a T1 connection may be considered an audience member, albeit not simultaneously. At bandwidths of 300 kbps and higher, digital video becomes a practical media on the Internet. For organizations considering becoming webcasters to reach this audience, the primary issue is cost versus benefit. The main costs include facilities, content, and bandwidth fees. The benefit is increased revenue (or contributions in the case of non-profit organizations). The increase in revenue may be direct to the webcaster for Internet advertising on the Webcast channel, or indirect, in the form of increased sales at a retail outlet.

Webcasting Facilities
Like conventional broadcasting, webcasting facilities can range from the simple to the complex. At the low end are Webcast plants that are little more than a PC full of digital video clips set up as a Web server, hosted by an Internet Service Provider. A high-end facility will include a live video studio, a production department, an equipment rack full of servers, and its own Internet backbone connection. For the purpose of the hypothetical business models presented below, present day space leasing costs, bandwidth pricing and staffing costs in the San Francisco Bay area are used.

Webcasting Content
The digital video programs offered by an Internet television station can be identical to programming on broadcast television, provided that the webcaster has permission to re-broadcast them on the Internet. Movies that are out of copyright can be Webcast without any permission. Video programs and movies that have never been distributed in conventional channels may be Webcast with their owner's permission. Then, there is content created specifically for the Internet.

Today, most of the original video content distributed by downloading or as pay per view on the Internet is in the adult entertainment category. As sports organizations become more Internet oriented, their games and background content will probably become a significant percentage of Internet media content. Educational or corporate training materials are already on the Internet as Web pages and downloadable text. Distance Learning and Learning on Demand can both be accomplished effectively with video. Direct marketing videos, generally known as infomercials, are becoming more common on the Internet every day, with real estate virtual tours leading the way. Although the major news gathering organizations that dominate the airwaves today have a limited Internet video presence, this is bound to increase. More importantly, as thousands of Webcast channels go online, video journalists will have more non-mainstream outlets for their stories.

Pre-existing media content requires minimal processing, or authoring, before it can be Webcast, and so has minimal handling costs associated with it. Original video content that takes full advantage of the interactivity of the Internet has substantially higher authoring costs associated with it. Although the sky is the limit when it comes to authoring intense interactive content such as videogames, a rough estimate of the additional costs of interactive video versus non-interactive video is about a one hundred percent premium, assuming efficient authoring tools and staff that knows how to use them.

For the purpose of the hypothetical business models presented below, content costs are based on our own experience in buying media, producing new media, and converting existing media for use within Internet television.

Bandwidth Cost
Before any bandwidth charges are incurred, the Internet TV server must be placed on the Internet. If the server will be located in your own facility, and you are not already hosting a Web site, you will need a router, a csu/dsu, and other interconnect equipment. If this is a first-time installation of an Internet server, then there will be charges for setup of the dedicated connection from a local ISP (presumably one located on the Internet "backbone" or main line), and the phone company's local loop charges. Once the connection equipment and service has been installed, it must be supervised and maintained by competent personnel. Scalability of the Internet connection must also be considered. If a T1 line is used to make the connection to the Internet, bandwidth can not be increased beyond 1.54 megabits per second without installing a second T1 line and additional interconnect equipment.

The alternative to owner-hosting the Internet TV server is to contract with a company that specializes in providing Internet hosting services in a shared facility, referred to as "co-locating". Co-location hosting companies offer a state-of-the-art facility, with highly redundant Internet backbone connectivity, climate-controlled space, an uninterruptable power source, 24x7x365 network monitoring, and best of all, virtually unlimited amounts of bandwidth, on demand. This allows the webcaster to start with a small amount of bandwidth, and to increase the bandwidth at any time, without any additional equipment or local loop line charges.

The price for server co-location is approximately $400/month. This is the rack space "real estate" cost. In addition, bandwidth usage is sold per 1Mbps (one megabit per second). Each 1mbps of Bandwidth is approximately $950 per month, and can support about 3 concurrent video streams. A range of price structures is available, from "pay as you go" to "fixed block" purchase plans. Since time of day is a factor in Internet backbone bandwidth pricing, off-peak loading to remote caches in local markets can reduce costs.

Business Models
While it is difficult if not impossible to predict how real business operations will perform, the following hypothetical cases may serve to illustrate the general feasibility of Internet television in a variety of applications. Given the rapidly changing nature of the Internet and technology itself, these examples should be considered perishable. None of the following represent actual businesses.

Case 1: Video on Demand
A producer/distributor of Yoga videotapes aimed at the health conscious consumer is presently making VHS format tapes, duplicating them and marketing the tapes via a Website. The Yoga site has e-commerce support so consumers can buy online with a credit card. The tapes are shipped via UPS or US Mail. In this case, the object is to increase revenue by selling more videotapes and to add three new sources of revenue; pay per view yoga videos, embedded Web page links to second party e-commerce sites and video advertising of second party products that are health oriented.

The content on this YogaTV1.com channel consists of free video programming on health and fitness topics, pay per view Yoga video clips that average 5 minutes in length, infomercials averaging 20 minutes in length, and 30 second commercials. During free video playback, a commercial is shown every 10 minutes. At start-up, YogaTV1.com has 48 hours of free content in which each program is repeated on a typical cable TV channel rotation schedule. If a viewer chooses to watch all 48 hours of free content, that viewer will see 288 commercials during the 48-hour rotation.

In addition to the free programs, YogaTV1.com offers an online library of 200 instructional Yoga video clips on a pay per view basis. These video clips were previously produced for sale on VHS tape, and their cost was expensed prior to the Internet television project. To keep its proprietary content fresh, YogaTV1.com produces 6 new pay per view video clips each week, adding 300 clips per year to its library. New free video programs are added at the rate of 2 hours per week. One hour of second party infomercials is available on the site for free viewing. Each week, one of those three infomercials is replaced with a new one.

YogaTV1.com has a facility based on a Level 1 Imon.comTV Instant Internet Television package, at a cost of $35,000. In addition, they purchased a PC configured as a digital TV production suite for $8,000, a Mini-DV camcorder for $2,500, a TV lighting package for $1,000 and a tripod for $500. No costs are given for studio space or workspace, as the existing offices of YogaTV1.com are sufficient.

Production costs for the 2 hours of new instructional yoga video clips each month (twenty-four 5-minute clips) are $5,000. A contractor, using YogaTV1.com's equipment and facility performs this work on a part-time basis. The 48 hours of free programming material had a one-time acquisition cost of $5,000. Over the course of the first year, another 100 hours of video will be acquired at a cost of $12,000.

The cost of Internet bandwidth to YogaTV1.com is $7,000 per month for a guaranteed 1 megabyte per second of data output; enough to support 20 simultaneous individual video feeds from the YogaTV1.com server.

Based on the numbers above, YogaTV1.com spent $52,000 to get to the point where they could begin webcasting. Then, each month they spend $16,000 to operate their station. (7,000 + 5,000 +1,000 +20% overhead) Then, an additional $10,000 per month is spent in advertising on the Internet at health and fitness Web sites. So, in the first year YogaTV1.com spends a total of about $364,000. Note that in the pro forma P & L statements below, the hardware is amortized over three years.

On the revenue side, YogaTV1.com generates four revenue streams: pay per view, infomercial fees, video ads, and e-commerce link fees. The pay per view revenue is $720 per day, every single day of the year, for a total of $262,800 ($0.50 for a five-minute video clip * 5 users * 12 showings per hour * 24 hours * 365 days). This figure is based on the assumption that, on average, 25% (5 of 20 streams) of the station's Webcast capacity is utilized by pay per view.

The second revenue stream, infomercials, yields $144 per day, for a total of $52,560. This figure is based on the assumption that one infomercial is always playing to one viewer, and that the infomercial advertiser will pay $2 each time their program is shown ($2 * 1 user * 3 showings per hour * 24 hours * 365 days). On average, the infomercials use 5% (1 of 20 streams) of the station's Webcast capacity.

The third revenue stream is video ads that are shown in the course of free video programs. Assuming that free programs will account for 70% of the usage of the station, 336 viewer-hours per day are subject to a video ad burden of one ad every 10 minutes. This yields 2016 ad slots per day. At $0.25 per 30 second long ad, this amounts to $504 per day, totaling $183,960 per year. It is worth noting that from the advertiser's point of view, this is a premium price to pay for a 30 second commercial, given that only a single person is watching it. Put in ad industry terms, the rate is $250 per thousand. YogaTV1.com justifies this price by pointing to the quality of the audience, the ease of targeting, and the ease of measuring the results based on click-throughs.

The fourth revenue stream is from fees paid by Web site owners who want their pages to pop up when the viewer clicks the "Visit Website" button, beneath the video screen. YogaTV1.com prices these embedded Web address placements at $0.05 per click-through. Like the video ads, these placements are only available during free programming, not pay per view or infomercials. Infomercials have in effect pre-paid for their click-throughs with their $2 per showing payment. And, YogaTV1.com has decided that pay per view video clips will be commercial-free in all respects. During the 336 viewer-hours of free video per day, an average of 2000 click-throughs occur, generating $100 per day, yielding $36,500 per year.

All in all YogaTV1.com's revenue is $535,820 in the first year, for a gross operating profit before tax effects of $206,420. This represents a 39% gross margin.

Pro Forma Financials for Case 1

Video on Demand

One time Cost

Imon.comTV                                    35,000
PC/Digital TV Suite                             8,000
Mini-DV Camcorder                             2,500
TV Lighting                                        1,500
Purchased Programming (48 hrs)           5,000

One time Costs                                52,000

Amortized 3 years                      =    $17,400/Year

Annual Recurring Expenses

New instructional clips
2 hrs x $5Kx12 Months                =    60,000

Additional 100 hours of
purchased material                     =    12,000

Cost of bandwidth
$7Kx12 months                          =    84,000

Overhead $3Kx 12 months           =    36,000

Advertising $10k x 12 months      =    120,000

                                                    312,000

Video on Demand

Revenue model        Annual $         Comments

Pay per view           262,800          $720/day

Infomercial Fees       52,560           $144/day

Video Ads              183,960           $504/day

E-commerce Fees     36,500            $100/day

                            535,820

Income Statement - Annual

Revenue                                  535,820

Recurring Annual Expense         (312,000)

Amortization of one time costs
(3 yrs)                                     (17,400)

Operating Profit                       206,420    39% 

Case 2: Cable TV Extends onto the Internet

A regional cable TV operator with 61-channel analog local facilities, decides to try out webcasting from one station in a suburban town of 150,000 people, in which 40,000 homes have the cable. The cable plant does not support cable modems or any other digital delivery system. The suburb is in a metropolitan area of 2 million people. Of that metro area population, 20,000 residences have high-speed Internet connections to their homes via cable modems (from a competitive cable TV company) or DSL (from the Phone Company). Within the metro area are the regional offices of 100 Fortune 1000-class corporations, all of who have at least one T1 Internet connection. The corporate LANs are used by a total of 25,000 employees.

The cable TV company's new Internet television station, Channel21TV.com, is based on a Level 3 ImOn.comTV package, plus a second ImOn.comTV expansion server supporting a total of 400 simultaneous streams. This webcast system cost $142,800, which is being amortized over 3 years. Internet bandwidth is block-purchased for $75,000 per month. All of the content on Channel21TV.com is free programming. All of the revenues are derived solely from an ad bundle that provides advertisers video spots, banner ads and e-commerce links.

Program content varies widely on Channel21TV.com. During business hours on weekdays, the channel is targeted to businesses with programs including sales motivational training, management techniques, stress management, business news, financial markets analysis, industry trends reports and the like. Weekday mornings and evening, the programming is primarily local news, weather and traffic. On weekends, the programming is primarily local junior college level sports, local sporting events not carried by national broadcasters, and community events. Late night programming is classic movies, "underground" movies, local club live webcams, and music videos from local bands.

All webcast content is "canned", that is, all programs are stored on the servers, either because they were transferred from another medium, like videotape, to hard disk, or were captured from a live video feed to hard disk. Live real-time feeds can be webcast as they are stored, for instant replay. In any case, the fact that all programs end up stored, means all programs are always available as "video on demand".

The cost of Channel21TV.com's content is $500,000 in the first year. Six hours per day of content are "free" in the sense that those hours are identical to the local content produced by the cable company for its cable TV broadcast anyway, or are extended length versions of the same content. Ten hours are public domain content or content provided by authors in return for recognition. The cost of processing the public domain and donated content is $120,000 per year. The remaining eight hours are business-related content purchased specifically for use during weekday business hours. This content, some of which is from live satellite feeds, and some of which is sourced from videotape, costs Channel21TV.com $500,000 per year. Staffing and overhead cost $200,000, reflecting use of existing station resources, plus one part time staffer dedicated to the webcast project. The cost of advertising is $20,000 per month or $240,000 annually. Summing up, the annual cost to run Channel21TV.com is $2,007,600 including amortization of system cost.

Revenue is produced entirely from ad bundles. Each bundle includes one 30-second commercial in-line with the program content, like conventional TV, plus 5-minutes of e-commerce linkage, plus the exclusive banner at the top of each search page requested during the 5-minute period following the video spot. The way this works is, while a 30-second commercial is running, any mouse click on the video will link to the advertiser's Web site. Then, when the program resumes, the e-commerce linkage remains active for 5 minutes, at which time the next commercial spot runs. At any time within those 5 minutes, a click on the video will pause the program and open the advertiser's e-commerce Web site. When the Web site window is closed, the video program resumes itself. Also, every time the built-in search engine is used during the 5-minute period, the resulting search report will feature the advertiser's banner ad on each page of the report.

Channel21TV.com has priced its ad bundle in three tiers. Tier 1 ad bundles play during business hours on weekdays and on weekends from Noon until 8 PM. Tier 1 ad bundles are priced at $50 per ad bundle. There are 96 Tier 1 bundles sold per day, generating $4,800 per day. Tier 2 ad bundles play during the 6 hours per day of original local programming. Tier 2 ad bundles are priced at $20 per bundle. There are 72 Tier 2 bundles sold per day, generating $1,440 per day. Tier 3 ad bundles play during the 10 hours per day of public domain and donated content programming. Tier 3 ad bundles are priced at $10 per bundle. There are 120 Tier 3 bundles sold per day, generating $1,200 per day. Total daily revenues are $7,440. Annually, this amounts to $2,715,600.

Pro Forma Financials, Case 2

Cable TV on the Internet
System Cost = $142,800
Amortized 3 Years $47,600 / year
Annual Recurring Expenses
Cost of Bandwidth $75K x 12 months = 900,000
Cost of Program Content = 500,000
Advertising $20K x 12 months = 240,000
Staffing and Overhead = 200,000
Cost of Processing = 120,000
Revenue Model
  Annual $ Comments

Ad Bundles

Tier 1 1,752,000 4,800/day
Tier 2 525,600 1,440/day
Tier 3 438,000 1,200/day
Income Statement-Annual
Revenue 2,715,600
Recurring Annual Expenses (1,960,000)
Amortization of System Costs (3 Yrs) (47,600)
Operating Profit 708,000   26%

Case 3: Special Interest Video Magazine on                              the Internet.

An entrepreneur with a serious interest in motorcycle racing decides to operate an Internet television station exclusively for motorcycle racing fans. The website gateway to the station, MotorBikeWorld.com is openly accessible to anyone, at any Internet connection speed. The Internet television facility, MotorBikeWorld.comTV, is available via a link from the conventional website to subscribers, who must have a high-speed (384,000 bits per second, minimum) Internet connection. Subscriptions are available on a monthly or annual basis. The subscription rates are $6 per month or $36 per year. Each subscriber is guaranteed a minimum of 2 hours of video connection time per week. By the end of the first year of operations, there are 100,000 subscribers.

MotorBikeWorld.comTV was built up over a period of one year, starting with an ImOn.comTV Instant Internet TV Station Package 3 for $84,000, serving 200 interactive streams. By the end of the first year, another 1000 interactive streams were added, raising the system cost to a total of $266,000. The initial website design and programming cost was $200,000. The monthly bandwidth fee to serve 1200 simultaneous interactive streams is $240,000. The general and administrative expenses for the business are $1,700,000 per year. Advertising and promotional fees are budgeted at $4,000,000 per year.

The content of MotorBikeWorld.comTV is all motorcycle racing video, from dirt bikes and time trials, to road racing and drag racing. When the station first went on the net, it had 24 hours of stored video on its servers. Every week, another 2 hours were added to the video on demand library. The videos are mostly made by amateurs who submit them in return for an on-screen credit. Tapes of major races are provided by the broadcast rights owners for a fee. Annual Internet re-broadcast rights fees are budgeted at $200,000. Post-production costs are limited to cutting, encoding and authoring to enable the interactive features of ImOn.comTV. There is no live coverage of races. Every hour of video includes twelve 30-second ads, which become a permanent part of any video viewed and then stored by a subscriber for replay.

Looking at the second year of operations, revenue from subscriptions is $3,600.000. Then, there is advertising revenue. The total number of streaming video hours provided from MotoBikeWorld.comTV for the year is 10,512,000 (1200 * 24 * 365). This yields a total of 126,144,000 ad spots ("impressions", in advertising parlance). Each ad spot is sold as a bundle that includes 30 seconds of video advertising time, 30 seconds of click-through exposure for the advertiser's first e-commerce site while the ad runs, and then 5 minutes more of click-through to the advertiser's second e-commerce site, while the race video is on-screen. Advertisers also receive search engine results page banners for any searches initiated within their 5 minute long linkage period. The ad bundles are sold for $0.06 each, which is $60 per thousand impressions. This yields $7,568,640 in ad revenue, for a total gross of $11,168,640.

Special Interest Video Magazine on the Internet.
One time costs          
System cost              266,000  
Design & Programming              200,000  
One time costs             466,000  
Amortized 3 years       $155,330/Year  
           
Annual Recurring Expenses
Cost of bandwidth          
$240K x 12 months       =   2,880,000  
Advertising & promotional fees       =   4,000,000  
Administrative Expenses       =   1,700,000  
Internet rebroadcast rights fees       =     200,000  
            8,780,000  
   
Revenue Model- year two*    Annual $     Comments
Subscriptions            3,600,000     100K @     $36/Year
Advertising Revenue            7,568,640     126.1K @     $60/1,000
           
*First full year of operation
Income Statement- Annual
Revenue        11,168,640  
Recurring Annual Expense         8,780,000  
Amortization of one time costs (3 Years)           155,330  
Operating profit- year two and beyond         2,233,310        20%

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