The Economics of Webcasting
D.M. Schwartz, Jim Newcomb, Leonard Kain, Sue Ann
von Kaeppler, and Abe Matar.
dated 14 March 2000
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
Forma Financials for Case 1
PC/Digital TV Suite 8,000
Mini-DV Camcorder 2,500
Purchased Programming (48 hrs) 5,000
time Costs 52,000
3 years = $17,400/Year
2 hrs x $5Kx12 Months
100 hours of
$7Kx12 months = 84,000
$3Kx 12 months = 36,000
$10k x 12 months = 120,000
Annual $ Comments
Fees 52,560 $144/day
Statement - Annual
of one time costs
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.
Forma Financials, Case 2
TV on the Internet
Amortized 3 Years
Cost of Bandwidth $75K x 12 months
Cost of Program Content
Advertising $20K x 12 months
Staffing and Overhead
Cost of Processing
of System Costs (3 Yrs)
3: Special Interest Video Magazine on
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.
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.
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.
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 ½ 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.
Interest Video Magazine on the Internet.
x 12 months
& promotional fees
rebroadcast rights fees
Model- year two* Annual
full year of operation
of one time costs (3 Years)
profit- year two and beyond
ImaginOn, Inc. All rights reserved, except this document
may be copied and freely distributed, provided it
is whole and unedited, including this copyright notice.