Wanted: Models That Can Turn a Profit: Content providers seek a path out of the red

Internet.com (Feb. 7, 2001)

Where’s the money? As advertisers hit the brakes in the face of recession worries, that question is being asked across the Internet. But nowhere more so than among streaming media sites, where higher costs and low broadband penetration team up to make profits elusive.

Can advertising alone power the industry? The answer depends on who you ask.

“Yes, it is reasonable to expect that advertising will support [streaming media] as it has supported other media before,” says Dan Russell, director of national advertising sales at RealNetworks.

“I don’t see that happening anytime soon,” counters Malcolm McClaughlin, a streaming media analyst at the research firm IDC. “Advertising will obviously be a component, but I think more of what you’re going to see is the cable television type model.”

That model involves subscription fees for content like music and video. And while Russell has high hopes for advertising, he too believes streaming media companies should not box themselves in: “Companies that aren’t evaluating additional ways to monetize their streaming really don’t understand the power and opportunities behind streaming media.”

RealNetworks itself is a classic example of that. While the company’s 2000 profits were hard hit by the advertising and technology slump, its new subscriber-based GoldPass service has signed up 150,000 paying customers in its first five months of operation. The $9.95 a month service provides premium audo and video content, as well as software and other products.

“The incredibly rapid adoption of RealPlayer GoldPass opens up a new and extremely important business model for RealNetworks and our partners,” Richard Cohen, senior vice president, Consumer Division, RealNetworks, Inc. said in a press release hyping the service.

While the <I>Wall Street Journal</I>, with more than 500,000 subscribers, has been the sole Internet subscription success story, IDC’s McClaughlin and others believe a paid model has strong potential for streaming sites.

“You’re starting to see this with music,” says McClaughlin. “Content aggregators like Napster and MP3 are moving toward a portal model that allows them to charge graduated fees. Once they get enough really good content in place people will start to pay for this stuff.”

The catch lies in the timeline.

“I’m not certain streaming will give you any revenues directly — not today, not with the kind of quality we have,” says Gartner analyst Sujata Ramnarayan. “If you look at content sites that came up to deliver movies, they didn’t have good movies to begin with.

“Just because you have content and streaming, doesn’t mean you can make it,” she adds.

Even RealNetwork’s Russell admits that the ability to support video streaming sites with advertising remains far down the road.

“We see people spending between two and three minutes per video clip, 15 to 20 minutes per session, and when you’re talking about that limited viewing, it’s difficult to build substantial advertising,” he says.

The potential now, he believes, lies with Internet radio.

“Internet radio today has the opportunity to be 100 percent advertising supported, provided the content is appropriate and compelling and has the ability to bring people back,” he says.

Up until now, “content has been lacking. Now we’re starting to see compelling content and that’s bringing unbelievable numbers,” he adds, pointing to RealNetwork’s deals with the NBA and Hollywood.

Russell says advertiser interest in the right kinds of content is so high that his company sold out its inventory last year and began doing deals with other content providers to rep their inventory in order to satisfy clients.

But then there’s less of that inventory on Internet radio than on its terrestrial cousins.

“Streaming audio advertising has matured to a large degree, but compared to what happens in terrestrial radio, there’s a lot less of it,” explains IDC’s McClaughlin. “Up to about four minutes an hour, compared to 12. And on terrestrial stations they’ll hit you with a big block of ads at the same time as all the other stations, that doesn’t work online.”

The substantially higher cost of streaming versus static content sites adds substantially to the challenges of climbing out of the red.

“It is expensive today, there’s no doubt,” says Gartner’s Ramnarayan. “That’s something that needs to be addressed.”

Most expensive of all is live streaming.

“There is a difference technically in how the actual content is being served to multiple users in a live event,” explains Randall Luo, streaming media product manager at Akamai. “It’s a more involved process and has a different pricing structure.”

That one reason many Internet broadcasters are moving toward a caching system that is variously being called “simulive” or “pseudo-streaming.” It looks and feels live, but it’s not.

“It gets stored on your hard drive but you can start paying back that downloaded file even though the entire file hasn’t been downloaded yet,” explains Bryan Ma, a technology analyst at IDC. The advantages include better quality and less bandwidth.

At the moment, technology providers like Akamai are also shielding their customers from the real wildcard of live streaming, the fact that higher traffic <I>should</I> mean higher costs.

“That’s why we have a megabytes-delivered model to charge our customers,” explains Akamai’s Luo. “If we were to price on users we would have very high costs incurred by our customers.

“It’s not like you cap at 5,000 people and if you go to 5,001 it’s a whole new cost structure,” he continues. “It’s priced on the amount delivered.”

But even those numbers are substantially higher than cached content, which is why most content providers opt for on-demand systems.

“Live means you have to build an infrastructure that can handle the maximum number of viewers you expect,” says RealNetwork’s Russell. “On-demand allows you as a host to estimate and build out a system to match the audience you build over time.”

At the moment, RealNetworks estimates, 70 percent of streamed content is on-demand, and 30 percent is live.

“There’s not going to be that much live streaming for a while,” predicts Gartner’s Ramnarayan. “It’s usually done by Victoria’s Secret or someone like that as a publicity stunt rather than something people are actually going to pay for.”

Then again, beautiful models in sexy underwear may be <I>exactly</I> the business model that works.

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