TV Always Has been Disruptive to Media Economics

It has been commonplace to note that "a bit is a bit" when thinking about why Internet Protocol has value for end users and app providers, and why IP turns all single-purpose networks into general purpose networks.

In terms of the protocol, it largely is true that a "bit is a bit," allowing any sort of content or communications to use a single network. For users, a bit is never a bit, however.

People don't really buy "bits," they buy function and value. They want to talk, send a text-based message, watch a video, create a document or share a song, video or article.

And there is an expectation about what each of those things "should" cost. People expect to use email without incremental cost. They might expect to pay a little to send and receive text messages or make and receive phone calls.

They have similar expectations about the cost of using a linear video subscription, over the air TV or radio.

And that is where the business model runs into the physics of media. Some high value apps require relatively little in the way of incremental network resources, once the network is built.

Texting, email and voice are prime examples.

Video entertainment is qualitatively different in its impact on networks than voice or messaging, while the price per bit expectations also are qualitatively different.

Simply, revenue per bit for messaging and voice can be as much as two or more orders of magnitude higher than for full-motion video or Internet apps.

Assume a fixed network ISP sells a triple-play package for a $130 a month retail price, where each component--voice, Internet access and entertainment video--is priced equally (an implied price of $43 for each component).

By some estimates, where voice might earn 35 cents per megabyte, revenue per Internet app might generate a few cents per megabyte.

A Netflix subscription generates no direct revenue for an Internet access provider, but could represent network consumption of a few gigabytes or more, depending on image quality.

Revenue arguably is zero dollars per gigabyte.

And that’s the problem with video: much of it does not actually represent revenue for the ISP. But even if it does, what is the revenue and cost per gigabyte?

Even if one assume use of one hour of standard definition video, and that product is owned by the ISP, revenue might be $1 to $2 per gigabyte, or small fractions of a penny per megabyte.

“The truth is all bits are not created equal,” says Nicholas Negroponte of the Massichusetts Institute of Technology Media Lab. “And people don’t appreciate that (the cost ot download) a book, a normal novel, is about a megabyte.”

By way of comparison, “a second of video is more than a megabyte.” Beyond that, there is the value of any app or device, such as a heart pacemaker, consuming only small amounts of data.

The value of those bits, and a consumer’s willingness to pay for the value represented by those bits, is highly disparate. “And so to argue that they’re all equal is crazy,” Negroponte says.

That is why video entertainment that shifts from point-to-multipoint networks (broadcast TV, broadcast radio, satellite TV, cable TV or telco TV) to unicast point-to-point is so disruptive, in a business sense.

There is only so much any consumer is willing to pay to watch video. There likewise is a sense of value, compared to price, for making phone calls or sending text messages or web surfing.

The point is that use of IP networks to deliver entertainment video is highly disruptive of media economics. That applies to content owners as well as network service providers.