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There are a number of ways to deliver digital video content, and delivering that content online is the most expensive of them all. How expensive? Dan Rayburn recently took a look at CDN pricing, and while it is on the downswing, it’s still pretty expensive. For example, a customer who buys 100 terabytes at $0.15 a gigabyte would have to pay around five dollars in bandwidth to serve 1000 views of a three minute video. That means they’d have to get at least five dollars in CPM (cost per thousand) advertising just to break even, and that doesn’t include storage costs.
My math isn’t what it used to be, and companies are understandably closed-lipped about their expenses, so please feel free to correct my numbers. Obviously corporations like Google (GOOG) and Apple (APPL) aren’t paying that much for bandwidth, but the expense is not insignificant, and they aren’t the only people paying — The Register pegs the cost to UK ISPs of delivering BBC iPlayer content at $1.30 an hour. And when compared to delivering video over broadcast, cable or satellite, it’s definitely more expensive per viewer hour.
The good news is that it’s getting cheaper — Rayburn’s numbers show a decrease since the last quarter, and data from TeleGeography shows long-haul 2.5 and 10 Gbps wavelength rental prices declining steadily over the last few quarters and are now nearly half what they cost only a year ago. Google, which deals in massive amounts of bandwidth, has purchased backbone fiber-optic lines to connect their server farms to each other and to peer nodes with ISPs in major metros.
Another problem with costs is the penalty for success — if everyone suddenly tuned in to watch Heroes online instead of on their televisions, NBC would wake up with one huge bandwidth bill hangover in the morning. There are ways to mitigate this popularity tax, such as 95th percentile billing. And of course, using peer-to-peer technology would make things cheaper for distributors, if not ISPs. Cable and satellite connections could care less, cost-wise, if everyone or no one is watching at any one time.
It’s also true that cable companies are facing a bandwidth crunch of their own — there’s only so much content you can pipe over the existing back end hardware and coaxial cable. IPTV promises to provide something of a solution, as not every channel would have to go downstream to every user at any given time. But that would require an infrastructure investment and therefore impact profit margins for near foreseeable future. The cable network has already been built, and therefore beyond maintenance costs there’s no overhead for cable companies.
The easy answer is simply to provide much lower quality video than you would get on cable. As I’ve argued in the past, quality is all about bitrate, and the higher the bitrate, the bigger the bill. To broadcast high definition content over the Internet would be incredibly expensive. Even standard definition bitrates typical of digital cable would probably make YouTube turn from profit to loss (or more loss) even at the $20 CPM rate the new video advertising is said to be making.
So while it’s certainly free and easy to publish video online, actually delivering that video to millions of users in high quality is inevitably more expensive than traditional broadcast. If the telecom companies manage to charge companies tolls for priority over the last mile connections, it could get even more expensive.