Mechanics of Webcasting for Profit

Now that a broadband connection to the Internet is used in more than 6 million North American homes, it is time to take another look at the business of making money Webcasting today.

While there are a few exceptions, virtually all of the revenue being generated by video on the Web is in the adult entertainment segment. This is no surprise to anyone familiar with how the videocassette recorder and videotape industry developed. Just as the VCR and camcorder grew out of the adults-only niche and became mainstream consumer products, so too will Web video. And, given the accelerated rate of technology deployment and acceptance now compared to 30 years ago, Webcasting for money will be mainstream much sooner than you might imagine.

While the ratio of adult to general video content will change dramatically as the Webcasting industry matures, the formats, infrastructure, methodology and economics will remain substantially the same. Understanding these factors is the first step to making Webcasting an integral and profitable part of any business on the Internet.

As in conventional television, video on the Web takes two basic forms, prerecorded and live. Live video Webcasting can be just like live broadcast television, where lots of people tune in to a specific program and watch it as it happens. This format is called multicast. Or, the video can be live and intended for one specific viewer, known as unicast. Unicasting can easily be two-way video, so the performer and the viewer see and hear each other.

Within the prerecorded category, there is video that can be viewed as it is sent to the user’s PC, known as streamed, and video that must be copied to a disk drive before viewing, called downloaded.

Multicasting to thousands of viewers is inherently more efficient in bandwidth usage than unicasting to the same audience. Streaming avoids the time-consuming process of downloading, but requires special software on both the sending and receiving computers.

The infrastructure required for live Webcasting simultaneously to everybody who has a broadband Internet connection is not yet in place. Estimates of when that capability will exist range from one to five years, depending on the analyst. There are several strategies for video distribution that maximize the accessibility of video, given the state of the Internet today. These strategies can be used together for best effect, or a single method can be used to minimize costs. In all cases, the goal is to get the digitized live video signal to the viewer as directly as possible, without excessive losses, which are experienced as dropped video frames or choppy audio.

The number of transport stages, referred to as nodes or links, will affect the quality of the video. The more direct the connection between source and viewer, the better. Unless the provider of the video content is itself an Internet service provider, the ISP will be the middleman between the video source and the viewer. And, unless the Webcast is entirely local, within one ISP’s customer base, multiple ISPs must handle the content. Getting the video to each ISP, without running into a bottleneck someplace becomes increasingly difficult as the logical distance between the source of the video and the viewer becomes greater.

Absolute “real” distance in miles is not the issue. On the Internet, New York City and Chicago are closer together than New York City and a suburb of Buffalo, NY. That’s because of the way the network is organized. The distance to consider for live Webcasting is not measured in miles, but in “hops.” Each hop is a link or node in the network. New York to Chicago can be one hop, while New York to some suburb of New York may be five hops, or more. For a Webcast at VCR quality, four hops is about as far as the video will go on the Web without losses. One way to work around this problem is to send the video up to a satellite and then back down, skipping all the hops in between main Internet destinations. Dedicated, leased data lines can also be used to bypass links in the Internet. Another way to deal with the logical distance limitation is to encode the video at a range of quality levels, so that more hops can be tolerated. While VCR quality video may start stuttering at five hops, a much smaller image at a lower frame rate can withstand 20 hops and still play smoothly.

When the source video is prerecorded, an additional method for optimizing video on the Web becomes available. Prerecorded video files can be distributed to leased storage sites close to major metropolitan areas, or even to the ISPs themselves. Then, when a viewer accesses the video, it is already nearby, much more likely to be within five hops. This method is variously known as “caching,” “edge distribution,” and “mirroring,” depending on the company offering the service. Live Webcasts are frequently recorded and then made available as archived video, taking advantage of edge distribution.

The economics of Webcasting in the adult entertainment industry can be considered two ways, depending on whether the Web video is itself for sale, or is being used to sell another product or service. For brevity’s sake, only the case of video itself for sale will be discussed here. This model applies to other industries, such as sports, travel, healthcare and training. Today, the premium video product for sale on the Web is live video, augmented by one-to-one text-based “chat.” The chat dialogue box provides the viewer with a means to communicate privately with the video performer. This form of live Webcast is typically priced at $6 per minute. Others may watch the same live video for no charge, at a much reduced image size and lower frame rate, without chat. The viewers watching for free are periodically solicited by banner advertisements to buy the pay-per-view version.

This combination of pay-per-view and free live video content differentiated by quality and interactivity levels can be profitable even when relatively small audiences are attracted. Looking at the numbers, a single video server live unicasting system can be installed for less than $50,000, including all the hardware and software. The hosting and bandwidth charges will be about $90,000 per year. When the system has no paying viewers, it can serve free live video at a small image size and low frame rate to about 1,000 PCs. The hourly cost of the system itself to its owners is about $15. The cost of video performers, the technicians and overhead needed to create content and operate the system can be about $105 per hour. If, out of 1,000 free viewers, six decide to pay for 10 minutes each during a typical hour, the gross revenue is $360 per hour. Bear in mind that any time a paying viewer is watching, 50 free viewers must be ejected from the system to support the high-quality viewer connection, assuming the system is fully loaded with 1,000 free viewers to start with. Put another way, if 20 high-quality pay-per-view connections are made, all free viewers will be locked out, left looking at the last still frame available, before the system went to 100 percent pay-per-view. In actual systems, freebie lockouts rarely happen, as system operators strive to keep a balance between potential paying viewers and those currently connected as pay-per-view.

For prerecorded Web video operations, the economics are not as attractive, because the content is typically priced at 20 cents per minute. On the other hand, operating costs are a small fraction of a live video system. While the system itself still costs its owners $15 per hour, there are no performers to pay, videotape sourced content is low cost, and tech support is minimal. Total hourly operating costs can be about $30 per hour, compared to the $120 per hour in the previous example. Even at $30 per hour, it only takes a ratio of three pay-per-view customers to 847 free viewers for a Webcasting business based on prerecorded video to be cash flow positive.

In the above examples, a nominal 1,000 free viewer system is used only for the sake of simplifying the math. In fact, Web video scales easily with predictable costs right up to hundreds of thousands of simultaneous viewers, widely dispersed across the Internet. Granted, these are still small audiences compared to conventional cable and broadcast television, but they are affluent and by definition self-selected, motivated audiences, willing to pay for high-value interactive video.

The question to be answered by visionary businesses is, what will be the next video content category to be economically viable? Celebrity video chat? Music videos? Expert medical consultations? Personalized golfing tips? That is something to think about.

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