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Show Me the Money

Besides the technological obstacles to making video over the Internet a part of America’s viewing habits, there are also economic obstacles. In truth, no one has figured out how to make broadband entertainment pay. One reason is inherent in the medium itself. While TV broadcasters incur a large up-front cost to deliver their signals everywhere, once that investment is made, the cost per viewer to deliver a program becomes ever smaller as the audience grows. The cost of broadcasting a television program is the same, whether it is watched by one person or 60 million.

Not so with the Internet. The cost of delivering a video stream to an individual over the Internet doesn’t decrease as the audience grows. Content providers must pay per-stream licensing costs to RealNetworks or Microsoft or Apple Computer, so that customers can view video in RealPlayer or Windows Media Player or QuickTime. Internet service providers also charge on a per-stream basis to carry the traffic. And expensive technology may be required to manage simultaneous requests for the same material if a site becomes wildly popular. So costs expand proportionally with the audience-and the provider never gets the benefit of scale economies.

“The early model for broadband has been TV,” says Joe Laszlo, analyst for Jupiter Research, a Web advisory company. “But broadband is exactly the opposite of the broadcast world. Your costs go up as your audience grows.” According to Jupiter, the cost of providing video streams to a thousand viewers is nearly twice the amount advertisers are willing to pay to reach those viewers. Unless some fundamental shift occurs in consumer demand, so that people will pay for broadband entertainment, or in advertising prices, so that entertainment sites can charge more than they do now, broadband Internet sites will never be profitable.

This gloomy economic reality is reshaping how broadband content providers view the Web. “People are now turning to a subscriber model instead of relying on advertising,” says Laszlo. “There’s more potential there. But with the quality of service so unpredictable, it’s difficult to say whether sites will be able to charge enough to cover their production costs.”

As a result, many of the companies offering original broadband content-Icebox, Pseudo Programs, Digital Entertainment Network and others-failed within the last year or so. What’s left in many cases are Web sites that use streaming video to promote their own products. Movie trailers. Survivor updates. World Wrestling Federation interviews. To name just a few. Sites whose purpose is to promote successful programming in other media, such as TV.

“What you see developing online is the use of three- to four-minute promotional clips,” says Daryl Schoolar, industry analyst for Cahners In-Stat Group in Scottsdale, AZ. “Until the cost to deliver streaming media comes down, that’s primarily what you are going to get.”

Even many serious broadband content developers view the Internet as just a stopping ground, using it as a test market for eventual theater showings or television syndication. Heavy.com is a mix of alternative music and crassly humorous video clips aimed at a young, urban, mostly male audience. Its “Behind the Music That Sucks” animation sequences-a takeoff on VH1’s Behind the Music docu-mentary series-skewer everyone from Britney Spears to Eminem. While the site gets a million visitors each month, cofounder Simon Assad sees it primarily as a way to promote new programs, build an audience and eventually graduate to television.

“We’re expecting the Web site to be profitable, but we’re not depending on it,” says Assad. “Instead, we’re using the Internet to promote our television programming. I don’t need a broadcast license, I don’t need a distribution network, yet I’m broadcasting television right now over the Internet.”

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