Will Internet-TV be American?
November, 2001
It’s
been now about 80 years that American films and video media have been
predominant around the world, and despite many efforts, despite many government
supplied Francs, Marks, and now Euros, despite various restrictive rules and
regulations going back to the 1920s, not all that much has changed. Yes, there
is always some hopeful news every year – a film or TV series that has been
successful, some production company that lights the imagination, some
collaborative agreement that crosses borders—but somehow these hopeful news has
not diminished the basic dominance of Hollywood, which has also not been standing
still.
You know the basic facts. In 1999, of the 50 highest grossing films worldwide, 49 were American. The year before, it was 22 of the top 25. In Germany, domestic films are down to 10% of the market. In the UK, the domestic shares were 14% in 1998. Even in France, the audience share for domestic productions has dropped below one third of the total.
This is bad news, and it is especially upsetting to Europeans, because after all, for several centuries, culture had flowed largely in one direction: out of Europe, and to the colonies and the rest of the world. Then, after World War I, the flow reversed direction for the young medium of film. Around the world, audiences flocked to Hollywood movies. European cultural elites, shocked at the loss of control over their publics, led a counter-charge. They promoted government protectionism to support centuries-old national cultures against a few vaudeville theater promoters who had pitched their tents in Hollywood. But despite seven decades of efforts, this challenge remained.
World War II weakened Europe and Asia still more, and then the new medium of television killed most movie theaters. For a while this actually helped the maintenance of national cultural policies, because television, in contrast to film, could be controlled through the dominant public broadcast institutions. But this system broke down in the ‘80s, and the European airwaves and cableways soon filled with even more of Hollywood. Of course, there is also more domestic production of TV programs in each country, as one would expect in a system where there are more channels to fill, where audiences must be won nightly, and where domestic themes and actors attract viewers. Some program ideas are also being copied in the opposite direction. But on the whole, commercial TV is much more American in content than public TV, whether as actual imports or by being inspired in style.
And now, a new medium is knocking – television over the internet – and the question is what will enter when the door is opened. Will it be a multi-cultural richness of many national sources or will it be more of Hollywood?
The knee jerk response to this question is to invoke the usual internet platitudes. Anybody can enter, you can’t tell who’s a dog on the internet, a bit is a bit, silicon economics are different than carbon economics, the internet penetration is higher in Finland than in the US, etc. It is as if the internet community, staunchly internationalist and multi-cultural by outlook and background, does not want to face the very question whether it contributes to the further ascendancy of American mass culture.
And what is the answer to that question of what will be shown over Internet TV, and where it will come from? It is actually not an easy one to provide.
For media, transmission technology is destiny: it affects format, content and economics.
Moving many bits. Past technology enabled us to create transmission networks of two types: those that moved a lot of bits, shared by many. Think of it as a fat party line. This we called broadcasting and cable TV, both “synchronous” forms of communication. The second type of network moved a relatively small number of bits, but it did so on an individualized, non-shared, “asynchronous,” basis, giving everyone a skinny but individual line. This we call telephony. The two different applications were based on the cost of delivery. People knew almost from the beginning of TV how useful individualized video transmission would be. If money had been no object, one could have transmitted video over several phone lines already in the 1940s. But it was just too expensive to do so outside the labs.
So now we are in the midst of a historical move: from the kilobit stages of individualized communications to that of megabit stage , and within the reasonable future, to the gigabit stage . The implications of this transition are as great as the change from a transportation system and railroads to one of automobiles and the airplane had been in the twentieth century.
These developments have an impact on content. Media content is the kind of information bits for which a sizeable number of people would pay in money or attention. (It includes live performances, films, TV programs, recorded-music, and print publications. It excludes personal correspondence, business documents, baby pictures, and home movies, etc.) Media bit strings are expensive to produce because in order to make them reasonably attractive to audiences they must be carefully designed, created and edited.
I will analyze the relative cost of audio-visual media. Each form of delivery has its specific cost characteristics, which have implications. These calculations will be order-of-magnitude only.
Theater.
For centuries, audio-visual content was produced through live performances based on edited scripts and scores. The bit content of such performances is very high, which is why they are the ultimate standard in terms of sound and 3-D visual quality. The real-life in the yardstick against which the technical performance of all other media are compared.
|
|
Content/sec$ |
Distrib/Cap/Sec m¢ |
|
Theater |
70 |
460 |
Let us look at the cost of producing theater; defined as a decent regional theater in America. The cost of a theater production, up to the first curtain call, is about $70 per second of content[1]. The real cost problem for theater is its cost of distribution. Distribution includes the re-creation, each night, of the content for the audience present. This distribution costs, per viewer and per second[2], is .46 cents per second, or 460 millicents per second of transmitting theater content to one viewer.
With this distribution cost, the reach of each theatrical production is limited. These distribution characteristics make theater a naturally local medium in terms of distribution.
Film. The high per capita distribution cost of theater led to the film medium.
|
|
Content/sec$ |
Distrib/Cap/Sec m¢ |
|
Theater |
70 |
460 |
|
Film |
9260 |
5.2 |
Production costs are about $50 million per Hollywood film[3], or about $9260/sec, (A European film costs less than 1/5 of that and an Indian film 1/50.) To distribute the film bits by way of movie theaters, including wholesale distribution and exhibition expenses, comes to a distribution cost of 5.2 millicents per viewer and per second.
Thus film, in its Hollywood variety, is 130 times as expensive to produce as live quality theater. But it is almost 1000 times cheaper to distribute. Thus, film is a naturally long-distance medium in economic terms of distribution.
Furthermore, a film production can be distributed in an elaborate sequence of release through various media, such as video rental, pay cable, and TV, down the demand elasticity chain to distribution by other media. The aim is price differentiation among viewers with different elasticities of demand with respect to price. The result is the squeezing out of a major part of what economists call “consumer surplus.”
Of course, the same economies are also available to non-Hollywood film producers. So what is the problem?
One of the most successful European production efforts has been that of producing excuses about the relatively weak film sector.
For a time the reason given was the destructions of war. But that war was a long time ago, and does not seem to affect the rest of European economic and creative activities. (And note that some excellent French movies were made in Vichy France era, which is mildly embarrassing.)
Another reason given is that America is such a big market. Actually, more films per capita are made in America than in most European countries, which means that they divide up the audiences in narrower slices. And, in any event, the size of the home market is not necessarily the major factor. By that logic, Swiss watches or New Zealand Kiwi fruits would never make it in the world markets. One could even argue that the more a film can support itself in a big domestic market, the less it must try to enter other markets.
A related argument is that English is such a popular language. True, but most people watch film dubbed or sub-titled, and it’s not more expensive to do that from Italian into Spanish than from English. The dirty little secret is that while audiences in Europe love their own domestic films, they do not seem to care much about those from other European countries.
Another favorite explanation is that since American films are already produced and paid for by American audiences, they can be dumped into the world market, and displace domestic films that require expensive production. This argument is a confused economic analysis, yet it is accepted uncritically by most media intellectuals.
And another reason given is the dominance of Hollywood distribution companies, which then favor material of their own or under their control. This might be a description of reality but not of compelling economic logic. The distributor’s power arises from access to content that is widely attractive, not the other way around. Long-term – and 80 years is quite long for the media world – it makes no sense for a wholesaler to discriminate against rival products if they are demanded more strongly by consumers.
The reason why these arguments are dangerous is that they retard an analysis of the more fundamental explanations, and accelerate the run on government funding.
|
|
Content/sec$ |
Distrib/Cap/Sec m¢ |
|
Theater |
70 |
460 |
|
Film |
9260 |
5.2 |
|
Broadcast |
550 |
0.068 |
Broadcast television. Broadcasting reduces distribution costs dramatically. TV station and network distribution cost per viewer and second is .07 millicent per viewer per second of distribution[4]. This is 75 times cheaper in distribution than film, and almost 7000 times cheaper than theater. The cost of TV content production is about $550/second[5].
|
|
Content/sec$ |
Distrib/Cap/Sec m¢ |
|
Theater |
70 |
460 |
|
Film |
9260 |
5.2 |
|
Broadcast |
550 |
0.068 |
|
Cable |
110 |
0.046 |
|
Internet TV |
110 |
1.85 |
Cable TV. Cable content is cheaper, than broadcast
TV. Distribution costs is actually a
bit cheaper than broadcasting on per channel basis, since the bundling of
numerous channels is cheaper than a station-by-station broadcast distribution,
even ignoring the opportunity cost of the spectrum.
Internet TV. The cost of Internet TV content is hard to estimate. It includes a lot of low budget, experimental, volunteer TV. In the early stage of a new medium, there is a significant need to keep costs down. At the same time, the whole point of internet TV is to be more than regular standard, linear TV. The whole point is interactivity, multi-media, and new creation. The interactivity and multimedia aspects of the medium require additional features beyond straight video. And after some initial amateur period, competition will soon be fierce for audiences, and commercial providers of internet-TV will have to offer quality content. Therefore, once broadband Internet is available to most households and once people will consider it nightly among their entertainment options, it cannot possibly be produced cheaply.
Hence, program cost of original content that is not merely the replay or retransmission of traditional video will not be lower than that of linear cable TV, and more likely higher.
Now distribution costs are 1.85 m¢ per second and per user.[6] This is 40 times higher than the distribution cost per cable channel! The reason is that individualization requires significantly larger transmission resources. A similar disadvantage exists to another synchronous mass audience medium, broadcast TV, where the ratio is 1:27. Hence internet-TV can function economically only as a premium medium or a specialized medium. This defines several types of applications.
I. The use of the Internet purely as a distribution medium.
II. The use of Internet as a storage medium.
4. Archival programs. Old video and film becomes accessible by viewers as they link to servers that store them. The content cost for such programs have already been incurred. Archival access would benefit documentaries, in particular, because they tend to depreciate more slowly than most entertainment.
5. Interactive content supplementary to one-way distribution. Here, a 2-way channel is added to a one-way broadcast program, enabling the viewer to obtain additional information about the main program, or, more likely, to engage in commercial transactions.
6. Interactivity and multimedia applications, using the medium in ways that cannot be done over regular, one-way TV. This content type is the main innovative aspect of Internet-TV, and should be the main focus for attention. It is, however, also be far the more expensive content to produce, because it cannot fall back on existing content, and because it requires complex designs and software programming.
Cost analysis therefore shows that the cost advantages of cable-style distribution over internet-style distribution are significant by a factor of about 40.
The increased efficiency and declining cost of fiber does not mean that all pipes will become individualized. It is a common mistake to people who argue that transmission is becoming cheap, and will make IPTV cheap. Yes, but it drops just as much for cable TV distribution. The relative cost of shared (synchronous) transmission is still much lower than that of non-shared, asynchronous ones. At best, the two will coexist, with the individualized internet channels providing the premium offerings. At worst, internet-TV will never get competitive enough to become a mass medium and will remain a niche provider.
What the drop in cost means, however, is that the impact of distance becomes much lower and that both synchronous and asynchronous networks can be architected for national and global distribution rather than for a local. This means that terrestrial TV loses the protection of distance, and that satellite and cable TV lose the protection of limited spectrum on licensing.
From the numbers it is quite clear that one would not want to use internet TV for regular video content distribution. For that purpose, cable TV and its fiber digital variants will be much cheaper. Internet TV’s market is for applications that go beyond regular TV: distant, specialized, archived, interactive, asynchronous, linked, multimedia.
To produce such interactive content is expensive, as mentioned before. It requires creativity, lots of programmers, and significant alpha and beta testing, and many new versions. It might be a bit like Dungeons and Dragons meet Baywatch meet Survivor. Such also exhibits strong economies of scale on the content production side, and network externalities on the demand side. Both favor content providers that can come up with big budgets, can diversify risk, distribute also over multiple other platforms, create product tie-ins, and establish global user communities.
Even for non-premium program, such as creative small productions, or sex-shows and games--where the absolute production costs are lower, the economic advantages of a large user base still apply.
And these requirements will favor American companies when internet-TV emerges in serious. The U.S. has a large internet community, significant hardware and software entrepreneurial energy barely contained by the recent downturn ; a financial system that provides risk capital; big content producing companies with worldwide distribution and with experience in reaching popular audiences; talent in content creativity and technology from all over the world; efficient geographic clusters in production and technology; the cultural prowess of the world’s super-power; language; a culture of diversity; and a university system that generates technology and entrepreneurship. These factors are also available elsewhere, but probably nowhere quite in such combination. On the other hand, the US lacks the supportive mechanism of public TV that exists in Europe and Japan.
Thus, the medium of internet TV combines the strengths of the US economy and society in entertainment content, in internet, and in e-transactions. Add to that economics of scale, and there is nothing on the horizon that can match it. And therefore, internet TV will be strongly American. Commercial participants from other countries will also be players, of course, but most likely either domestically without much global reach, or global players who will offer basically American-style content to the world, like sitcoms and the Italian “spaghetti westerns” of the past. This gives a special responsibility to the public broadcast institutions of Europe.
[1] Based on $500,000 re production, per information for Macarter Theater. Princeton, NJ, by communication
[2] Based on Information from ibid
[3] [GET] Source
[4] Based on a $4 mil operating budget per station, and a $500 mil national network distribution cost
[5] Based on an $1 mil/ half hour network programming
[6] Based on $40/mo for 1Mbps internet channel.