When vendors and industry executives go to a show like CES, none of them seems to be satisfied to talk about what they are doing now. Almost always, they want to talk about the future and something more exciting and for this year, it’s all about 4K. All week we’ve seen companies talking about the role HEVC plays with 4K, improved compression, higher-quality video and hardware devices that will be able to decode and playback 4K content. While it all sounds exciting, the reality is, no one is discussing the business models around 4K streaming and the fact that for most, the economics of delivering 4K content don’t work.
This week we’ve heard a lot of technical talk about encoding, chips and devices, but no one is addressing the cost or QoS issues associated with 4K streaming. Lots of vendors are saying how HEVC “solves the 4K challenge”, but that’s just a technical challenge. What about the business challenge? I have yet to see a single vendor even mention it. No service like 4K streaming will ever come to the masses and survive if both the technical and business challenges aren’t worked out. I don’t doubt that the technical side of 4K streaming will be solid as there are a lot of vendors in the industry who excel in the encoding and compression segment of the market. But so far, vendors are not talking about how they are going to convince content owners to actually adopt 4K streaming and what the benefit is to them for doing so. How does streaming something in 4K instead of HD help the content owners business?
At CES, Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN) and Comcast (NASDAQ:CMCSA) talked about their 4K content offerings and all of them disclosed that the bitrates they plan to use to deliver 4K content, using HEVC, will be between 12Mbps-20Mbps. That’s great for Netflix and Amazon, who have subscription based services and don’t rely on video advertising for revenue, but what about the vast majority of content owners who only make money from their content via advertising? The average broadcaster, news site and publisher, even the large ones, won’t be able to do 4K streaming as the cost for all the extra bits means they will have a content business they can’t monetize. Just think about how much content you view every day, from major content portals, where the max bitrate is 1Mbps. Why aren’t those websites delivering the video in 3Mbps? The answer you get when you ask them is that they can’t afford the extra bandwidth costs associated with it.
To put some real numbers behind it, for a content owner delivering video today at 3Mbps, one hour of video is going to consume about 1.4GB. If they are paying $0.02 (two cents) per GB, which is a low price, it’s currently costing them about $0.03 (three cents) to deliver one hour of video. If they then want to deliver that same content at 4K quality, it’s going to cost them between $0.11 (eleven cents) and $0.18 (eighteen cents), depending on the bitrate used, for one hour of video. Anyone see a problem with this? Content owners won’t be able to sell enough additional ad inventory to be able to justify the costs associated with moving to 4K and that’s just for the delivery part. That does not take into account all the extra costs they will have for encoding the content, storing it and additional costs associated with changes that will be required in their video workflow.
For all the talk of 4K streaming, there will be very little content available in that kind of quality for years to come. That’s the reality when it comes to 4K streaming. I know some will want to argue this point with me and will comment about how compression improves each year and how we’re producing better quality video at lower bitrates. But those are all technical arguments, not business ones. And CDN pricing is not declining enough each year to offset the costs of all the additional bits that are required due to 4K. I’ve spoken to multiple content owners about 4K and they all say that they can’t make the business rationale of offering content in 4K quality, unless it’s just a few pieces of their content to use as a test so they can get familiar with the technology.
Content owners and syndicators like Amazon, Netflix and a handful of others will make a very limited amount of their content available in 4K in the next eighteen months. But even they won’t foot the bill to make a large portion of their catalog available to stream at 4K quality, even years from now. We still don’t have 4K device penetration and that always takes 2-3x longer than the market predicts, to truly get to scale. Content owners aren’t going to spend a lot of money to reach such a small amount of 4K devices in the next 3 plus years. But even if that wasn’t the case, there are only a handful of companies like Amazon and Netflix where the additional costs associated with 4K streaming even makes sense, from a business point of view. They can afford to do it, they are big companies and can experiment. That’s all 4K streaming is going to be for years to come, an experiment. It won’t and can’t be adopted by the masses and content owners and consumers, unless there is a clear business value proposition for doing so.
Next week I’ll discuss how bandwidth costs and business models aren’t the only problem with 4K streaming, delivery and QoS is also something no one is talking about.