The Economics Of The Streaming Service Provider Business

There has been a lot of attention generated by the media as to the success, and more often failure, of streaming service providers. As the amount of digital content companies produce continues to climb, the number of streaming network providers, which reached an all time high in 2000, steadily declines. Some of this decline can be attributed to a lack of funding as a result of the downturn in both the public and private equity markets. However, the reduced number of companies is more likely due to the flawed business models and the lack of customer support found within streaming providers’ businesses, many of which should never have received funding in the first place. This article addresses the type of companies that will succeed, and those that will fail, in the future of the streaming services business.

The Economics of Streaming
A lot has changed over the past two years. The bandwidth glut is here, the supply of fiber laid has exceeded demand, and numerous telcos like MCI WorldCom and Global Crossing have floundered. Because of the glut, surviving telcos have had time to improve the reliability of their networks. Peering points, where private and public networks converge, have improved such that packet loss has been drastically reduced. The price of hardware such as servers and network storage devices has plummeted. The ample supply of bandwidth have forced carriers to lower their Megabit per second (Mbps) prices charged to customers, sometimes as much as 75%, such that collocation centers can offer bandwidth and rack space at much reduced rates. All of these factors translate to lower operating costs for streaming companies, and therefore consumers should benefit from lower prices.

However, the way that many streaming providers structure their networks will never allow them to become profitable. Distributed network providers face numerous hurdles to profitability and quality of service, including commitments for unused rack space and bandwidth, power, switch/router ports, reporting and reliability issues, increased storage costs due to unnecessary content replication, high labor costs, and poor customer service. Thus many CDNs are saddled with higher costs, and yet are forced to lower their prices in order to compete with more nimble, smaller service providers.

Much like smaller electric utilities that generate their own power and transmit it over other people’s transmission lines, tomorrow’s streaming companies will be forced to become nimble and may have to change carriers on short notice. If a distributed network has boxes in thousands of locations, this makes the task that much more difficult.