Monday, February 12, 2007

TiVo / Amazon - Unbox can't really succeed

I posted last week about the new Unbox service from Amazon & TiVo. Others have even speculated on what this may mean for potential competitors. While this will certainly be a great new feature for existing customers, and an interesting service for Amazon & TiVo, one major question remains for me on the business front. Who is paying for it, and how can it possibly scale?

Over the years, I've looked at the economics of video delivery over the Internet (cost of bandwidth, etc.) In order to make money at a tolerable consumer pricepoint, you need to get the audio/video bitrate down below about 1.0 mbps, preferably closer to 512 kbps. To do this and still maintain a reasonable quality level, you need an advanced video codec (i.e. WMV9/VC1 or MPEG4.) Note: current TiVo DVR's record video between around 1.2mbps (basic quality) and 6mbps (best quality).

The installed base of TiVo Series2 DVR's use Broadcom mpeg decoders that are only capable of decoding mpeg-1 and mpeg-2 formated video. Even the new Series3 from TiVo uses a Broadcom part that can only decode mpeg-2 (at least it's HD!). If TiVo had used a newer part (like this one), at least their new hardware would support better codecs. But, they designed the Series3 architecture before this part was readily available.

So, in order to deliver videos over broadband to the 1.5M broadband enabled TiVo boxes, the quality is either going to be sub-optimal or someone is going to be losing money. And, unless bandwidth costs drop by a significant amount, the economics for this service may always be "upside down".

So, that's why I say Unbox can't really succeed. If everyone starts using it, even Amazon is going to eventually notice the costs associated with delivering video to people at a loss. If nobody uses it, then it doesn't really matter, does it?

1 comment:

Chris said...

Bandwidth isn't that expensive. Amazon S3 prices bandwidth at $0.20 per gigabyte, and (based on the MPEG-2 copy of "Star Trek - First Contact" Tivo-ed from SciFi channel) a two hour movie consumes roughly 4 GB of storage. A download costs around $0.80, leaving $3.19 from a typical rental for profit, fees to movie studios, etc.

Amazon's network is well distributed geographically and optimized for scale. As stated in 2006 SEC filings, Amazon has been heavily investing in infrastructure for services like S3, EC2, and other web services. They've shown a willingness to invest for this kind of growth and I'd expect that to continue.

Unbox on Tivo is compelling enough (and we watch few enough movies these days) that we're considering dropping Netflix for it.