It's Rishi

Recently I flew to the east coast via JetBlue. Although I took the red-eye, it was still a pleasant experience. Time flew by (no pun intended) as I spent half the flight watching the WSOP and then proceeded to nap for a bit while listening to XM radio via my noise-cancelling headphones. On my return flight, I took a US Airways flight that I found for about 20% cheaper than other alternatives. Worst decision ever. The plane was old, the seats narrow and worn, legroom sucked, no in flight entertainment…horrible. I just couldn’t believe how much more pleasant a flying experience JetBlue offered. I thought to myself: “Man, if JetBlue offered internet, I think I really would pay even 50% more to fly JetBlue”.

Fast forward to today and I see a headline saying that JetBlue is testing Wi-Fi internet. I was super excited..until I read the article. It turns out that JetBlue is in fact testing out the feature however it is super, super crippled. It’s the equivalent of having an early 1990’s AOL client as your gateway to the internet. Because, it seems, RIMM and Yahoo! are sponsoring the feature, passenger internet use is limited to Yahoo Mail, Yahoo Messenger, and BlackBerry messaging. How incredibly dumb. Moreover, according to the article, while JetBlue has plans to expand this service to their entire fleet, they don’t have plans to expand the capabilities of the service.

Meanwhile, Virgin America has equipped their entire fleet with Wi-Fi and are planning to add Internet service within a year. If I recall correctly, they will be charging passengers a very nominal fee for access and possibly a slightly higher fee for additional bandwidth. Sounds perfect to me.

As the rest of the domestic airline industry seems to be supremely focused on profitability over service, JetBlue and Virgin American clearly are bucking the trend. It’s not a stretch to say that they are reminding their customers that flying can be a joyful experience – as it was decades ago. I’ve talked to several friends and we all agree that we’re willing to spend more for a better experience. Internet is the true killer app for in flight entertainment. I hope JetBlue realizes this and rethinks their internet strategy. Otherwise they’ll be eating Virgin’s dust.

It has been estimated that over 50% of the total Internet bandwidth (~2 terabit) in the world is consumed by BitTorrent traffic. It has also been estimated that about 50% of BitTorrent traffic is video. That’s a whole lot of video. In fact, that’s 2tb/sec / 8bits x.0.5 x 0.5 * 3600sec = 225 terabytes of video files downloaded every hour! From my experience, virtually all video files are DivX/Xvid avi files (I have yet to see a video torrent that isn’t) that seem to average about 7-10MB/minute. This means that every hour, about 20-30 million minutes of video are downloaded. Based on these numbers, it is very reasonable to conclude that tens and possibly into the hundreds of millions of people around the world are illegally downloading video via BitTorrent.

Don’t get me wrong now, I’m not writing this to incriminate anyone. BitTorrent has been very good to me also. It has essentially saved me the cost of a Tivo every month. Any TV show I want, I have in a matter of minutes and with a little RSS magic, what I want is automatically fetched for me as it becomes available. Of course, a significant percentage of this video is movies, not TV. But let’s put that aside for now and focus on TV.

My roomate and I pay about $60 to Comcast every month just for cable television. I personally feel like that’s a good amount of coin and as such I don’t necessarily feel that horrible when I download torrents of shows that I miss. Without a doubt Comcast is getting hurt by BitTorrent. If the estimate is correct, half of their bandwidth is being used up by BitTorrent traffic so they have surely had to pay hefty amounts to accelerate the upgrading of their capacity. However, my guess is that very few consumers have cancelled their cable TV subscription due to the availability of TV content through BitTorrent. So, while the impact of BitTorrent on Comcast’s ISP business may be significant, I doubt their cable TV business has been affected much.

So who’s the big loser? The TV networks of course. Torrents of TV shows have all the commercials stripped from them to make the file smaller in size and for the downloader’s viewing pleasure. As of last fall, ABC’s Lost had an average 30-second spot rate of $328k (Ad Age chart). At that time, Lost had about 10m viewers. Back in October ‘06, it was measured that over a span of a week, torrents of the latest episode of Lost had been downloaded over 500k times and as much as 1m times. That represents 5-10% of Lost’s total viewership. A 1-hour show like Lost has about 30 30-second paid ads which at the rate of $328k per ad, ABC brings in almost $10m per episode in ad revenue. For the sake of simplicity, let’s say that the ad rate is directly proportional to the audience size. In the absence of BitTorrent, if half of those 5-10% of downloaders would have watched the regular broadcast of the show, that would haev added about $.25-.5m in ad revenue per episode. For a 20 episode season run that’s $5-10m per season in lost revenue for ABC from the show Lost alone.

It is important to point out that at the time of measurement, Lost was the most downloaded TV show on BitTorrent. Also, looking at the chart, Lost’s $328k 30-second ad rate is amongst the highest in primetime. With these two factors combined, the revenue impact of Lost is probably an order of magnitude higher than the typical show. Overall, though, I can definitely see a major network like ABC losing out on about $25m of ad revenue across all of its shows this year. And that is $25m of pure top line since the cost of that additional revenue is essentially zero.

So what can the networks do about this? Plenty. Moreover, just as p2p has sparked tremendous growth in the long-tail of the music industry and created new opportunities, the same is happening in TV and film. I’ll talk about what the networks and new industry players have been up to and sort out some of my thoughts in my next post.