Technical and Legal Issues for Internet-Based TV Market Entry

Diffusion and Technical Issues

Diffusion describes the process by which an innovation is communicated and adapted over time among the members of a social system (Rogers, 1995). As streaming media reach the homes with broadband technology, the interplay between consumer applications and community evolution is expected to drive an ongoing sequence of technical innovations (Zysman & Weber, 2001). However, the diffusion of Internet-based TV is partially hindered by technical restrictions.

As of January 2001, 34.8% of all Germans older than 14 years of age were connected to the Internet (e.g., www.digi-tv.de). The number of households connected via broadband Internet access was still much lower. In 2001, approximately 2.1 million people in Germany used broadband cable, primarily DSL (see Regulierungsbehoerde fuer Telekommunikation und Post, 2002; www.emarketer.com, however, speaks about only 1% of the German population). This measure of the number of online households is important for Internet-based TV providers because it determines the 'technical reach'. Broadband technology is still in its infancy in Germany. Its availability and acceptance must undergo significant improvements to make Internet-based TV a viable alternative to traditional TV. Nevertheless, online access and bandwidth will increase and thus improve the chances of Internet-based TV.

Secondly, the standardization of media players is an issue. Reception of audio-visual content via the Internet is dependent on such players which enable consumers to view streamed video. As of 2002, no generally accepted player standard had emerged. However there are quasi-standards, and growing efforts to achieve compatibility are underway. Nonetheless, the best-known software programs to run TV on the Web (Realplayer, Quicktime, Windows Mediaplayer) still do not share the same file formats. Consumers have trouble with additional hard-drive space and the necessity to update their different media players regularly. This lack of standardization represents an obstacle to the diffusion of Internet-based TV. Considering the perspective of Internet-based TV providers, the absence of agreed-upon standards is problematic in that programs must be encoded for different players. Each format requires its own pool of servers and its own transmission system (Careless, 2000).

Thirdly, computers are barely adequate devices for watching TV (e.g., Dvorak, 2000). The display is limited compared to a TV screen. However, the industry adoption of the multimedia home platform (MHP) in Germany describes an effort to alleviate this problem. Additionally, with the arrival of 'intelligent TV', e.g., personal filtering agents for handling the flood of offers of both on-demand and live programs (Negroponte, 1995), the new technology will gain a further advantage.

Fourthly, IP-based transmission is comparatively unreliable, but the quality of transmission is improving rapidly. Streaming software is capable of transmitting 30 frames per second compared to only eight in 1998 (Bhandari et al., 2000; Steinmetz, 2002). As the standard in Germany for analog TV (PAL) is 25 frames per second (Himmelstein & Liviscach, 2000), 30 frames would be sufficient for displaying content in the accustomed quality.

Fifthly, the diffusion of Internet-based TV is limited by access costs. If access is expensive, the viewers' willingness to pay extra for content is relatively low (Dewan et al., 1998; Thielmann & Dowling, 1999). The costs for Internet access in Germany declined by 31% in 2001. Heavy users saved almost 42.3% from 2000 to 2001 due to the rising popularity of flat rates (Federal Statistics Office Germany, 2001). Such declining access costs certainly improve the opportunity for Internet-based TV offers.

Finally, Internet-based TV providers may be confronted with negative economies of scale. The greater their market success, the worse their risk of economic failure. As the reach of an Internet-based TV station increases, its costs per customer do not decrease since they must cover the additional costs charged by an ISP (or telco) for each additional stream to every additional viewer. Therefore, Internet distribution of TV programs can easily be more expensive than cable and some other media (Noam, 2000). But as Internet bandwidth develops, Internet-based TV transmission is likely to become more economical (Waterman, 2001), leaving legal issues as the next significant constraint.

Legal Issues

While the legal situation of Internet-based TV providers is confusing and unstable, traditional TV stations face tighter constraints than Internet-based TV providers. Traditional broadcasters have to accept licensing restrictions, whereas Internet-based TV providers are confronted with contradictory regulations in the area of media law (Goldhammer & Zerdick, 2000). The main regulatory basis for TV via the Internet in Germany is the 'Mediendienste-Staatsvertrag (MDStV)', which is primarily designed for online services directed at the general public. Internet-based TV providers neither need a registration nor a license ( 4 MDStV). Overall, however, there is uncertainty regarding future jurisdiction.

Copyright issues are important legal considerations for Internet-based TV (for technical solutions to copyright issues on the Internet see—among others—Clarke & Nees, 2000). Most traditional broadcasting rights are sold either regionally or nationally. A worldwide license, which would be necessary for Internet-based TV, is connected with prohibitively high costs. This builds a strong barrier for online transmission of movies and similar content.

The case of iCraveTV illustrates one facet of this issue. The Canadian station, iCraveTV, broadcasted 17 Canadian and American TV programs via the Internet (Standeford, 2000). They did so by receiving the programs and transmitting them to the Internet without any authorization from the TV stations. After copying the analog signals of the TV stations and transforming them into digitized signals, iCraveTV barely faced any further marginal costs. Industry giants, especially content providers like Twentieth Century Fox, Disney, ABC, and Time Warner successfully took legal action to stop iCraveTV. The station had to face a court-ordered shutdown of its website (Cave, 2000). Hence, copying TV programs from third parties into the Internet does not seem to be a viable solution for Internet-based TV, and entering TV markets via Internet-based TV seems feasible mainly if entrants are prepared to invest in the rights to content or to limit their program to in-house productions (e.g., news or documentaries). However, when technical restrictions have been overcome and the legal situation has been clarified, important questions about revenues still have to be answered. The third layer of our sequential framework which follows evaluates various possible business models.