Business Models for Internet-Based TV

Business models for online content can be based on (1) subscription, (2) usage-based fees, (3) advertising, and (4) online sales (Alison et al., 1998; Loebbecke, 1998; Loebbecke et al., 1998; see also Zerdick et al., 1999; Weill & Vitale, 2001). Therefore, with the exception of online sales for TV stations, the business models of Internet-based TV providers (see also Waterman, 2001) are similar to those used by traditional broadcasters.

In the following, the four different revenue streams are discussed, and their benefits and drawbacks are elaborated (see Table 3).

Table 3: Evaluation of Revenue Sources

Evaluation Revenue Source	Benefits	Drawbacks
Subscription	Bundling	High reputation required
Usage-Based Fees	High marginal payment disposition; Reduced uncertainty for customers due to exit options	Efficient micro payment systems required; Only applicable to 'premium content'
Advertising	Problems of uncertainty solved	Lowest possible amount of individual payment disposition
Online Sales	Overcoming other --, esp. time, restrictions	Acceptance of interactive elements by TV audience not clear

Subscription Models

The rich offer of free TV stations in Germany limits the marginal payment disposition for additional entertainment and information services (Stark & Schenk, 1999). This weakens the prospects of subscription-based business models. Subscriptions raise the risk that consumers bear because they confront consumers with a longer term obligation compared to free or fee-based offers. The risks, embedded in the 'experience good characteristic', i.e., the uncertainty about the product quality, can be reduced by brand names or with guarantees (Akerlof, 1970). This requires Internet-based TV to have gained a certain reputation before a subscription-based business model becomes a valid strategy.

Subscription represents a way of bundling the content offered (Shapiro & Varian, 1999). Bundling describes the aggregation of separate goods into a bundle of goods. From a provider's point of view, it increases profits by smoothing the demand curve and thus shifts parts of the consumer rent to the producer. The benefits of bundling increase as the number of goods in the bundle increases. Bundling is especially attractive if marginal costs are low and the customers' valuation of the goods in the bundle is independent (Bakos & Brynjolfsson, 1999, 2000). Both conditions are fulfilled in the case of Internet-based TV. Hence bundling will generally increase the willingness to pay, thereby enhancing revenues.

Usage-Based Fees Models

Usage-based fees for single bits of content are similar to pay-per-view models in traditional TV. They help to reduce the uncertainty described above by segmenting transactions (Dietl & Franck, 2000). In contrast to subscription-based business models, the viewer has multiple 'exit options'. Fee-based business models could be appropriate for providers offering 'premium content' for three reasons. Firstly, while handling charges for small payments outweigh the costs of the service (Pagani, 2000), this is expected to change with the installation of efficient micro-payment systems based on e-cash or similar technologies (Turban et al., 2002). Secondly, fee-based models can capture the marginal payment disposition of viewers for premium content better than advertising-based models (Rawolle & Hess, 2000). Thirdly, in fee-based models, streaming costs can be billed to the viewer, thus avoiding negative economies of scale.

Advertising Models

Advertising has been the most important revenue base in the private German TV sector in spite of the recent market downturn (TV advertising volume in 2001 for all stations in Germany: approximately 7,5 billion). Advertising business models rely on the concept of the dual market (audience and advertisers) as described earlier. However, the current online share of advertising budgets is comparatively low in Germany. It accounts for about 1.2% of the country's total advertising turnover (A.C. Nielsen, 2001).

Internet-based TV can provide a variety of different advertising formats enriched with multimedia functionality (e.g., Timmers 1999). It remains to be seen how the standard TV spot and Internet advertising will merge and evolve. Advertising might also be based on such concepts as 'content sponsorship', i.e., the soap opera, which goes back to the early days of radio (Hanson, 2000). In the Internet era, more customized approaches and new advertising concepts gain importance (Turban et al., 2002; Pramataris et al., 2000; Lekakos et al., 2001). In the United Kingdom, two large providers (Cable&Wireless, Sky) are experimenting with interactive advertising via TV (Pagani, 2000). However, any predictions about the development of more personalized TV advertising, thanks to the Internet's potential for interactivity, are speculative at this stage (see also Brown-Kenyon et al., 2000).

Online Sales Models

Consumer time constraints are a limitation for subscription-, usage-, and advertising-based revenue sources. Consumers are only able to spend a defined amount of time and money on media consumption. Although this amount may rise, it is and will remain limited. Such limitations could be overcome by expanding the economic activity of TV providers to online sales. Due to the interactivity provided by Web-based solutions, additional business models, like online sales triggered by broadcasting elements, might be implemented (Alison et al., 1998). In spite of the success of TV shopping channels (Gruninger-Hermann, 1999), it is not clear whether recipients will take advantage of TV offers for transactions (e.g., Lee & Lee, 1999; Margolis, 1996), as TV causes rather passive media usage (Levy & Windahl, 1984; McQuail, 1972). This view is supported by Zimmer (2000), who predicts that active usage will gain importance only slowly. The development of interactive features in the TV sector is at a very early stage. Hence, any predictions about the future value of online sales solutions are problematic.

Overview of Revenue Sources

The underlying business models of traditional and Internet-based TV are, in some ways, comparable. Therefore, opportunities for Internet-based subscription TV are also reduced by the high availability of free-TV offers. Pay-per-view models based on premium content—often fiction films and sports—face additional copyright problems over the Internet with its global reach. The economic relevance of the advertising model that drives traditional TV broadcasters needs to be watched carefully. As of July 2002, the advertising income of traditional TV stations is much higher than the advertising income attributable to Internet-based TV or even to all Web content. Valuing innovative revenue sources like online sales or customized advertising generated by growing interactivity in any detailed manner does not seem possible at this stage.