Consumer entertainment is in the middle of two radical transitions -- the shift from analog to digital, and the shift from physical media to Internet distribution. The shift to digital is nearly complete, but the shift to Internet distribution is still far from over. The first content to make both transitions was music. Though there is still substantial physical distribution of music on CD's, Internet distribution through services such as Apple iTunes is rapidly eclipsing CD sales. Video is now largely digital, but has been slower to make the transition to Internet distribution. There are technical reasons, such as multi-gigabyte file sizes, and multi-hour download times, that contributed to initial delays, but with today's broadband services, and ever cheaper high-capacity hard drives, the real hold-up is now business models. To date, Internet video distribution has followed three basic models: ala-carte pricing in which a fee is charged to rent or buy a show, advertising-funded in which the viewer "pays" for what they watch by watching ads inserted in the program stream, and subscription pricing in which a periodic fee is paid to access a library of content. This paper examines all three, and draws conclusions about which of the three will win in the end.
Ala-carte pricing was the first business model used for Internet distribution of video content, and still dominates today. In this model, consumers pay a fee for each title they download. The fee can be a few dollars for a show they "rent" and only have access to for a limited time, or ten dollars or more for a show they "own" and can watch indefinitely. The studios and content owners like this model because it's a familiar extension of the pay- ...