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Delivering Free Online Video -- and Mulling an IPO
By ERIC J. SAVITZ
WITH THE RAPID SPREAD OF VIDEO across the Internet, investors hankering for a way to play it find themselves with few direct options. YouTube was snapped up by Google (ticker: GOOG) long before it could have realistically attempted an IPO; other services are too new to even begin thinking about raising equity in the public markets.
But the first Web-video IPO could emerge in the next 12 months, from a company that at one point was almost synonymous with Internet video piracy: San Francisco-based BitTorrent.
BitTorrent really refers to three things: a company, a Website and a peer-to-peer file-sharing technology. Created by founder and CEO Bram Cohen, a reputedly brilliant but eccentric coder (the latest entry on his blog holds forth on why forks have only four tines), the BitTorrent software became a wildly popular way to search for video files. In 2004, a company called CacheLogic estimated that peer-to-peer file sharing then accounted for 60%-80% of overall Internet traffic, with BitTorrent accounting for about half of that. Some of the files traded via BitTorrent were legal; many others were not. The company contends it has cleaned up its act. But before we get to the details, let's step back a bit and look at the larger picture.
If you want to deliver videos or other large files over the Internet, you have several choices. The simple way is to just deliver them from a server in a single location, and it works reasonably well if you don't get a lot of traffic. A more sophisticated approach is to use a content-delivery network, like the ones operated by Akamai (AKAM) and the newly public Limelight Networks (LLNW). They store copies of files at various locations around the Internet, to make the delivery of content -- videos, music or images -- more efficient. BitTorrent and other peer-to-peer networks take the distribution of content one step further: Rather than pull content from servers, you grab it from other people who already have it -- from your peers. Part of the magic of BitTorrent's approach is that large files are broken into small pieces; a movie can show up not from a single location but from a variety of places, to be put back together again when it arrives on your PC.
In an effort to stay on the right side of the law, BitTorrent has gone out of its way to convince most of the major movie and television production companies that using peer-to-peer technology -- BitTorrent in particular -- will sharply cut the costs of delivering Web video.
In an interview with Barron's, BitTorrent President Ashwin Navin took the bold view that any company in the business of shipping popular video content around the Internet free will eventually decide that the economics require using peer-to-peer file distribution. For free content, Navin says, doing it any other way is almost impossible without losing money: "The numbers don't add up." Because of the technology required, he contends, a distributor can't generate enough dollars from advertising to provide consumers free high-quality video on the Internet using a centralized system or a content-delivery network.
Navin says mainstream content players offering free video content online tend either to reduce the quality of the content to shrink file sizes, or assume that eventually a flood of users will provide economies to shift the math.
But he says the math doesn't work for free content, even with a content-delivery network. He contends that ads on high-quality video content can be sold for a CPM, or cost per thousand, of $40-$50 for a short video ad; he figures consumers can tolerate maybe three of them in an hour-long free video program. That means $150 for 1,000 showings, which is 15 cents in revenue per user. Content-delivery costs wipe out that revenue and more right off the bat, he says. And by the way, he notes that the CPM that advertisers will pay for user-generated content runs as low as $1.
BitTorrent does seem to have done a pretty good job of persuading the major studios to work with them. Once feared in Hollywood, the company has cut distribution deals with MGM, 20th Century Fox, Lionsgate, Paramount and Warner Bros., among others. Navin says BitTorrent.com now offers more than 10,000 movies and television shows. A quick perusal of the site finds available for rent or purchase mainstream movies like Borat, Babel, Blood Diamond, The Departed and An Inconvenient Truth; popular television shows like 24 and Buffy the Vampire Slayer; and a variety of free content, some of it user-generated, some of it older Hollywood material like the cult classic Night of the Living Dead and the 1934 version of Alfred Hitchcock's The Man Who Knew Too Much. In short, while you were thinking that BitTorrent was a creepy technology for trading illegal files, the company decided to take on Apple (AAPL), Amazon (AMZN), Netflix (NFLX) and Wal-Mart (WMT) in downloadable video.
But there is more to BitTorrent than its Website. The key to the business is software. As Navin notes, the company has started shipping a developers' kit for something the company calls BitTorrent DNA, which provides a way for content developers to distribute content directly using the BitTorrent software. He notes that users have downloaded 160 million copies of the company's desktop software, with another 100,000 copies downloaded every day. He envisions BitTorrent becoming as ubiquitous -- and as non-threatening -- as Adobe's (ADBE) Flash player. The company has begun to license hardware manufacturers so they can include the software in media adapters and other devices that will connect the 'Net with your TV.
Investors on Sand Hill Road are betting that BitTorrent can figure out a way to make money here; the company has raised $30 million in venture capital from Accel Partners and Doll Capital Management. And Navin, a former Goldman Sachs banker, says an IPO "is certainly within the realm of possibility."
SPEAKING OF VIDEO, a quick update. In my June 18 column, I asserted that cable companies were not going away, even with the proliferation of online video. One reason: Falling capital costs would lead to a big jump in cash flow. Last week, Craig Moffett at Bernstein Research noted that the recently filed proxy statement for the Dolan family's bid to take Cablevision Systems (CVC) private included a far more optimistic forecast for free cash flow than he or other analysts had been projecting. In short, Moffett thinks Cablevision is worth at least twice the $36 and change that the Dolans are offering, and he repeated his view that most companies in the sector are too cheap.
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e-mail: eric.savitz@barrons.com1; blog: blogs.barrons.com2
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