OVPs Still Rely Too Much on Bandwidth Resale

Over the last few months, I’ve seen a lot of customer RFPs from content owners and publishers looking for an online video platform (OVP) provider. In some cases, these content owners already use an OVP and are looking to change vendors; in other instances, they have a new content business or have been doing things in-house and now want to use an OVP for the first time. As customers ask me for feedback and share with me the quotes they are getting from the OVPs, the one thing that is consistent among all of them is that the OVP vendors are still getting a large percentage of their revenue from the resale of bandwidth.

When you look at how these contracts break down, the largest percentage of revenue isn’t coming from platform license fees; it’s coming from the delivery of the videos. And since no dedicated OVP owns its own content delivery network (CDN) -- it simply passed that traffic to a CDN, which it then has to pay for itself -- a large portion of the value of the contract is simply reselling bits. This is something we’ve known about for years, but many of the OVPs have downplayed how much revenue they get from the resale of bandwidth. The truth is, it’s a lot.

Brightcove, the one publicly traded OVP in the market, won’t disclose what percentage of its revenue comes from the resale of bandwidth through CDNs such as Akamai or Limelight Networks. I’ve asked the company reps multiple times, but all they will say is that it’s not a lot. But we have no idea what that really means. Ooyala and Kaltura aren’t public, but they too won’t disclose, on the record, what percentage of their revenue comes from bandwidth fees. But from taking a look at all of the vendor’s responses to RFPs, it’s a lot.

As an example, one customer sent out an RFP to move from one OVP to another and shared with me all of the quotes it got back. The value of its contract averaged $600,000 over the next 12 months. Out of that $600,000, $400,000 was for storage and delivery, $49,000 was for platform license fees, and the rest was made up of one-time setup fees, support fees, integration fees, and professional services for some custom analytics work.

That means 67% of the value of the contract to the OVP was from storage and delivery. And since that’s not something the client does in-house since it doesn’t operate a CDN, the vast majority of that revenue is being passed on to the CDN. Even if the OVP is marking up the storage and delivery by 30%, it is only making $90,000 on the $400,000 in storage and bandwidth. It’s not bad for simply reselling, but bandwidth and storage prices decline each year.

OVPs that target multiple-system operators (MSOs) tend to get a higher percentage of their revenue from platform license fees, as they aren’t reselling bandwidth and storage, since the MSO is deploying the OVP or TV Everywhere software inside their own network. But for those video platform providers that are selling directly to publishers and content owners, a lot of the value of their contracts is in the resale of bandwidth.

Not all of the customers who use an OVP use it for delivery and storage; many have their own contract with a CDN directly and only use the OVP for the cloud-based software service. But for those OVP vendors that sell directly to publishers and have a lot of their customers using them for storage and delivery, a large percentage of their revenue is tied directly to the resale of something they don’t actually own or deliver themselves. That’s something that all of the video platform providers are going to have to change in their businesses if they really want to accelerate the percentage of revenue that they keep from these contracts.

This article appears in the January/February 2014 issue of Streaming Media magazine.