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Parker Conrad

The explosive growth of Google's YouTube and video-sharing services such as BitTorrent has led to a dramatic increase in the amount of data traversing the internet -- Google CEO Eric Schmidt has pointed out that internet traffic generated by YouTube in 2006 was larger than all internet traffic combined in the year 2000.

There is room for further growth -- even with YouTube's success, less than 1% of video is delivered over the internet, as existing broadcast systems such as television dominate. But that could change.

It's unclear how online video will impact the telecommunications carriers (such as AT&T (T) and Verizon Communications (VZ)) that own the pipes that deliver video to the end user, or the content providers (such as CBS (CBS), Time Warner (TWX), and Viacom (VIA)) that create the video in the first place. Because of the breadth of video located all overy the web, Video search will be very important to users as well as for those working on Video advertising models.

One thing is clear, however -- online video requires massive amounts of bandwidth. A single 30-minute sitcom requires as much bandwidth as over two years of email messages for an average user.^[1]

The bandwidth required for online video will require telecom companies to spend massive amounts of money on network upgrades to keep pace with the additional traffic.

Who are clear winners from the growth of online video?

Equipment Manufacturers

• Cisco Systems (CSCO) and Juniper Networks (JNPR) together manufacture most of the routers that form the backbone of the internet. Their machines act as traffic cops on the digital highway, making sure that packets of data get to their appointed destinations. As internet traffic increases, carriers must buy more routers to handle the load.

• Alcatel (ALU), the largest supplier of optical networking equipment, as well as JDS Uniphase (JDSU), Sycamore Networks (SCMR), Nortel Networks (NT), and CIENA (CIEN) all stand to benefit from the rise of online video. These companies make optical networking equipment, and fiber optics carry most of the long-distance traffic on the internet. As internet traffic increases, so does the demand for these companies' products.

Cacheing Companies for Quality of Service

• Akamai Technologies (AKAM) and Level 3 Communications (LVLT) improve the reliability and speed of downloads by storing copies of files close to the user -- a process known as cacheing. High reliability and quality of service is particularly important for streaming video, as frequent interruptions create a bad user experience. Google's YouTube and other video sites make extensive use of Cacheing technology, and the demand for Akamai and Level 3 Communications' services is likely to increase if online video grows.

Who are clear losers from the growth of online video?

Companies who operate along the supply chain getting DVDs to viewers are clear losers from the rise of online video, as online video donwloads could cut them out as middlemen.

• Blockbuster (BBI) stands to lose if online video goes mainsteam. If viewers can connect their TVs to the internet, who would rent a DVD if they can pay to stream it over the internet?

• Netflix (NFLX)'s current business model is threatened if viewers can download movies over the internet. Who needs to wait two business days for a DVD when you can get it instantly? However, Netflix is moving aggressively into downloadable movies, and as such may be able to capture some of this new market.

• Coinstar (CSTR) operates a network of DVD kiosks. They currently have a majority position in Redbox, as well as full ownership of DVDXpress. If online video grows, physical DVD rental sales will drop and the need for these kiosks will diminish.

References

1. ↑ Assumes 30-minute sitcom requires 240MB, average person sends 15 emails a day with an average size of 18 KB