Curious Changes Coming in the Video Encoding Business

All these TVs, set-top boxes and gadgets with IP addresses are blowing the cob webs out of a business model or two. Traditional pay TV providers are scrambling to hang on to customers amidst the streaming video surge, appliance makers are pondering if consumers really want their smartphones to talk to their dishwashers, and now the auto industry may have to compete with Google and Apple.

The thoroughly confused Alice of “Alice in Wonderland” might ask: “Which way ought I go from here?” Which way indeed. Many in the video business are falling down their own rabbit holes, finding the new reality to be “curiouser” and “curiouser.”

It’s more fun to imagine the potential hardships of the cable industry because most people love to hate the cable company. But let’s consider the less sexy professional video encoding business instead. It is an essential player in how all this high-value video is darting around the Internet. And it is now face-to-face with new customers who have different ideas about how to get and pay for encoding.

There are two fundamental changes impacting how encoding is done. The first is the introduction of unicast (as opposed to broadcast) transmissions of stored content, and the second is the proliferation of multiple consumer screens. The ability to request specific content that a server delivers to an IP address is dovetailing with the sprouting of massive server farms and cloud storage. For many years content owners bought customized hardware encoders, encoded content at the networks’ headend and broadcast it over satellite, coax cable or the radio airwaves.

But “off-the-shelf” server processing power has increased, video compression standards like MPEG-4 AVC have matured, and many OTT video service providers with “gazillion” bytes of stored on-demand video are putting encoding software on their own hardware (or that of the server farm’s hardware). In this scenario, encoding is more of a commodity—thus bringing an incremental change in the professional encoding business model. Instead of selling the racks of specialized hardware along with a fee for each channel of encoding, the transaction is now only for each encoding stream/channel. Hardly a rabbit-hole dropping experience, but a disorienting shift (for traditional encoder suppliers), nonetheless.

But it is the need to encode and format one piece of content on the fly in potentially dozens of ways that can turn the encoding business model on its head. A metered or “pay per use” model would be welcome by OTT video service providers but probably not so welcome by encoding providers. And now that the tools to accomplish this are available, there are probably going to be some “hare-raising” changes in encoding business models.