Commoditization Is Not A Dirty Word, Online Video Vendors Need To Embrace It

Whenever I use the word commoditization to describe a technology or service in the online video industry, it tends to upset some people, especially vendors. I routinely get emails from executives telling me that I'm not helping them or the industry by using that term and they want to argue with me that many of the services I talk about are not commoditized. I think many vendors don't truly understand what the word commoditized really means or the positive impact that commoditization has on their business and on the industry.

The definition of commoditized is, "a good or service widely available and interchangeable with one provided by another company" or "a good or service easy to obtain by making it as uniform, plentiful and affordable as possible." This is exactly what has happened with online video in today's market. All pieces of the video ecosystem are affordable, don't require a huge capital investment and have become very easy to obtain, with dozens of vendors offering very similar services.

No one can debate the fact that today, the underlying technology of online video including storage, encoding and delivery are completely commoditized. Services like YouTube are free to the masses and even someone like my Mom can very quickly and very easily shoot, upload, encode and distribute a video clip. The actual technology behind that process is commoditized and this is a good thing for everyone. Services like YouTube have made vendors jobs easier by educating their customers and allowing many of them to become familiar with the basic technologies and terminologies that drive our industry.

Thanks to services like YouTube, vendors can spend their time showcasing the features and functionality of a platform, rather than having to explain to a content owner the process of getting video online or how to embed a video player. This is a good thing for everyone, including vendors and is one of the main catalysts of growth for our industry. Whenever I use the term commoditized I'm also using it to describe the basic fundamental building blocks that all of these video application run on top of. Encoding is completely commoditized but that's not to say that the quality of encoding is the same amongst all of the different services in the market. Online video platforms are commoditized but it's the scalability and functionality of these platforms that makes them unique. Delivering video on the web is absolutely commoditized, but it's things like the performance and reach of the network that makes the service offering unique.

No single individual including myself decides what technology or services are commoditized in our industry. The market and customers decide what they think is unique and worth paying more money for and what isn't. Last year we saw pricing for video delivery services across CDNs drop on average between 35-40%. The reason for this is that content owners decided that the differences amongst many of the vendors, specific to video delivery, were very similar. Many CDN vendors want to disagree with this notion but the fact is, every CDN is focusing on services they call "value add". They are spending more of their time and effort to show customers the differences in their services, the value they provide and the reason why a customer should pay more for that service. This is a good thing!

In a truly capitalist society, the ability to commoditize anything is seen as a benefit to all, and opens up resources that can be put to better use to further innovate in the industry. That's exactly what we are seeing today. Online video platform vendors are no longer talking about how they encode video or how they embed the player, they have moved on to valued services like the integration with ad networks and the necessary analytics that are required for the service. Content delivery networks no longer talk about simply delivering content in mass volume, they are talking about being able to deliver the right content, to the right user, on the right device for a customized experience. All of this is possible due to the fact that the underlying technologies and services are commoditized.

Far too many are quick to think of the word commoditized as bad or one that gives a black eye to our market. The fact is, it's the commoditization of the service that allows vendors to show how the quality, scalability, performance, reach and functionality of their offering is different in the market. Without the commoditization of much of the technology in our industry, none of that would be possible. Used in the proper context, the word commoditization is something vendors should embrace and be able to talk about in a positive light, instead of being so quick to simply think of it as dirty word in this industry.

Comments

[Rebecca]

Dan, very, very well said. I have to say I was one that use to think of the word as negative, but in the light you describe it in, I completely agree with you. Thanks for bringing these kinds of topics up as no one else seems to be.

[Steve Lerner]

Well said Dan, very well said...

Here are some economics to back up the "commoditization" of video delivery.

The cost to a vendor of selling an additional unit of a good is called "marginal cost".

The revenue earned by a vendor of selling an additional unit of a good is called "marginal revenue".

In a perfectly competitive market, the marginal revenue of a sale is equal to its marginal cost. That is, in a perfectly competitive market, one has to sell the extra good at cost in order to make the sale, or else their competitor will be lower in price and make the sale.

The marginal cost of selling an additional of bandwidth for large object delivery has collapsed massively as the price of bandwidth has collapsed.

Therefore the marginal revenue, which is already zero, simply becomes an eroding top line of revenue.

Everyone knows this is true- there is no dispute that the price vendors can charge for bandwidth has been declining every single year.

But since that price is the same as their cost in a perfectly competitive market, the top line erodes...

This is the proof that the market is commoditized- the lack of ability to gain a margin, the collapsing marginal cost, etc... all of this is the factual proof of commoditization.

[HB]

I agree with you Dan. We cannot deny the truth about commodization. Well, we need to be real to get real accomplishments also.

So what if that's the definition of that word. Like you said let us just take its positive effect for us.

[Douglas]

Well put Dan, For my service, which is hosting streaming wedding videos, I priced my margins to make it very hard for videographers to want to offer the services themselves. Because I am a web-based company, I can afford to keep my margins tight. While a videographer is stuck with what their local market will bear. Really, everybody wins; The videographer gets to re-sell my service with a 50% revenue share to brides (who are requesting a place they can share their wedding videos by the way) The bride gets to share her wedding video without any file size limits, and because I have the logistics and infrastructure in place, (and the time to do the encoding, handle the tech issues that invariably come up) I am usually the only option a videographer has to offer streamed wedding videos to their clients. Pretty sweet all the way around if you ask me.

[Mark Walker]

The danger lies in what a customer is willing to pay (WTP) for any good or service. As our industry becomes more and more "commoditized" the value perception drops along with the WTP. Why would a client pay significantly more for what they PERCEIVE to be the same thing?

The challenge is to point out the benefits of what we each do, that makes our particular service more valuable than the low-price leader down the road.

Who has that great copy to share with us?