Apple has killed the video store; will ISPs be next?

The Olympics are nearly over, and the Australian team deserves kudos for an excellent performance all around. Yet even as the Olympic sun sets on the Bird's Nest for the last time this weekend, millions of spectators around the world will be scanning their dials in the hope of finding something else to fill their viewing hours.

While Seven's missed HD opportunity and lethargic online Olympics coverage don't bode well for the movement of on-demand TV on the internet, one small relief is that broadband subscribers won't have to worry about being speed limited — since there wasn't enough video worth downloading to dent ever-expanding download quotas.

Yet that may not be the case for much longer: the ABC's iView service is offering very compelling content at high quality, for example, and over the past week Apple threw its own hat into the ring by finally offering movie rentals and downloads to Australian customers through its iTunes Music Store (iTMS).

Rentable movie downloads finally give the Apple TV a very good raison d'être, and could well spell doom for local video stores if Apple plays its cards right. What struck me most about the launch of this new service, however, was the fact that a goodly number of broadband subscribers are likely to experience speed limiting — or the spectre of four-digit broadband bills — as this stuff takes off.

Punters who know their way around BitTorrent already probably know that it's quite possible to encode a good-quality movie in around 700MB of data, a convention initially introduced when the introduction of DivX technology made it possible to fit a movie on a single CD-R.

Apple's movies are slightly larger, at around 1GB each — but with one big difference: you not only pay for the privilege of renting your movies, but you pay for the bandwidth to bring them into your home. Even on a relatively generous plan like TPG Internet's $59.99 "Heavy" ADSL2+ plan, which provides 30GB of peak usage and 20GB of off-peak usage, you're paying around $1 extra for the bandwidth to download each movie. Think of it as the money you'd spend on petrol driving to the video store twice.

Although, providing content online does have its limits since content providers are indeed paying licenses and building out their infrastructure to cope. BitTorrent has already sent download volumes surging, but when even legitimate content downloads start being measured in gigabytes instead of megabytes, customers need to reconsider their usage models.

ISPs are using the explosion in consumption to differentiate themselves. TPG, for example, offers its customers 21 predominantly ethnic broadcasting IPTV channels quota-free; Telstra offers customers access to its BigPond Music, movie, and other content for free; and Internode has focused on offering quota-free downloads through mirrors of download archives such as Usenet and Sourceforge.

In deciding what to offer, ISPs naturally weigh their cost in delivering content against the value of differentiating themselves in the market. But the introduction of 1GB-plus movies on iTMS Australia made me wonder whether iiNet — whose media lounge offers quota-free downloads from iTMS as well as worthwhile content like ABC iView, NASA TV, Barclays Premier League soccer and 60 internet radio stations — might suddenly have to rethink the basis for its offers.

After all, somebody is paying for this content — so could iTMS' movie offering break iiNet's bandwidth budget? How much content can these companies provide quota-free and still make money?

Turns out it's quite a lot. Michael Malone, managing director of iiNet, told me the company's customers are downloading 70 terabytes of "quota-free" data every month. That's double the volumes just six months ago, and doesn't reflect what is likely to be another spike as Australians cotton on to the fact that they can now rent new release videos over their broadband. What the iPhone 3G did for 3G, rentable iTMS movies will do for video on demand.

I asked Malone whether the company was going to stick with its iTMS quota-free offer now that it faces a potential 250-fold jump in bandwidth demand thanks to movie rentals. His answer: bring it on.

"It's a retention initiative, and we're letting the strategy on this emerge," he explained. "Content owners have a mandate to get their content to as many customers as possible, while avoiding distribution costs and making their content as accessible as they can."

"The entertainment side gives [ISPs] the ability to differentiate, since it's easier to sell movies or video content than just selling people a fast connection. So we're going to get as much content as we can online, look at what customers are using and what they're excited by, and see what we should pursue in the future."

Installing lots of servers to cache content to customers is one thing, but how does iiNet offer live, interactive, streaming content like iView and iTMS without having to build a server farm the size of Kalgoorlie? After all, traffic over an ISP's own network is nearly free, but ISPs must pay for each megabyte of traffic sourced from overseas.

Turns out the company has a peering agreement with Akamai, the global content delivery network that distributes iTMS, iView, and scads of other content on behalf of content providers. iiNet downloads just one copy of a stream, then uses IP multicasting to distribute it to customers — helping it scale up to dizzying capacity without actually having to add thousands of servers to store the content.

Had Seven actually started signing up customers to capitalise upon its Unwired wireless ISP, this is the kind of model that it could have easily pioneered, using the airwaves to deliver loads of live Olympic footage (and, yes, even ads) on demand at very low incremental cost. Had it been executed properly, Seven could have used the Olympics in a quite effective broadband customer grab.

It's too early to say what Nine will do in preparation for the London Games, but perhaps it should take a cue from the likes of iiNet, TPG, Telstra and Internode (which this week appointed new CEO Patrick Tapper and announced plans to redouble its focus on video services after recently boosting plan quotas across the board).

All of them see delivery of live streaming video as their next step up the food chain. Just imagine for a second the impact on the market once the first ISP follows the lead of SelectTV and begins bundling TV stations from around the world — compelling ones — as quota-free downloads. Plug in your Apple TV or a similar device to funnel this stuff to your lounge room, and you'll be able to kiss Seven, Nine and Ten goodbye forever.

Have you switched ISPs for the free content? Would you? And can you envision your broadband connection replacing your TV?