I wrote a little about it here.

http://news.ycombinator.com/item?id=502705

But essentially I believe that there is a real disconnect between the cost of production and the amount of entertainment that a viewer can get, especially since things are approaching a free pricepoint (impact of filesharing) and TV and the Internet converging (like PG has written about recently) along with major upgrades in bandwidth.

I also think that as home entertainment systems become more widespread and advanced, people will prefer the convenience of watching from home instead of cinemas, especially if it is significantly cheaper and the experience can be a little more interactive (internet overlays)

Anyway, throwing down some numbers, doing some quick back of the envelope math, The Dark Knight cost $180 million to make and it has a runtime of 152 minutes. So an approximate cost of $1.1 mil/minute for the production.

Conversely, Season 1 of Lost (which is known in the TV industry as being notoriously expensive to produce) cost $44 million for 22 episodes of 44 minutes approx running time each, or 0.045 mil/minute.

Yet in terms of entertainment for the home viewer, 1 minute of entertainment is 1 minute and tastes vary - so why the big difference in price of production? The major costs are salaries of large numbers of people involved and technology (sets/effects etc) [1].

This is why we start seeing ludicrous distribution agreements in place to maximise profits so that the economics of this weird system can work [2], eg - regions on DVD's

A little anecdote about what I tried to do the other month. I live in Australia, and I jumped onto itunes because I was curious about what shows were available. A lot of the shows I enjoy were not on there, but even more surprising was that some shows that did exist were missing seasons. The worst case of this was a certain show only having seasons 1, 3 and 5 available on itunes - this is a result of stupid distribution agreements and simply being unable to put it up on itunes yet.

However, I could jump onto any torrent tracker and download everything for free, including the seasons that were not available through legal online systems. There is something wrong when the path of least resistance is unlawful.

So my idea is that you could produce content for the online market using a process fairly similar to a digital animation studio [3], just limiting yourself with digital assets and working it a bit like a sitcom. Limited pre-made sets, characters, story driven and episodic content.

Your production pipeline then essentially becomes a case of an asynchronous digital puppet show and if you keep most of your talent inhouse, you could work it using a team about the size of a small to medium sized startup.

Anyway that's the basics, I haven't detailed much about my monetisation strategies (there's more that can be done than just advertising) and there's a little bit of secret sauce I can't reveal, but that's the general gist.

[1] - Marketing costs don't usually get taken into account in the cost of production of a film, instead the company distributing the film takes a percentage. For example, in Pixar's early days, Disney was taking an approximate 50% cut. Internet distribution reduces these costs and so the total amount of income required is less to break even, so easier to attain profitability on any production.

[2] - When you see people saying that you can't make money with online video, I personally think it's because they're still wasting money unnecessarily on production costs. If you use online advertising as a benchmark for monetisation, the way it is now, you really need to reduce the cost of production to be able to make a profit and when/if online advertising recovers, you will only stand to make more money.

[3] - Another thought is to produce content like Uwe Boll is notorious for. I'm not sure what the situation is now since there has been a few enquiries about his practises, but in the past a film produced "in Germany" (basically by a German production company) was able to have 100% of the money invested into it written off due to German Tax law. So investors were investing say, $10 million into a film, which would only net a $3 million return, yet it essentially cost them nothing due to the tax loophole, so the return was all profit. Uwe Boll would pick up video game licenses (which are why all his films are based of video games) cheaply and produce "films" (I use the term loosely) at an alarming rate.