As DVD revenues begin to slow, Hollywood studios are looking to online video as a platform for incremental growth. Though currently in its infancy, by 2011 the online video market will have a retail value in excess of $3.8bn worldwide, as revealed in a new industry report from entertainment analyst firm Understanding & Solutions.

Despite a raft of activity within the sector – ranging from new service launches, key content partnerships and continued experimentation with business models – online video has, to date, taken off much slower than the industry anticipated. The USA leads the way, yet is only expected to generate revenues of $280m in 2007, 1% of the total home video market.

“The market is currently underperforming for a variety of reasons,” says Mai Hoang, Analyst with Understanding & Solutions, “online video services and title availability are limited, pricing strategies are embryonic and the technology infrastructure has yet to catch up. However, momentum is building and by 2011 online video in the US will represent 8% of total home entertainment revenues, with Western Europe close behind at 7%.

At present the US online video market is predominantly driven by two services, Apple iTunes – using the Electronic Sell-Through (EST) model – and Xbox Live Video Marketplace – using online VoD.

iTunes has sold in excess of 2 million movies and 95 million TV shows to date. Its competitive pricing structure, user-friendly interface and the iPod’s ubiquitous nature have allowed it to gain traction quickly. Similarly, Microsoft’s Xbox Live Video Marketplace has boosted the online VoD movie market, bridging the gap between PC and TV, and providing easily accessible High Definition content to consumers. Though many other players operate within this marketplace, so far no provider has been able to build comparable scale.

Going forward, online video must continue to reach out to the living room to ensure mass market penetration. The rise of home networking will be a major driver in developing its presence, and media extender solutions such as Apple TV are already available to consumers.

Story filed 17.12.07