Study: Digital business to reach critical mass

The U.S. video download market is on track to triple in size to $279 million this year, but that may be about as big as it gets.

That’s the conclusion of a new study by Forrester, one of the first to analyze the nascent download biz.

While many in Hollywood are hoping that new stores like Wal-Mart.com and devices such as the Apple TV will help spur interest in video downloads, Forrester isn’t counting on it. Research firm found that the small portion of people already downloading movies and TV shows will likely increase their spending as a result, but that most people simply aren’t interested.

“The people who pay to download video are extreme media-philes,” said Forrester analyst James McQuivey. “They are not the tip of an iceberg. They may grow their own spending, but there aren’t many people like that left.”

While revenue is expected to triple this year, Forrester’s study, based on consumer surveys and exec interviews, projected that the number of people buying digital copies of movies or TV shows will only grow from 7 million to 11 million.

Though conflicts between digital rights management formats and high prices contribute to the problem, Forrester found that most people simply don’t see the value in downloading movies and TV shows given the ubiquity of DVDs and the growing number of DVRs.

That doesn’t mean digital distribution has a dim future, however. Forrester instead is predicting that free, ad-supported video-on-demand and subscription-based digital movie rentals will dominate.

Already, most networks are making deals with numerous Web sites and cable operators to offer TV shows free on-demand with commercials a day after they air. Examples include CBS’ interactive audience network and the NBC-News Corp. joint venture, and ABC’s recent deal with Cox.

Many digital execs at networks already say they see ad-supported streaming, and not paid downloads, as their main focus going forward.

Movie biz is still focusing primarily on paid downloads in order to not upset the huge DVD sell-through biz. But as the homevideo market continues to stall and paid digital downloads don’t come close to making up the difference, Forrester predicts, studios will start experimenting more with digital business models.

“In TV, it will be ad-supported everything in digital,” McQuivey said. “But for film, it’s going to be subscription. That’s the model a lot of people are used to with premium channels and Netflix, and it just makes the most sense in digital.”

Though rights issues for studios could be complicated, Forrester predicts that consumers will respond best to the opportunity to pay a flat monthly fee and get any movie on-demand. Currently, online movie rental services like Xbox Live and the soon-to-launch Vudu charge between $3 and $5 per pic.

Lack of growth in permanent downloads will likely spell trouble for the fast-growing number of online videostores, from BitTorrent to Movielink to Amazon.com. Even in the currently small market, Apple’s iTunes, which has thus far sold more than 2 million movies and 50 million TV shows, is bigger than all its competitors combined.

The Forrester study concluded that most of these digital videostores will have to transition to an ad-supported or subscription model to survive. Even market leader Apple, firm said, will have to upgrade the Apple TV, to access a broad range of Internet video without making users pay for each download.

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