RIO DE JANEIRO — Competition is heating up in Brazil’s nascent video-on-demand market, which is expected to expand rapidly over the next few years. Two deep-pocketed world players, Netflix and Apple, have recently entered the arena to compete for new customers with local NetMovies, portal Terra and the top two local pay TV operators, among other smaller players.

There’s lots at stake in a market that has shown clear signs of great potential. The recession-free Brazilian economy last year passed the U.K. to become the sixth-largest in the world, and social policies have allowed millions of families to emerge from poverty and enter the middle class with coin to spend on entertainment. As a result, the country’s total base of pay-TV subscribers rose 29.5% to 12.7 million last year, according to regulatory agency Anatel, while the total number of active Internet users increased 11.2% in 2011 to 47.5 million, according to Ibope Nielsen Online.

“The potential for growth is very high, but it is a market in development,” said Jason Ropell, Netflix’s VP for content, who was in Brazil recently for the RioContent Market, the top gathering of local TV reps. “It only takes time. Brazilians consume a lot of content, especially from Hollywood.”

Netflix launched its Brazilian website in September with subscription VOD (SVOD) services only and a library of movies and TV shows that does not include new releases. The company has a call center in Brazil, but not an office, Ropell said.

Two months later, Apple launched a Brazilian online iTunes Store with transaction VOD (TVOD) services. The list of movies includes some new releases, but prices are higher than Netflix’s. It does not offer TV programs.

Pioneering NetMovies offers a service comparable to Netflix in the U.S. with SVOD and home delivery of DVD and Blu-ray. Another top player in the Brazilian VOD market is Internet portal Terra, which is part of Spain telcom giant Telefonica. Terra offers SVOD and TVOD services.

Meanwhile, the top two local pay-TV operators have launched VOD services. Cable operator NET, which has 5 million subs, offers Now, while satellite operator Sky, with 3.5 million subs, has Sky Online. Their moves can be perceived as defensive, as the two operators want to prevent customers from migrating to VOD service providers.

In the case of NET’s Now, subscribers do not pay extra to see movies previously presented on NET’s all-movie channel Telecine, says Now’s programming director Fernando Magalhaes. For non-Telecine movies, however, subs must pay extra.

“My goal is to improve the services for our subscribers,” Magalhaes says. “For the same fee, we offer better services.”

More than just competing againsteach other, VOD players in Brazil face obstacles inherent in the market, says Fabio Lima, CEO of digital film distrib company Mobz, a top player in the Brazilian digital market. One problem is the lack of broadband services in certain areas of the country. There are also regulatory concerns, in that taxes must be paid on VOD rentals and sales.

“Brazilian customers need to be educated about VOD,” Lima says. “At this point, the number of customers is still small, but it is growing fast; Brazil will have a significant VOD market within three years.”