U.S. Video on Demand Displacing Rentals and DVD Sales

By Tara Seals Comments

Video on demand revenue in the United States is projected to reach $10 billion annually by 2014, according to research firm In-Stat. That growth, analysts say, is eating into retail DVD and Blu-ray sales and rental revenue, with “no leveling in sight."

Pay-TV and broadcast TV services still generate the majority of the revenue, but both business models are currently under stress, says analyst Keith Nissen. He adds that on-demand viewing of video content, whether by transaction or subscription, is taking hold. And in order to ensure the continuation of existing revenue streams, new value propositions must be created.

 “A trend that started with personal video recorders is once again transforming the video industry, as consumers demand greater flexibility and convenience in acquiring entertainment content," explains Nissen.

The demand for flexibility will translate into a triumvirate of time- and place-shifting delivery models. The future will be a hybrid ecosystem, made up of both linear TV and on-demand video revenue streams.  Namely, “Transaction-Video-on-Demand (T-VOD)" encompasses online TV rentals, pay-TV VOD rentals and pay-per-view; “Subscription VOD (S-VOD)" includes online video subscription services, premium TV channels and free VOD with a pay-TV service; and “Electronic Sell-Through (EST)" covers the purchase of TV and movie content that is independent of subsequent content delivery methods. Download revenue in the U.S will more than triple between 2010 and 2014.

The success of on-demand EST will hinge primarily on the buy vs. rent decision. Realistically, EST cannot replace historic retail DVD video sales. However, the migration of DVD rentals to online T-VOD services will help fill this revenue gap. Subscription VOD will see the highest growth rate, but also the most intense competition: Online à la carte rental of TV episodes will directly compete with online subscription TV services, such as Hulu Plus and Netflix, and may detrimentally impact the use of TV Everywhere services.

“The transition to on-demand video does not mean that linear TV is coming to an end," said Nissen. “What we are seeing is the economics of the digital entertainment world have begun to shift."

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