Apple StoreThe paid video download market is a dead end, according to a new report by Forrester Research, Inc. Forrester estimates that paid video downloads will peak in 2007, generating $279 million in revenue, up from $98 million last year. Instead, advertising models will drive the online video market.

In the past year, companies such as Apple, Amazon, Microsoft, and Wal-Mart have begun offering consumers the ability to download television programs and movies to own or rent. But a recent Forrester survey showed that only nine percent of online adults have ever paid to download a movie or TV show. Furthermore, an analysis of these consumers showed they are a niche of media junkies willing to spend heavily on such content; they do not represent the vanguard of a rush by mainstream consumers. Without mainstream viewers joining the party, the video download market will not grow fast enough to support the ambitions of all the companies involved.

“The paid video download market in its current evolutionary state will soon become extinct, despite the fast growth and the millions being spent today,” said Forrester Research Principal Analyst James McQuivey, in the press release. “Television and cable networks will shift the bulk of paid downloading to ad-supported streams where they have control of ads and effective audience measurement. The movie studios, whose content only makes up a fraction of today’s paid downloads, will put their weight behind subscription models that imitate premium cable channel services.”

Other implications of such a market shift include:

• Set-top boxes give in to Internet video. Apple will have to rethink Apple TV, shifting it from a closed pay-per-view system to an ad-supported, broadband service provider model that puts YouTube videos as well as ABC.com TV shows directly on the TV. At the same time, Internet-friendly set-top boxes from Cisco and Motorola will give Comcast and Time Warner a way to offer competing Internet-based, ad-supported content.

• Television networks allow ad-supported downloads of prime-time TV shows. New technology such as the recently announced Adobe Media Player will allow consumers to download video for playback without losing the ads that were sold with the video. Expect ABC to go first in 2008, with other networks quickly following.

• Paid video download pioneers CinemaNow and Movielink shift their expertise to partner with satellite and telco service providers provide video-on-demand (VOD) content without a huge investment in VOD infrastructure.

• Streaming of ad-supported TV shows eclipses DVR use by the end of 2008. Advertisers will cheer because this shift thwarts ad-skipping; consumers will applaud this breakthrough because it’s cheaper than a DVR and is more flexible.

“To attract mainstream viewers, media strategy executives must develop new business models and delivery mechanisms to make video downloading ad-supported and geek-free,” says McQuivey.

The report “Paid Video Downloads Give Way To Ad Models” includes recommendations for media executives and is currently available to Forrester RoleView clients. It can also be purchased directly at http://www.forrester.com/Research/Document/Excerpt/0,7211,42291,00.html
Apple has already signaled their intention to continually develop new software features for Apple TV via free software and/or firmware updates and hinted at iTunes Store video rentals in the future. Please see related articles below.