Forrester: Paid video download market is a dead end; Apple will have to rethink Apple TV

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.

76 Comments

  1. Forrester makes about 2 dozen “macro trend” calls a year. They get 1 or 2 correct and at least six absurdly wrong. So why would anyone care what they say ? Amazing that they are still in business….large companies sponsoring their “research” as a way to get independant confirmation of their corporate strategy.

    I know, I’ve used company money to pay for a study that supports my business unit several times.

  2. I doubt 2007 will be the peak in paid video downloads. It is quite possible that this will catch on as people realize that paying a $50+ montly bill to Comcast for 200 channels isn’t the best option. Many people tend to watch a few shows and never touch the other 197 channels. But, because cable companies bundle everything, you have to pay for them all. About a year ago, I dropped my expensive cable (only have basic for $9 a month) and I buy the other shows I want to see that aren’t on basic (like Battlestar Galactica). I have saved over $200 and I get better quality than the standard def without commercials.

    In an era of people skipping ads with TiVo, I’m not so sure that an ad support model will continue to exist. I sure think all the cable companies better start rethinking their business plans.

  3. I just really want to get this out on the record:

    1. AppleTV is a product ahead of its time trying to push the envelope on new technology.
    * not very many people yet have the TVs that this works with, when people upgrade their TV sets over next few years they will be able to get an AppleTV if Apple sells the product right.
    * Apple doesn’t yet have the content in HD format from iTS and is not yet really ready to leverage the power of this hardware.

    It will take time for this product to mature properly and find its market.

    2. The AppleTV is a product designed to expand the ecosystem around iTS, and allow Apple to leverage its strength in online downloads by allowing people to have more freedom and flexibility to do what they want with their content. As Apple grows this ecosystem and creates new ways to use your content, the parts will feed on themselves. It could be some time before the true success of the AppleTV is known. It’s got much potential, I am willing to give Apple some time to really sell this product properly, I think they can do it.

    I don’t think Apple has everything in place to really leverage this hardware, but I’m not sure we’ve seen all of Apple’s strategy yet.

  4. I’m suprised that more companies haven’t pushed for access to iTunes in some capacity, to be able to display content free or otherwise. They could have it as an add on to the store and it would guarantee an audience who would be able to view it without having to worry about browsers and plugins and it has a proven interface.

    Of course, they want it on their websites to be able to hawk their crap to people.

  5. This article is right on the money.

    The overwhelming amount of average everyday people want it cheap, instant and easy.

    I’m spending all day and 25 DVD $$ burning a backup of all the video content bought from iTMS.

    Stuff I will hardly ever watch again and can’t play on my PS3 hooked up to my HDTV.

    I will need ANOTHER device (AppleTV) just to watch it on my HDTV in poor quality.

    This totally sucks, it would have been better to buy the series on DVD in the first place.

  6. I don’t see how Forrester Research can say video downloads will “peak” in 2007. There’s always going to be “peaks” but Forrester Research’s findings are like predictions from the 1950’s saying that the popularity of TV programming will peak in the year 1958. With the video download technology still in it’s infancy (pre-mature birth if you ask me) any “peak” will likely be YEARS away. Look at Podcasts, they have become very mainstream in just 3 or so years. Video downloads, purchased or not, is far from a dead end. Broadcast and downloaded video and audio will soon blur into one and the same.

  7. Apple TV is going nowhere fast in it’s current form. No way the public embraces it without some kind of Tivo functions to get it into people’s living room. After having to pay for cable/sat why would I want to buy low quality shows and movies??? It just doesn’t make sense.

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