Summary:

Apple’s iTunes is #1 when it comes to movie sales and rentals online, but Microsoft’s share is growing quickly due to sales of its Kinect motion controller. While Sony ranks third now, it could soon be overtaken by Walmart’s Vudu if that service continues to grow.

itunes

Apple is still the dominant player in online movie sales, with nearly two-thirds of all electronic sell-through (EST) revenues coming from its iTunes movie store. But rapid sales on gaming platforms like Microsoft’s Xbox 360 and an increase in the number of digital storefronts built into connected TVs are chipping away at iTunes’ dominance.

IHS Screen Digest reported that Apple’s iTunes dominated sales of movies and TV shows online in 2010, accounting for 64.5 percent of all EST and Internet video on demand revenues. But that share has declined pretty dramatically as other platforms gain consumer adoption; a year earlier iTunes had 74.4 percent share of the EST market, according to Screen Digest.

Apple’s fastest-growing competitor is Microsoft, which solidly holds the number two spot for online video sales. Buoyed by higher sales of its Xbox 360 gaming platform, Microsoft’s share of the online VOD market increased from 11.6 to 17.9 percent over the last year. In a phone interview, Screen Digest analyst Arash Amel said that much of Microsoft’s growth was backloaded to the fourth quarter, and was due in part to what he called the “Kinect effect.” The Kinect motion controller didn’t just increase sales of Xbox units, but it made the game console more family friendly, something that Amel said helped increase the number of digital video sales that happened on the platform but also skewed the types of movies that were being viewed to more family-friendly fare.

Sony also saw its share increase — though not as dramatically — as it accounted for 7.2 percent of online video sales, compared to 5.7 percent a year earlier. However, Amel said that at the same time Microsoft’s online video sales increased due to Kinect, Sony was seeing its sales cannibalized by the introduction of Walmart’s Vudu digital storefront on its PlayStation 3 gaming platform. As a result, while Sony was in third place for the full year, for the fourth quarter Sony actually fell behind Amazon for online video sales.

Over the next year, due to its rollout onto new connected TV platforms and aggressive pricing of movie sales and rentals, Amel said he expects Vudu to end 2011 as the number three provider of online movie sales. With backing by Walmart and a plan to be on as many connected devices as possible, Vudu could see its share dramatically increase over the next year.

Amel said digital revenues totalled $385 million for 2010, of which $230 million was electronic sell-through and $155 million was Internet VOD or rental. That compares to $280 million a year earlier, which was comprised of $180 million in movie sales and $100 million in online rentals. While total revenues from digital storefronts are expected to increase to $480 million this year, that increase will be marked by a deceleration in electronic sell-through and a faster rate of increase for rentals. Online movie sales are expected to grow just $30 million, to $260 million in 2011, while rentals will increase by $65 million, to $220 million over the next year.

The slower growth in the electronic sell-through market is bad news for studios, as they try to combat weakening DVD sales with an increased focus on digital distribution. The problem is that digital sales of movies aren’t as seamless as they need to be, which is something that the industry is hoping to solve with the introduction of its UltraViolet digital rights locker. By enabling users to buy a movie once and watch it on multiple devices with cloud-based streaming, UltraViolet could eliminate some of the current friction that comes with purchasing, downloading and transferring files between different devices — a process that is virtually impossible now. But UltraViolet won’t be available until the middle of this year, which could slow adoption of digital movie sales.

All that said, digital distribution probably make up for the decline of DVD sales over the next several years. According to research firm In-Stat, DVD and Blu-ray disc sales are expected to fall by $4.6 billion between 2009 and 2014. Without a robust platform for distribution online, the studios may find the digital transition difficult to navigate.

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