Netflix Dethrones Apple, Tops Online Video Service By Revenue

Netflix Tops Apple 2011 Online Video Revenue

Netflix passed Apple in 2011 to become the largest U.S. online movie service by revenue, according to a report released Friday by research firm IHS iSuppli. Netflix’s share of online revenue grew dramatically from 0.5 percent in 2010 to 44.0 percent in 2011.

Apple, which in 2010 held 60.8 percent of online video revenue, fell to 32.3 percent, allowing Netflix to surge to first place. Microsoft and Sony also saw their year-over-year percentage of revenue decrease, while Walmart-owned Vudu increased slightly, from 2.7 percent to 4.2 percent.

“2011 marked a sea change in the online movies business that saw the balance of consumer spending shift from a DVD-like transactional model to more TV-like subscription approach,” said Dan Cryan, research director for digital media at IHS iSuppli. “The online movie business more than doubled in 2011 to reach $992 million and it is expected to double this year as well.”

The cause for the sea change was the substantial increase in subscription video on demand (SVOD) usage, where a customer pays a flat recurring fee for access to a large library of content, compared to traditional video on demand (VOD) services, where customers pay a separate fee for each title.

Revenue from SVOD, offered by services like Netflix and Hulu, grew a staggering 10,000 percent, from $4.3 million in 2010 to $454 million in 2011. VOD revenue, from companies like Apple and Vudu, also grew, but at a much slower pace, from $155 million in 2010 to $273 million in 2011.

IHS iSuppli 2011 Online Video Revenue

“We are in the midst of a significant change in the way people pay to consume movies online,” Mr. Cryan said. “All the significant growth in revenue in the U.S. online movie business in 2011 was generated by rental business models, which provide temporary access, not permanent ownership. Rental delivers unlimited consumption with a low monthly fee for older titles as well as cheap rentals of new releases, providing the kind of value that online consumers want.”

While Netflix and Apple combined now drive over 75 percent of revenue for the entire U.S. online movie industry, the companies, in practice, offer different value to consumers. VOD services like iTunes are used primarily to access new releases, while Netflix-like SVOD services offer consumers value by granting access to a wide variety and number of older titles.

“Effectively the market has split,” Mr. Cryan said. “Netflix and Apple are competing for some of the same consumer time and money. However, the core value proposition of the two services is actually very different.”

Netflix’s strong growth is expected to slow down dramatically in 2012, as the company competes for customers with other online services and cable companies. iSuppli therefore expects VOD to have stronger growth this year, as services like iTunes continue to expand with new features and devices.