Apple: Online Movie Rental Leader Within 18 Months, Study

According to analysis by Convergence Consulting, titled “The Battle for the North American Couch Potato,” nearly a quarter of all TV viewing will be Web-based by 2010, and Apple will be a movie rental leader within 18 months.

Last year, Apple managed to sell each TV show in its library 160,000 times, and each movie in its library about 10,000 times. Both figures showed decreases from their 2006 equivalents: 200,000 episodes of television sold, and 13,000 movies sold.

Although the online ad market was $22.5 billion in 2007, and is expected to more than double by 2011 to $47.5 million, only about 2% of all TV ad revenue was made online in 2007, and Convergence Consulting estimates that it will grow to 8% by 2011. As a result, Convergence warns that selling TV episodes directly to consumers through iTunes and other services is an “economic dead-end” with total download revenue per show averaging that of one 30-second TV ad.

The average TV subscriber home pays $64/month and watches 250 hours of TV, equating to $.25/hour. Apple’s run-rate for TV shows ($2 price) sold in 2006 was just 200,000 episodes per TV show, in 2007 this declined to 160,000 episodes per show (per show revenue is underwhelming, equating to an average 30 second TV ad).

Convergence argues that rentals only make sense for big players such as Apple, Amazon, and Microsoft because they all sell products that bring their services to the TV screen. Furthermore, Convergence predicts that Apple will become the online download rental leader within 18 months.

Online movie rental is only rational for players such as Apple, Amazon & Microsoft that sell other related products, and for Movielink, which is now owned by Blockbuster, and seeks to reshape its business. We forecast these four players, led by Apple, will have the largest revenue market share.

Online represented only 2% of US Movie/TV sales in 2007 and Convergence Consulting predicts it will rise to 3% for 2010, although high margin splits with studios will continue to weigh on online DVD sales:

Apple was responsible for 80% of Online Movie/TV download sales in 2007. As noted above on a per TV show basis sales are in decline; Movies have seen the same fate - on a per movie basis Apple sold 10,000 in 2007 down from 13,000 in 2006. Apple’s movie library is highly limited, with Disney representing nearly 60% of all movies sold. DVD sales, with their high margin 80-20 split, are the largest single source of operating income for the Studios, hence there is little incentive to disrupt the traditional distribution channel.

Researchers predict in-store rental revenue will account for 44% of movie/TV rentals in 2010, with mail rentals accounting for 37%. Rentals through kiosks will make up 11% of all rental revenue, and online rentals will account for 7%. That’s a dramatic shift compared to 2007, when 71% of rental revenue came from in-store rentals, 25% from mail rentals, 4% from kiosks and 1% from online.