Apple has been dethroned as the dominant player in the U.S. onlinemovie business. According to a recent report from market researchfirm IHS iSuppli, Netflix surged past Apple's iTunes service in 2011 to become the largest U.S. online movie service byrevenue. Netflix s market share soared to 44% in 2011 , an increase from less than 1% in 2010, while Apple s share oftotal revenue declined to 32.3% last year from a 60.8% in 2010,despite seeing strong revenue growth. 2011 marked a sea change inthe online movies business that saw the balance of consumerspending shift from a DVD-like transactional model to more TV-likesubscription approach, said Dan Cryan, research director fordigital media at IHS. The online movie business more than doubledin 2011 to reach $992 million and it is expected to double thisyear as well. IHS iSuppli's press release follows below. Netflix Surpasses Apple to Take Lead in U.S. Online Movie Businessin 2011 June 1, 2012 DAN CRYAN Riding a tidal wave of growth for subscription video on demand(SVOD), Netflix Inc. in 2011 surged past Apple Inc. to become thelargest U.S. online movie service in revenue terms, according to anew IHS Screen Digest Broadband Media Market Insight Report frominformation and analytics provider IHS (NYSE: IHS). Netflix s share of U.S. online movie revenue soared to 44 percentin 2011, up from less than 1 percent in 2010, as presented in thetable below. The caused the company to rise to first place in 2011.Meanwhile, Apple s share of total revenue declined to 32.3 percentlast year, down from a 60.8 percent in 2010, despite enjoyingstrong revenue growth. 2011 marked a sea change in the online movies business that sawthe balance of consumer spending shift from a DVD-liketransactional model to more TV-like subscription approach, saidDan Cryan, research director for digital media at IHS. The onlinemovie business more than doubled in 2011 to reach $992 million andit is expected to double this year as well. Online, on the money In the United States, revenue from SVOD services which giveconsumers access to movies in return for a regular, recurringfee reached $454 million in 2011, growing by more than 10,000percent from $4.3 million in 2010. As a result, SVOD became thelargest segment of the U.S. online movie business in 2011,surpassing the other major parts of the market, transactional VODand electronic sell-through. This change can be attributed to twofactors: Netflix s decision to start charging directly for onlineaccess, and the major growth in the number of people using onlineSVOD. Meanwhile, transactional VOD expanded to $273 million in 2011, up75 percent from $155 million during 2010. In contrast to SVOD,transactional VOD services like iTunes require consumers to pay aseparate fee to rent each individual movie. EST grew by just 2.4percent to reach $236 million. We are in the midst of a significant change in the way people payto consume movies online, Cryan said. All the significantgrowth in revenue in the U.S. online movie business in 2011 wasgenerated by rental business models, which provide temporaryaccess, not permanent ownership. Rental delivers unlimitedconsumption with a low monthly fee for older titles as well ascheap rentals of new releases, providing the kind of value thatonline consumers want. In contrast, EST, which is much moreprofitable for studios on a per-transaction basis, is stuck in thedoldrums. Netflix and Apple leading two sides of the market What Netflix and iTunes have in common is that both services arefocused on the hardware side of the business. Netflix is available on a very wide range of connected devices,while iTunes can take advantage of Apple s soaring device salesgrowth. Nevertheless, comparisons between the two services have theirlimits. IHS research reveals that it s not unusual for 70 to 80percent of titles consumed through a transactional service to benew releases. However, SVOD services are overwhelmingly used forolder titles. Effectively the market has split, Cryan said. Netflix andApple are competing for some of the same consumer time and money.However, the core value proposition of the two services is actuallyvery different. To understand the relative positioning of Netflix and Apple, it srevealing to compare each service to its closest competitor. While Netflix rules the SVOD market, its closestcompetitor Hulu is less than 10 percent of its size. Apple siTunes continues to dominate the transactional segment, accountingfor 63.0 percent of revenue in this area, which was only downslightly from 64.6 percent in 2010. At the same time, the biggrowth story of 2011 was Walmart s Vudu, which captured 8.2percent of the growing transactional market, up from 2.8 percentlast year. Most of this growth has been achieved by using aNetflix-like device strategy and has come at the expense of otherproviders, not Apple. SVOD into the future The stunning growth in SVOD revenue seen in 2011 is not likely tocontinue at the same rate in the future. Netflix's customer transition is now complete.
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