OTT Video DoublesAmericans will watch more movies via the Internet than they will on physical video formats such as DVD and Blu-ray in 2012, marking a milestone in the rise of legal Internet Protocol (IP) and over-the-top (OTT) video consumption, according to a new report from IHS. Legal, paid-for consumption of movies online in the U.S. will reach 3.4 billion views, or transactions, in 2012, almost 1 billion units more than the 2.4 billion for physical video this year, according to the IHS Screen Digest Broadband Media Market Insight report.

Physical movie formats such as DVD and Blu-ray had a commanding lead over movies delivered over the Internet as recently as last year, IHS noted, with 2.6 billion views or transactions, compared to 1.4 billion for online. IHS forecasts that Internet-delivered movies will grow 135% this year, surpassing a declining or stagnating volume of DVD and Blu-ray disc sales.

The emergence of so-called “all-you-can-eat” online video subscription services, such as those offered by Netflix and Amazon Prime, has been a key growth driver, offering subscribers unlimited consumption for a flat monthly or annual fee. On-demand Internet video service subscriptions made up 94% of all paid online movie consumption in 2011 as compared to just 1.3% of units consumed that were bought on an outright ownership basis via electronic sell-through, IHS report authors pointed out.

IHS breaks physical format video sales into three categories, including VHS, DVD and Blu-ray discs. On the on-line side, IHS sub-categories include  electronic sell-through (EST), Internet video-on-demand (iVoD) and subscription video-on-demand (SVOD).

“The year 2012 will be the final nail to the coffin on the old idea that consumers won’t accept premium content distribution over the Internet,” said Dan Cryan, senior principal analyst, broadband & digital media at IHS. “In fact, the growth in online consumption is part of a broader trend that has seen the total number of movies consumed from services that are traditionally considered ‘home entertainment’ grow by 40 percent between 2007 and 2011, even as the number of movies viewed on physical formats has declined.”

That said, IHS forecasts that Americans will still spend more time watching movies on physical formats than they do watching on-line content. Americans will spend an estimated 4.3 billion hours watching DVDs and Blu-ray discs compared to 3.2 billion hours for movies online, according to IHS.

Physical video also will continue to generate more revenues than online options, IHS says. The research firm predicts that online video will generate just $1.7 billion in revenue as compared to $11.1 billion for physical formats. The discrepancy is due to the fact that Americans will pay an average 51 cents for every movie consumed online as compared to $4.72 for physical video. That’s a relationship that’s likely to persist out as far as 2016, when IHS forecasts that online video revenue will account for 17% of revenue as compared to 75% for physical video. Pay-TV VoD will account for the remaining 8% of the overall market.

Within the online video services space, competition is intensifying, as subscription VoD service providers such as Amazon Prime and Hulu challenge Netflix’s market leadership. 2011 was pivotal for Amazon Prime in particular, as it completed the shift from a discount video buying/delivery service to a full-fledged, subscription-based OTT video service provider, IHS noted.

The popularity of SVOD may “clip the wings” of electronic sell-through services, IHS added. “After more than 30 years of buying and renting movies on tapes and discs, this year marks the tipping point as U.S. consumers now are making a historic switch to Internet-based consumption, setting the stage for a worldwide migration of consumption from physical to online,” Cryan said. “We are looking at the beginning of the end of the age of movies on physical media like DVD and Blu-ray. But the transition is likely to take time: almost nine years after the launch of the iTunes Store, CDs are still a vital part of the music business.”