Online video really is a tale of two markets, “movies” and “television.” The key strategic insight is that both movies and music originally were “packaged goods,” while television never was anything but a service.

As it turns out, it is easier to transform the distribution function of a packaged goods business than a service business. Online retailing is probably the best example.

In the communications business, there is a different dynamic. Communications, a service, now is available as a product.

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Ignoring for the moment the matter of how people pay for their apps or services, many over the top messaging or voice communications features now can be bought a la carte, much as a single song, album or movie can be purchased.

To complicate matters, though, business phone systems, a product, now can be bought as a service. The phrase “communications as a service” therefore is a bit misleading, except as applied to hosted IP telephony–a service–as a substitute for a business phone system (a product).

As a rule, though, it remains correct to note that the overall direction is in the direction of products becoming services. Streaming music and packaged video are examples. But so are computing, storage and software becoming services.

In the video arena, there is a similar shift towards former packaged goods becoming a service, as well as a “download.” And you might argue that the services approach is the bigger trend.

As maligned as Netflix has been for its recent pricing and packaging missteps, Netflix in 2011 surged past Apple to become the largest U.S. online movie service in revenue terms, according to IHS Screen Digest.

Netflix revenue share grew tp 44 percent in 2011, up from less than one percent in 2010, a rather astonishing rate of growth in a single year. Netflix also has single handedly changed the retail packaging of online video, from an a la carte to a subscription model.

Apple’s share of total revenue meanwhile declined to 32.3 percent in 2011, down from a 60.8 percent in 2010. The key observation there is that Apple uses the download, a la carte model.

In the United States, revenue from Netflix-style subscription VOD reached $454 million in 2011, growing by more than 10,000 percent from $4.3 million in 2010.

Transactional VOD revenues grew to $273 million in 2011, up 75 percent from $155 million during 2010.

In contrast, electronic sell through, or download to own models are not growing much at all, perhaps mirroring the trend in physical media to rent content rather than own it.

What neither Netflix nor Apple have yet been able to do is dramatically change the distribution of subscription TV.

Over-the-top video providers are not yet an adequate substitute for traditional pay TV, at least in the United Kingdom, according to Ovum. Instead, OTT video is complementary, and used for “catch up TV” or for movie viewing.

Based on a survey of 3,000 U.K. broadband users about over-the-top providers Amazon, Apple, BBC, Google, Hulu, Netflix, Samsung, Sony and Xbox Live, Ovum argues that “although OTT TV services now more closely resemble those of their network-based competitors, they have a long way to go before they can match the quality and breadth of content of traditional pay-TV offerings.”

Among the other key observations is that Apple and Netflix appeal to different segments of the market. Apple’s iTunes tends to be used more for “transactional” viewing, essentially traditional “video on demand,” where titles are bought one at a time.

Apple has 63 percent of revenue for transactional purchasing. The corollary is that since 70 to 80 percent of titles consumed through a transactional service are new releases, it is reasonable to argue that Apple iTunes is used more heavily for watching new release movies.

Subscription services, such as Netflix, tend to get more viewership from the catalog. That doesn’t mean “new releases” are unimportant, simply that more of Netflix’s views are of older titles from the catalog.

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