• by Aaron Baar , February 18, 2012

Consumers are looking to on-demand video programming more and more, but the pay-TV operators who generally control those offerings may be facing some disruptive challenges in the near future.

According to The NPD Group, video-on-demand revenues from pay-TV services hit $1.3 billion last year, with 15% of consumers age 13 or older having used the services at least once in the 12-month period between August 2010 and August 2011. All told, there were about 40 million users of video on demand during that 12-month period, according to NPD (formerly National Purchase Diary.)

However, a competitive set of Internet video-on-demand options is growing at a healthy clip as well. Revenues from Internet video-on-demand hit $204 million last year, and the channel (which includes offerings from iTunes, Amazon, Vudu and others) hit seven million users by August 2011. According to NPD, one out of every six (16%) paid video-on-demand movie rental transactions were attributed to Internet sources in 2011.

With the increase in Internet-connected video devices (particularly TVs), that number could accelerate quickly. “Internet-connected everything will absolutely accelerate adoption, and it wouldn't be surprising to see doubling of iVOD in a year to 18 months,” Russ Crupnick, senior vice president of industry analysis for the NPD Group, tells Marketing Daily.

Moreover, the evidence suggests that more consumers are choosing to forgo the pay-TV services for the Internet services. According to NPD, iVOD users reduced the time they spent watching television shows, news and sports via pay-TV companies by 12% between August 2010 and August 2011. According to NPD, consumers perceive iVOD movies to be a better value than those offered by pay-TV companies and that the Internet offers greater availability of titles.

“Cable companies need to improve the user experience, become better marketers of VOD, and work with [production companies and studios] on getting ‘most favored nation status,’” Crupnick says. “Consumers will ultimately use a variety of services so there is opportunity for cable to be one. But there also risk they get shuffled out.”

“iVOD distributors are effectively using CRM, free trials, and other promotions to gain trial usage of their services by new customers,” Crupnick said. “With this new competition eating away at revenues, pay-TV operators need to be equally aggressive with promotions, in order to instill a habit of movie buying among their subscribers.”