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Netflix surpasses iTunes to become largest US online movie service

Despite its missteps last year, Netflix still managed to surge past Apple's iTunes and become the largest US online movie service in revenue terms, according to new data from IHS iSuppli.

Apple dropped from 60.8 per cent in 2010 to 32.3 percent market share in 2011, even though it saw "strong revenue growth," IHS said.

"2011 marked a sea change in the online movies business that saw the balance of consumer spending shift from a DVD-like transactional model to more TV-like subscription approach," Dan Cryan, research director for digital media at IHS, said in a statement. "The online movie business more than doubled in 2011 to reach $992 million and it is expected to double this year as well."

Ironically, one of the factors that contributed to Netflix's growth in the space were the price hikes that initially alienated so many of its customers. Last year, Netflix split pricing for its streaming-only and DVD rental services, charging $7.99 for each rather than $9.99 for both. That decision to start charging directly for online access helped boost its revenue share, IHS said.

The price hike - and the short-lived decision to re-brand the DVD business as Qwikster - contributed to a loss of about 800,000 Netflix customers last year. But that started to rebound around the holiday season, and Netflix said recently that customers who dropped Netflix last year are starting to return.

Still, IHS does not expect the 2011 Netflix surge to continue. "Netflix's customer transition is now complete," IHS said. "While its effect will be felt into 2012, which will be the first full year of paid streaming, Netflix's U.S. digital customer base is likely to expand at a slower rate, in keeping with premium pay-TV channels."

As a result, IHS expects video on demand (VOD) services to grow at a faster rate than subscription video on demand (SVOD) services this year - unless a new SVOD service is unveiled, like a standalone HBO streaming option or full-fledged pay-TV subscription online.

For now, however, SVOD is the largest segment of the U.S. online movie business, with overall revenue reaching $454 million in 2011, up from $4.3 million the year before. Netflix's closest competitor in the market is Hulu, which offers Hulu Plus for $7.99 per month with a focus on full-season TV shows.

For those buying or renting access to one movie or TV episode, iTunes is king with 63 percent of revenue in the space. But Walmart's Vudu managed to grab a piece of the pie, growing from 2.8 per cent of the market to 8.2 per cent last year.

Not surprisingly, up to 70-80 per cent of content consumed on services like iTunes are new titles, while services like Netflix are "overwhelmingly used for older titles," IHS said.