Online video retail sales will exceed $3.8bn by 2011, new research from the analysts at Understanding and Solutions claims.

The online opportunity is now considered so important that Hollywood studios are preparing to fully engage in the emerging markets, the report claims, pointing out that DVD sales are finally beginning to slow down.

The report points out that despite the arrival of online video services and products, such as iTunes and Apple TV, industry emergence has been slower than expected. The US leads the way, though it will generate revenues of just $280m in 2007.

“The market is currently underperforming for a variety of reasons,” says Mai Hoang, analyst with Understanding & Solutions. “Online video services and title availability are limited, pricing strategies are embryonic and the technology infrastructure has yet to catch up. However, momentum is building and by 2011 online video in the US will represent 8 per cent of total home entertainment revenues, with Western Europe close behind at 7 per cent."

The analyst expects multiple online video formats will exist, with no single format predominating across the industry. High Definition formats also seem set to attract interest, the report states, observing that the industry is presently dominated by iTunes and the Xbox Live.

iTunes has sold more than 2 million movies and 95 million TV shows to date. Its competitive pricing structure, user-friendly interface and the iPod’s ubiquitous nature have allowed it to gain traction quickly, the analysts state.

Microsoft’s Xbox Live Video Marketplace has boosted the online VoD movie market, bridging the gap between PC and TV, and providing easily accessible high definition content to consumers.

"Going forward, online video must continue to reach out to the living room to ensure mass-market penetration. The rise of home networking will be a major driver in developing its presence, and media extender solutions such as Apple TV are already available to consumers," the report concludes.