Our take...
AAM's withdrawal from the online movie distribution sector comes at a time when many companies, such as Tesco, are only beginning to roll out video download services in the UK. The 2005 launch of the Lovefilm digital store marked the first significant attempt to distribute legal movie downloads in the UK. While it is often the case that being an early entrant into a new market conveys some competitive advantage over slower rivals AAM's move into online movie distribution was perhaps too early.

Consumers have been slow to embrace legal digital downloads, deterred by a host of obstacles including long download times, prohibitively high pricing (particularly for digital retail) and the limited choice of titles. These issues are gradually being resolved; broadband speeds are increasing, pricing is coming down and Studios are becoming more willing to license their content. The transactional online movie market is beginning to pick up – Screen Digest forecasts 1.3m digital movies will have been rented or bought in 2008.

However this market growth does not mean that AAM's decision to exit the market is unwise. The market has grown primarily as a result of the introduction of movies to Apple's iTunes store (iTS) in June 2008 and the iTS now dominates the UK online movie market. Outlets which are not closely bound to a device, including those run by AAM, struggle to generate significant sales volumes as consumers are reluctant to buy content which cannot easily be moved off the PC. The launch of movies through the iTS has also compelled other stores to lower their prices in order to compete with those set by Apple - £10.99 for digital retail new releases and £6.99 for library titles. While this is good news for consumers, this price drop reduces the already low retailer margins still further.

From an economics perspective, the transactional online video market is shaping up to be a 'value-add' business, with successful service providers investing heavily and paying over the odds for content for digital distribution in order to drive a separate, higher-margin profit centre – devices sales in the case of Apple or increasing supermarket footfall (through cross-promotion) in the case of Tesco. AAM does not have another business centre for which its online distribution network could play this supporting role. As such concentrating on digital cinema, in which AAM is one of the leading players in Europe, is likely to prove a far more profitable use of AAM's resources than maintaining its online distribution network.