Hollywood’s hopes for a future built on digital film downloads have been severely undermined by research showing cooling consumer demand for movies online.

The film industry was banking on digital distribution eventually replacing the income it generates from sales of DVDs, which have been in steep decline for the past two years.

But while sales of digital films rose sharply in 2007 and 2008 growth stuttered in 2009, according to a report by Screen Digest.

The media research group had forecast total online movie sales in the US of $360m (€264m) for 2009, based on the sharp growth of 2007 and a near doubling of sales in 2008 to $219m.

Yet after a slowdown in the second half of the year, US revenues for 2009 were substantially lower than forecast at $291m.

“The market just cooled off,” said Arash Amel, a research director with Screen Digest. “This wasn’t caused by economic factors . . . the level of interest in digital downloads just isn’t there.”

He believes consumers have been deterred by an array of competing online platforms that prevent viewers from watching digitally downloaded films on the devices of their choice.

A consumer buying a film from Apple’s iTunes store is unable to watch it on their Microsoft Xbox console, for example.

“Digital downloading is characterised by its restrictions – it’s all about what viewers can’t do, rather than what they can do,” added Mr Amel.

Hollywood has moved to address problems associated with digital distribution yet the industry is divided on the best way forward.

Walt Disney has created Keychest, which it describes as “enabling technology” that allows consumers to buy a film once and watch it anywhere.

But the rest of the industry is supporting the rival Digital Entertainment Content Ecosystem coalition, which is backed by Sony Pictures.

With no immediate solution in sight, the Screen Digest report is likely to make grim reading in Hollywood.

The private equity and hedge fund money that poured into the industry fuelling a production boom has evaporated following the financial crisis, leaving the studios desperate for new revenue sources.

Studios have made efforts to cut the pay offered to top stars while the number of films going into production in 2009 fell almost 20 per cent to 520 and is forecast to fall again this year.

Screen Digest has slashed its growth forecasts for digital film sales by 30 per cent after the smaller-than-expected rise last year.

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