The future of Internet television belongs to free video podcasts and ad-supported video downloads, according to a new report by Forrester Research. Forrester estimates that paid video downloads will peak in 2007, generating $279 million in revenue, up from $98 million last year. Beyond 2007, advertising models will drive the online video market.

Despite the interest in selling video downloads from companies like Apple, Amazon, Microsoft, and Wal-Mart, only nine percent of online adults have ever paid to download a movie or TV show. Forrester’s analysis suggests that, while there’s a niche of media junkies willing to spend heavily on such content, they do not represent the vanguard of a rush by mainstream consumers. Without mainstream viewers joining the party, the video download market will not grow fast enough to support the ambitions of all the companies involved.

“The paid video download market in its current evolutionary state will soon become extinct, despite the fast growth and the millions being spent today,” said Forrester’s James McQuivey. “Television and cable networks will shift the bulk of paid downloading to ad-supported streams where they have control of ads and effective audience measurement. The movie studios, whose content only makes up a fraction of today‚Äôs paid downloads, will put their weight behind subscription models that imitate premium cable channel services.”

Other highlights of Forrester’s report:

• Internet video will replace closed set-top box ecosystems. Apple will have to rethink Apple TV, moving to an ad-supported, broadband service provider model that puts YouTube videos as well as ABC.com TV shows directly on the TV. At the same time, Internet-friendly set-top boxes from Cisco and Motorola will give Comcast and Time Warner a way to offer competing Internet-based, ad-supported content.
• Television networks will allow ad-supported downloads of prime-time TV shows. New technology such as the recently announced Adobe Media Player will allow consumers to download video for playback without losing the ads that were sold with the video. Expect ABC to go first in 2008, with other networks quickly following.
• Streaming of ad-supported TV shows will eclipse DVR use by the end of 2008. Advertisers will cheer because this shift thwarts ad-skipping; consumers will applaud this breakthrough because it‚Äôs cheaper than a DVR and is more flexible.

“To attract mainstream viewers, media strategy executives must develop new business models and delivery mechanisms to make video downloading ad-supported and geek-free,” says McQuivey.