A new analysis of the state of film distribution over the Web reports that the biggest stumbling block to the adoption of digital video downloads is Hollywood.

“The single biggest factor holding back Internet movie sales is Hollywood’s reluctance to allow films to be sold over the Web so that they can ultimately be viewed on TVs,” according to the report.

A secondary issue identified is the complexity of digital video download options.

“Although technologies exist today that allow for the transfer of Web-distributed films to traditional TV sets, these technologies are too complex for most consumers. Other technologies that allow for a smoother transition of movies to TV sets are still too new and have yet to gain traction in the marketplace.

According to the analysis, the market for movies on the web will generate just $37.25 million in 2006 in the U.S. Placed in context, this revenue is less than the 2005 domestic box office revenue for independent film hit Napoleon Dynamite, which generated $44.5 million in ticket sales that year.

The sale and rental of movies over the Internet will grow dramatically over the coming years and could reach nearly 60 million (59.4 million) units by 2010, with revenues skyrocketing to over a half billion dollars ($534 million).

Even with this growth, Internet movie sales and rentals will still represent a tiny portion of the motion picture industrys revenues. The $534 million in 2010 represents only 2% of the home video rental and sales revenue generated by the motion picture business in 2005. The 59.4 million units still represents only 4% of the total home video units sold in 2005.