Worldwide sales of set-top boxes (STB) dipped one percent in the fourth quarter of 2010 despite countries transitioning from analog to digital and more operators offering services like high definition and DVR, according to market analyst firm Infonetics Research.

In its latest report, the research firm has predicted that STB shipments would increase 25 percent from 2010 through 2015, but the revenue would decline 5 percent to $13.1 billion due to drop in average selling price.

“On a global basis, demand for set-top boxes continues to increase as more countries transition from analog to digital and more operators offer enhanced services such as high definition and DVR. We also are seeing increasing demand for hybrid set-top boxes,” says Teresa Mastrangelo, directing analyst for video at Infonetics (News - Alert) Research.

In the fourth quarter of 2010, the research firm said it witnessed the dramatic growth of over-the-top services, as service providers and equipment vendors hit the 'sweet spot' for pricing.

Interestingly, these services have continued to complement pay TV rather than replace it.

Demand is also increasing for hybrid set-top boxes, which leverage the existing broadcast infrastructure, but utilize the broadband connection to incorporate OTT content and increase interactivity and on-demand services.

In the fourth quarter of 2010, worldwide set-top box (STB) sales dipped 1 percent from the previous quarter, to $3.63 billion, with cable STBs seeing the biggest sequential decline.

According to the researcher, over-the-top (OTT) media servers –– standalone set-top boxes such as Apple (News - Alert) TV, Roku Media Player, Boxee STB –– experienced the strongest sequential growth, nearly doubling quarter-over-quarter as providers such as Netflix and Hulu (News - Alert) launched low-cost streaming services toward the end of 3Q10.

In the meantime, Netflix and Hulu have become major players in the over-the-top (OTT) media servers market.

Netflix added more than 3 million subscribers in 4Q10 -- nearly twice as many as in the previous quarter, and 3 times as many as during the same period in 2009 -- now supporting a subscriber base that exceeds 20 million.

Hulu introduced its paid service, Hulu Plus, last year at a similar price point; its subscriber base is expected to exceed 1 million in 2011. In Europe, Amazon UK's unit LOVEFiLM is likely drive increasing OTT media server demand, according to the researcher.

OTT media server revenue jumped 90% in 2010, and is forecast by Infonetics to grow to $1.16 billion in 2015.

The race for vendor leadership in the overall set-top box market is extremely tight, with Motorola (News - Alert) just edging out Pace and Technicolor for worldwide revenue in 4Q10 due its focus on the lucrative North American market and offering more STBs with HD and DVR functions, which come with higher ASPs.