The company said that its subscribers streamed more content to connected devices in February than requested rentals of DVDs, Blu-rays and video games.
Demand for digital streaming over physical copies has led LoveFilm to state that it is now a "predominantly streaming business", raising question marks over the future of the DVD operation.
LoveFilm, which launched a streaming-only service called LoveFilm Instant last year, said that the number of films and TV episodes streamed online through internet-connected devices is now exceeding demand for physical copies by 20%.
Digital streaming demand in February was up a staggering 400% year-on-year, although the rental of physical products also increased by 25% year-on-year.
Jim Buckle, the new managing director of LoveFilm following the resignation of chief executive Simon Calver, said that the growth in demand for digital is expected to continue.
"The first quarter of 2012 has shown us two things: that LoveFilm members are watching more films and TV series both on the internet and on DVD than ever before and; in less than three years, streaming through LoveFilm Instant has become more popular than renting DVDs," he said.
"Our members crave instant on-demand access. With more world-class digital content being added to LoveFilm Instant and a growing number of internet-connected devices delivering it to members' living rooms we expect this trend to continue.
"At the same time, many of our members continue to enjoy the combination of LoveFilm Instant and LoveFilm By Post in one, great value for money, subscription, with both services growing rapidly."
LoveFilm now has more than 2m subscribers across Europe, accessing a range of movies such as The Twilight Saga: Eclipse, Source Code and soon the acclaimed Tinker Tailor Solider Spy.
However, the firm is facing stiff competition from rival Netflix and will soon have to cope with the arrival of Sky's pay-as-you-go TV and film streaming service NOW TV.
Another key challenge facing LoveFilm is what it should do with the legacy DVD rental operation.
Last year, Netflix angered customers in the US by announcing plans to spinoff its DVD-by-mail business into a new brand called Qwikster, running separately from the core Netflix streaming business.
After widespread criticism from subscribers, investors and analysts, Netflix was forced to backtrack on the plans, involving the abandonment of Qwikster and the retention of the DVD rentals operation in the Netflix offering.
However, Netflix opted not to include DVD rentals when it launched in the UK and Ireland earlier in the year, showing that the firm sees little future in the postal operation.
> Netflix, LoveFilm drawn into pay-TV movies probe