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For Video-on-Demand, It's Showtime

Here's how VOD will help to pay Hollywood's elephantine budgets: At the moment, filmmakers earn only 30% of the proceeds of a DVD rented via Blockbuster (BBI) or Netflix (NFLX).

But because so many parties are begging to be their partners in this new distribution channel, content producers turned the tables and negotiated to earn a whopping 70% of the revenue earned on every on-demand showing.

As a result of this gigantic swing in pricing power, according to a new report by analysts at Thomas Weisel Partners, the impact of VOD on studios will be much greater than just a pickup in sales. If demand for all forms of home video -- DVD rentals, DVD sales and on-demand -- grows only 3% annually to $10.3 billion by 2012, studio home video revenue will grow 14% a year to $5.4 billion.

The difference is the much higher margin earned via the on-demand channel, and it is likely to transform the market's view of movie producers from volatile, hit-dependent cash cows into above-average growth companies akin to specialty retailers. Lions Gate -- a specialist in horror flicks such as the Saw series -- has told investors that there are 29 companies negotiating for its digital VOD rights.

The bidders are all the companies bidding to be your video supplier of choice, including not just Comcast and broadband/Web-based TV provider Verizon (VZ) but also (AMZN), Apple Computer (AAPL) and Wal-Mart Stores (WMT).

The case of regional Bell operating companies Verizon and AT&T (T) is particularly intriguing because they are likely to try to use video-on-demand to acquire and retain customers for their new foray into living rooms via fiber-optic lines, according to Weisel analysts.

That is why these brand new players on the movie distribution scene are more willing to pay much more attractive splits to movie studios for VOD rights. They don't mind paying a few dozen more cents per movie if it means they can wrest control of movie watchers from their cable competitors.

Two Years, 20%

I think you make a lot of money over at least the next two years by betting on the stocks of content providers like Viacom, Disney, Lions Gate, Time Warner and Marvel. Look for the shares of each to advance at least 20% over the next 18 months. My favorites are Lions Gate, Disney and Viacom.

Video-on-Demand Stocks
12/19 price Market cap
Lions Gate Entertainment $10.47 $1.1 billion
Viacom $39.34 $27.5 billion
Walt Disney $34.85 $72 billion
NDS Group $48.03 $2.7 billion
Marvel Entertainment $27.42 $2.2 billion
Time Warner $21.92 $87 billion
Gaiam $12.94 $350 million

Weisel also recommends Gaiam (GAIA), the nation's leader in fitness and nontheatrical home-video products. The company creates and distributes 95% of its own media with a direct-to-consumer distribution strategy focused on yoga, Pilates and personal-improvement titles. It also sells a lot of videos to LodgeNet Entertainment (LNET) for use in hotels.

Another less well-known winner in video-on-demand and pay TV will be NDS Group, which is a unit of News Corp. (NWS) that trades separately from its parent. It's the leading maker of digital content protection technology, with 64 million active subscribers.

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