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About seven months from now, the mainstream investment media will happily regale you with stories about the consumer electronics devices and apparel that are flying off store shelves as Christmas presents. They'll make their manufacturers sound like they're great investment opportunities, but of course they'll be late.
Just to give you an idea of how messed up this reactionary method of investing can be, recall that last year's big holiday items were the iPod, the red-hot personal music device from
, and satellite radio devices made by
XM Satellite Radio
( XMSR) and
Sirius Satellite Radio
. Apple shares are up 5% since Dec. 1, which is not too bad given the 3% decline in the broad market since then, but the satellite radio stocks are both down a tad more than 25%.
On the other hand, if you'd picked up on the trend at this time last year and sold on Dec. 1, just as the story was becoming more widely understood, then you'd have been up 150% on Apple and almost 100% on Sirius. And that is how the game is played properly.
The market's recent panic, in other words, may turn out in retrospect to have been a good time to do a special kind of Christmas shopping. So what shall it be?
Let's go big-picture first. If you have a wide enough field of vision, you can see a $250 billion to $1 trillion market opportunity just now opening up in the new world of consumer electronics, in which the long-promised convergence of media, software and hardware is swiftly becoming reality. That sounds like a really big number, but it may actually be conservative, according to a report by CreditSights analysts. If you're old enough, after all, you may recall the skepticism that met personal computers in the 1980s. And yet the humble PC spawned
industries of $200 billion for computers and $200 billion for software.
Flexible, energetic companies that can provide easy-to-use, digital media software, hardware, delivery systems, content or components at reasonable prices will increasingly find favor with investors in this environment. In many cases, you already know the names: device-maker Apple, to be sure, as well as those satellite radio providers. But also content providers such as
( PIXR) and
DreamWorks Animation SKG
; carriers such as cable goliath
and companies that help you find stuff, like
It's important to keep in mind that people in the future -- which is to say, seven months from now, but also seven years from now -- will still only have 24 hours in the day, so the new digital devices and content they buy will largely replace stuff they already have. Just as iPods selling for $250 surmounted large switching costs to replace Walkmans selling for $50 once digital content became available, so will high-definition plasma televisions selling for $999 ultimately replace conventional televisions selling for $500 once HD programming becomes more prevalent. It's just a matter of time, as manufacturing costs plunge and consumer prices fall into a sweet zone under $1,000.
Jumbo Replacement Cycle
So in this context, what we are really facing is the prospect of playing the early stages of what might be the biggest replacement cycle since the PC edged out paper and pen. CreditSights analysts get to their calculation of $500 billion, for the U.S.' role in the cycle alone, this way:
Upgrade of 250 million televisions to HDTV at an average cost of $750: $200 billion.
Unified digital hub to replace VCR, set-top cable box, DVD and personal video recorder at an average price of $250: $60 billion.
Software to create, manage and access content for 110 million households at $90 per home: $10 billion.
Digital delivery services to 70 million households at $40 per month: $20 billion per year.
Advertising spent on network and cable TV, radio and the Internet equaled $90 billion last year, and is likely to shift to the new media and rise, as these consumers are dedicated buyers.
340 million Walkman-like devices replaced by $200 iPods: $68 billion.
If you add the rapidly growing market for video game players and content, such as the PlayStation Portable from
and the new Xbox from
, there's another $50 billion to $100 billion. And pretty soon, if you include the rest of the world, plus some space on the margins for products unknown today, you can see how Shane Robison, chief technology officer at
, puts the revenue for new digital media at a $1 trillion annual run rate.
Now we've got to bring this 30,000-foot view back down to earth and figure out which pieces are actually going to sell big in the coming holiday season.
Holiday Season Contenders
For my money, Sony's beautiful, popular PlayStation Portable is a slam dunk -- so even though there are many more moving parts at Sony to worry about, not to mention the lumbering Japanese economy, I would consider Sony shares at the current quote and lower after their recent selloff from $41.50 to $35.
Another is still Apple, for although iPod sales will slow, its computer line continues to make significant headway both technologically and in the market against the Windows competition. I would love to see Apple purchase
and turn that company's fantastic Treo 650 -- a phone/organizer/wireless email device -- into a full-bore handheld digital media hub.
On the component side of things, you have to be impressed with the opportunity in front of consumer disk-drive maker
and disk-drive subassembly maker
Convenient, large local storage is what makes all of the cool media devices work on a personal level, and this industry has finally rationalized itself into a small number of players that are no longer hellbent on killing each other with price wars. Shares of both have held up this year, a good sign that the industry's good deeds are appreciated.
On the television side, there unfortunately are not a lot of great choices, as this is still a brutal business with cutthroat pricing. But for sheer innovation and low-price leadership, you should take a look at Korean-Dutch joint venture
, which is one of the world's largest suppliers of large LCD panels in sizes small enough for color mobile phones and large enough for computer monitors and high-definition televisions.
Although not as bright and gorgeous as plasma, the type of LCD panels made by LG.Philips are good enough for the mass market, and it should make great high-definition TV sets available at $500 price points for the mass market by November.
Without doubt, some devices, software and delivery systems will emerge from obscurity by the fall to blow us away. If you think you know what the electronics, software or content will be this year, please write me at
firstname.lastname@example.org and put DIGITAL in the subject line. I'll follow up with a roundup of reader suggestions in a few weeks.
At the time of publication, Markman was long Microsoft.
Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at email@example.com; put COMMENT in the subject line.