Comfort zone

Digi living room has many occupants

With the goal of building the "digital living room," an epic battle pitting computer hardware and software makers against consumer electronics companies is being fought.

Also of epic proportions is a new 91-page report from Canaccord Adams analyst Steven Frankel, who lays out the various battle plans and handicaps the potential winners of the aforementioned war.

In the end, he picks his favorite stocks for profiting from the digital living room. But first, a definition: Frankel says it "mixes physical media such as CDs and DVDs with personal digital media," streamed or downloaded from the Internet in a simple fashion.

"The nerd vocabulary of codecs, networking protocols and a hodgepodge of digital rights management schemes needs to be tamed," he said.

Ideally, he says, the digital living room will allow consumers "to move from linear television to DVR to DVD to files such as MP3s or photos, all from the comfort of the couch and without juggling multiple remote controls."

With that in mind, Frankel painstakingly pours through data related to YouTube, MySpace, Hulu, Fancast, Unbox, Watch Now (or whatever Netflix is calling that service nowadays), CinemaNow and others.

"We believe 2008 will be a year in which several of these new distribution paradigms gain traction," he says.

Online video already is hugely popular, if not yet easily viewed on living room TV sets. According to various sources Frankel names, 80 million Americans watched a TV show online last year; in December alone, 141 million Americans viewed 10 billion online videos; 85 million LCD and plasma TV sets were sold globally last year; and paid and rental video downloads will grow from a $215 million business worldwide this year to $2.4 billion in 2012.

Now for his stock picks: Frankel is advising clients to buy shares of Adobe Systems, Corel, DivX, Monotype Imaging, RealNetworks, Sonic Solutions, Universal Electronics and JumpTV, a Canadian penny stock.

He also raves about Dolby Laboratories, though he calls the stock at its current price only a "hold."

Regardless of who the digital living room victors are, "all will have to pay Dolby's toll," he said.

And he predicts that the digital living room poses a risk to pay TV companies — cablers due to "their tendency for risk aversion" and satellite for its inability to offer high-speed Internet access.