Few businesses seem poised to create instant wealth quicker than Internet video. Just ask YouTube Inc. founders Chad Hurley and Steve Chen, who sold their two-year-old company to Google Inc. (GOOG) for $1.65 billion. For the rest of us, finding a profitable way into the world of Internet video is trickier. For one thing, it's not yet clear just how companies will make big money by providing warmed-over network sitcoms or animated snippets of a frog in a blender.
Still, the blizzard of press releases heralding the availability of Lost for video iPods and MySpace.com (NWS) clips on cell phones may actually point to a real business forming. ABC Inc. (DIS) alone has streamed more than 12 million episodes of shows like Desperate Housewives and Lost. By late 2007, more than half of all U.S. homes will have broadband connections, according to Plano (Tex.)-based research consultancy Diffusion Group; each day more people use those wires to hunt for videos.
The race to get into consumers' homes, iPods, and cell phones is cutthroat. Phone companies are taking on cable companies with Internet-based TV shows, and Google, MySpace, and others have launched video services. "In an arms race like this, the best place to invest is with the arms merchants," says Samuel Wilson, an analyst with San Francisco-based JMP Securities. With some exceptions, that means buying suppliers of the software, boxes, and wires that zap content from the Net to folks' homes.
One promising player is Juniper Networks Inc. (JNPR), which is making inroads with telcos gearing up to launch Internet protocol TV--TV shows delivered over the Net. Re-arming cable players like Comcast Corp. (CMCSA), which offers online channels for user content and video-on-demand (VOD) programs, will likely be Netgear Inc., a supplier of wireless networking gear. In the wake of deals with satellite operator BSkyB (NWS) and Vodafone Group (VOD) in Europe, Wilson expects Netgear to enjoy a second wave of growth in the U.S.
FOR ALL THE HYPE about Internet video, many folks still want to curl up in front of their TV, not their computer. That plays to the strengths of NDS Group (NNDS), a British company 74%-controlled by News Corp. (NWS) NDS software protects TV signals from piracy for News Corp.'s satellites and is a likely winner as satellite companies try to compete with cable's VOD offerings. NDS is working on software for a "hybrid" set-top box to stream TV shows from the Net to satellite users. Because of its News Corp. link, it's guaranteed to get its service rolled out quickly on News Corp. satellites. Streaming shows like those from News Corp.'s game site IGN Entertainment Inc. (NWS) could send thestock to 55 from 48, says Oppenheimer & Co. (OPY) analyst Alan Bezoza.
News Corp. itself has become a king of the Net after buying MySpace in 2005. President Peter Chernin says MySpace will generate more than $500 million in online revenues and is "within $1 million or so of profitability now." By the end of `07 "they'll be getting much more revenue from MySpace and IGN," says Merrill Lynch & Co. (MER) analyst Jessica Reif Cohen, which could send the stock to 27, up almost 20% from its current 22.60.
By Ronald Grover