Toby's Digital Wave

08/27/2004 12:00 am EST


Tobin Smith

Founder and Chief Research Analyst, Transformity Research LLC

"A ChangeWave is a major, transformational trend," says Toby Smith, who searches for these trends through surveys of some 4,800 industry experts. Here, he isolates one of the biggest new trends and shows how investors can "catch a ride" on the digital entertainment wave.

"What we’ve learned over the years is that doing research takes more than just one guy sitting behind a computer. Our business is about real, transformational change not incremental change. We have a group of some 4,800 people throughout the world, and we ask them to be our eyes and ears. They are professionals in about 200 different industries. It’s a variety. We are agnostic about any one industry. Perhaps 65% of them are in some form of information technology. Many are physicians and scientists. Some are salespeople. Sometimes change happens at the industry level. Sometimes it happens at the company level. And our 'eyes and ears' are now in about 25 countries looking for these trends.

"So what are some of the biggest waves that are rippling through now? These waves can happen in an industry when it is reinvented. The number one reinvention going on in the world in terms of sales and profitability is LCD and high definition from old TV to new TVs. Very few people own large, flat screens TVs yet. But over the next few years, most will. There will be a rapid adoption of all things digital, including flat screens. The people we follow tend to be early adopters of technology, before these products move to the mass markets. But this move will occur when prices drop. The transition to high definition TV will be fast and our research suggests that 2005 will be the big year. You will soon see 30" LCDs TVs which now cost $2,499, soon costing $1,699. By the end of next year, they will cost $799.

"We love Silicon Image (SIMG NASDAQ), which is involved in this ChangeWave to digital entertainment. The company owns the technology behind DVI and HDMI digital-video interfaces. These connections allow you to send data directly from a device such as a DVD or DVR player to your high-definition TV screen, unaltered. (Without the interface, your receiver will convert the high quality digital signal to analog.) You can visually see a huge difference; and you will definitely want a digital-to-digital connection. SIMG owns the technology and the intellectual property behind this transmission system that will be in every flat screen TV, in every new tuner, and in every personal computer starting next year.

"The company will earn a royalty on every HDMI and DVI interface. Silicon Image has already signed 122 agreements for its interfaces to be included in systems made by such partners as Toshiba and Sony. This will not only be used for your home entertainment, but also on your personal computer, which will become as much a part of the home digital world as anything else. This will be a volatile stock, but it is one of the most intriguing investments we’ve ever seen. This is the type of stock, regardless of market conditions, that you want to buy. As we get into 2005, we think this stock will be worth $22 to $25 based on its earnings power."

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