Will On-Demand Video Kill Next-Gen DVD And DVD Rentals? (SNE, BBY, CC, NFLX, MOVI, BBI, CMCSA, TIVO, CSCO, DTV)

While rival high-definition DVD camps Blu-ray and HD-DVD carry their fight right through the upcoming launch, their underlying market is suffering the worst kind of erosion -- changing consumer behavior. The New York Times' Ken Belson collects the following data points on the movement away from recorded DVDs and toward on-demand video:

● The percentage of cable customers who watch on-demand television has doubled in the past year, to 23 percent, according to the Leichtman Research Group.

● Comcast, the country's largest cable provider, already gives its 20 million subscribers access to 3,800 movies and television shows. The 44 percent of Comcast's subscribers who have the set-top box needed to see on-demand programs have watched more than a billion of them so far this year.

● A poll by the Starz Entertainment Group this month showed that 60 percent of those who watch on-demand video buy fewer DVDs, while 72 percent of those surveyed are renting fewer movies.

If this trend continues, it's bad news indeed for the pure-play video rental companies -- Blockbuster (BBI), Netflix (NFLX), and Movie Gallery (MOVI). In a best-case scenario for them, DVDs would suffer the way CDs do from MP3 downloads. In a worst-case scenario, DVDs go the way of the cassette tape -- phased out entirely in favor of a more convenient and higher-quality delivery medium.

DVD device and disc sales would also be hit -- trouble for Best Buy (BBY), Circuit City (CC) and Sony (SNE), unless they can compensate for the loss via HDTV sales.

Meanwhile, set-top box and DVR companies such as Scientific Atlanta (owned by Cisco), TiVo (TIVO) and Motorola (MOT) stand to profit immensely from a such a shift. Cable companies like Comcast (CMCSA) and satellite TV provider DirecTV (DTV) would be delighted as well.