How to Turn Shrinking Home Theaters Into Growing Portfolios

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ADWDGT Couple sitting on sofa watching television with bowl of popcorn smiling  date; laughing; movie; tv; Adults; Beverages; Bo
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Technology has changed a lot of things around your home over the past dozen years. You can buy a refrigerator that dispenses carbonated water. You can install a thermostat that learns your patterns and adjusts your climate accordingly. You can use your phone to turn off your porch light and check on your high-def webcam.

However, of all of the rooms in the house, nothing has changed as dramatically as your living room. Digital delivery of media of the convergence of home theater appliances has radically transformed what the ideal living room looks like in 2014.

Back in 2002, a showcase living room home theater wasn't complete without a DVD player, a VCR, a CD changer and more than likely a heavy tube TV. Some early adopters had the first DVRs. Blu-ray would be introduced a year later, and it would take a few years before the lighter LCD and plasma units (with larger screens) to be reasonably priced.

These days no one is surprised when the only components of a home theater are a high-def TV, a Web-tethered streaming media player and perhaps a high-end audio system. The digital revolution is real, and it has transformed your living room. Investors aware of the shift may be able to profit from the convergence.

Back to the Future

Physical media is becoming obsolete. CDs were the first to go, peaking in popularity more than a decade ago. The record labels originally blamed piracy for the decline, but as Apple's (AAPL) iTunes Music Store gained in popularity, legal downloads replaced both the unreliable file-sharing MP3s and the compact disc.

Books and DVDs followed. Both media forms may have peaked a couple of years ago with Amazon.com's (AMZN) Kindle and other e-readers gaining market share from traditional leafy reads, and streaming video has gained in popularity in homes backed by high-speed broadband connectivity. Netflix (NFLX) now has more than 50 million global subscribers.

These companies were around in 2002. Apple was selling Macs, and it had just introduced the iPod a year earlier. Amazon was losing money selling books, CDs and DVDs online. Netflix was just getting off the ground renting DVDs by mail. They were market leaders in distributing physical media, and now they are leading the way in the digital revolution.

Even video game consoles -- an iconic fixture in the 2002 living room -- are starting to show signs of vulnerability. As software goes digital -- with more of the grunt work taking place on servers -- we're seeing the Xbox One and PS4 emphasize their features beyond gaming.

One More Nail in the Physical Media Coffin

Another sign that the days of discs as media are numbered came earlier this month when Outerwall (OUTR) announced that it would be closing as many as 700 more Redbox kiosks than it will open this year. Redbox was the last company that was still growing its business of providing DVD rentals, but even it's feeling the pinch of viewers relying more and more on streaming.

The good news for consumers is that the migration is easy on the pocketbook. DVD and Blu-ray players -- which at one point cost hundreds of dollars -- are now being replaced by compact streaming media players that can be had for as little as $35. Instead of bulky CD players or vinyl turntables, digital music can be stored on existing smartphones.

All of this has made Netflix, Apple and Amazon some of the biggest winners over the past decade. The living room may be getting smaller, but the investing opportunities continue to get bigger.

Motley Fool contributor Rick Munarriz owns shares of Netflix. The Motley Fool recommends Amazon.com, Apple, and Netflix. The Motley Fool owns shares of Amazon.com, Apple, and Netflix. Try any of our stock picking newsletter services free for 30 days.

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