What's Next: Hunting Killer Trends

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Sure, you can earn stable, boring returns investing in the stodgy, monolithic giants of corporate America. But you'll have a lot more fun, and potentially make a lot more money, if you move toward the bleeding edge of the market. Every day, new ideas, innovations, and companies emerge that can disrupt or destroy even the most well-entrenched and long-standing businesses. To invest in these upstarts before they take the world by storm, and pull your money out of dinosaur companies (or industries) headed for extinction, you've got to keep pace with the rumblings of change.

Here, we'll seek out new trends shaping the marketplace, and examine how they might change the business world – for better or worse. Last week, we took a look at pop-up stores. This week's killer trend: digital distribution.

CD racks, board games, bookshelves: Burn 'em
Blisteringly fast broadband speeds, bigger hard drives, piracy, and devices like Apple's (Nasdaq: AAPL) iPod all caused a perfect storm for the stodgy old recording industry. Music's longtime gatekeepers held consumers hostage, bound by such factors as the limitations of physical distribution and the slow transmission of information. Today, digitally delivered tunes are cheap, ubiquitous, easily shared, and only a few clicks away on a variety of online services.

Now the rumblings of disruptive digital change are beginning to spread beyond the music biz. Here are just a few examples:

• Amazon.com's (Nasdaq: AMZN) Kindle has done for reading what Apple's iPod did for listening: It's made the concept of digital books feasible. Doubters have long derided the possibility of paperless reading, but bookworms are responding well so far.
• Google (Nasdaq: GOOG) is also in on the e-book movement through its Google Books division.
• The Pandora music-matching service is winning fans on devices as diverse as Blu-ray players and Research In Motion's (Nasdaq: RIMM) BlackBerry.
• Netflix (Nasdaq: NFLX) may still send out your old-fashioned DVDs through good ol' snail mail. But it now also offers a streaming option on its site for on-demand movie watching, through computers or an ever-growing variety of home theater equipment.
• Got an urge to see the "Underpants Gnomes" episode of South Park, right now? Queue it up on Hulu.com. According to Comscore data released today, online video viewing had a record month in October, with Hulu coming in second to Google's video giant YouTube.
• Gamestop (NYSE: GME) recently announced the launch of a nascent digital distribution service for video games. It said the market for downloadable games is "not imminent," but it's coming. I guess Gamestop doesn't want to get pawned -- or, as the gamers say, pwned.

It's gonna get ugly
Investors beware: The one industry we've thus far seen challenged to evolve or die did not take the threat gracefully. When piracy and change threatened the music industry's cushy position as the middleman between artists and most mainstream consumers, things got ugly.

The Recording Industry Association of America's lawsuits against music fans -- and potential customers, and, when things eventually devolved into absurdity, a few individuals who happened to be deceased -- didn't exactly fill consumers with goodwill. The record labels' refusal to recognize that some degree of online music-sharing could foster more fans (and more revenue for bands' merchandise, tours, and so forth) was a big misstep, too.

Unfortunately, other old-fashioned, entrenched media companies don't seem to have learned much from music's example. They seem determined to barrel down the same senseless road, desperate to protect their increasingly outdated business models. Google is already facing heat about copyrights from book publishers, even though its digitizing mission has positive ramifications.

I worry that every old-school media company will stubbornly embark on the same misguided odyssey the music industry did, spending way too much money on thuggish tactics that don't really help them adjust to a changing environment. If so, these businesses won't do their revenues, profits, or shareholder value any favors.

Read it and weep
An increasingly digitized world makes it easier for artists and fans to have direct relationships, without the labels taking their cut. Artists like Radiohead and Nine Inch Nails have seen the writing on that wall, releasing albums themselves, online, to varying degrees of financial success. These are the early days of what may be a new paradigm for media.

The emergence of social networking sites like Facebook could be the biggest disruptive influence of all. A few keystrokes and mouse clicks now let people spread the word about cutting-edge artists and events to hundreds of others in seconds. In turn, all of those people have the ability to share that news with their friends, too. This ever-increasing free flow of information among consumers and creators could become the greatest threat to old-school media companies' marketing-driven business models.

As often and vehemently as they've resisted innovation in the past, I seriously wonder how today's media companies can survive in the face of digital delivery. Perhaps many of them shouldn't.

What do you think about digital distribution trends? Which companies will get wiped out by this paradigm shift? Which are most likely to survive? Are there even more disruptive innovations on the way? Would you touch media stocks like News Corp. or Time Warner (NYSE: TWX) with a 10-foot pole? Will companies like Apple and Google be able to keep on innovating?

Let us know in the comments boxes below -- and don't hesitate to chime in if there's a huge trend (or a quiet, emerging one) that you think investors ought to notice.