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DTS Inc. (DTSI - Snapshot Report) will be providing its hi-definition surround audio solutions to the French telecom company Bouygues Telecom’s Bbox VOD, a video on demand service. DTS’s new partnership with Bouygues Telecom will facilitate Bbox to offer an enriching sound experience.

According to research firm IMS Research, the video on demand (“VOD”) market is gaining traction in North America and Europe. The study estimates that North America will account for 33.1% of VOD revenues by 2016 and will be followed by Western Europe with a 30.5% contribution. The Asia Pacific is projected to account for 25.7% of VOD revenues.

Another study by market research firm Nielsen states that the video on demand market has increased 84% over the past year. Given the encouraging trends, we believe that the demand for high definition audio will also gain traction as every service provider would try to provide its customers with an enriching audio and video experience.

Thus, DTS stands to gain in the long term. Moreover, DTS’ sound solutions are included as standards set by Advanced Television Systems Committee (“ATSC”), Alliance for Telecommunications Industry Solutions’ (“ATIS”) and Digital Video Broadcasting (“DVB”). These organizations set voluntary standards for digital broadcasting and IPTV.

We believe that DTS’s investment in the network connected business will help it to gain significant market share going forward. This, coupled with higher penetration in the Chinese smartphone market and incremental revenue from the acquisition of SRS labs, will drive top-line growth in 2013.

Of course, the volatile macroeconomic environment and sluggish consumer spending will remain headwinds for Blu-ray sales in the near term. We also believe that the strong growth of network connected devices will eventually cannibalize the sales of DVD-based products and Blu-ray sales.

Further, the company faces significant competition from Dolby Laboratories Inc. (DLB - Snapshot Report), Sony Corp. (SNE - Snapshot Report) and privately-held THX Limited, which remains a headwind going forward.

Thus, we remain Neutral on DTS over the long term (6-12 months). Currently, DTS Inc. has a Zacks #3 Rank, which implies a ‘Hold’ rating in the near term.

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