The Real story is Liberty Media's plans!!!
This report is right on target in my opinion.
04:59pm EDT 20-Aug-03 Craig-Hallum Capital (Anthony Stoss 612-334-6330) OPTV
OpenTV, Corp. BUY
(OPTV - $2.68)
Anthony J. Stoss
Senior Research Analyst
612-334-6330
Astoss@craig-hallum.com
www.craig-hallum.com
Changes Previous Current Profile
Rating: -- BUY Price: $2.68
Fundamental Trend: -- Improving 52 Week Range: $0.70 - 2.78
FY03E Rev (MM): $63.1 Fully Diluted Shs Out (MM): 130
FY04E Rev (MM): $75.3 Market Cap (MM): $348.4
FY03E EPS: ($0.49) Insiders Own 38%
FY04E EPS: ($0.29) Stated Book Val./Sh.: $0.93
Net Cash/Sh.: $0.77
Debt / Capital: 00%
LT EPS Growth 25%
Get your remote ready, interactive TV is coming.
By using OPTV's technology, cable TV operators can offer digital cable TV
customers shopping, interactive TV ads, e-mail, chat, interactive games,
gambling, news, electronic programming guides, on-demand content and Internet
access.
INVESTMENT HIGHLIGHTS
Rupert Murdoch and News Corp's proposed acquisition of 34% of DirecTV for $6.6
billion has U.S. cable operators running into the open arms of interactive TV
companies. With Murdoch likely to offer interactive TV through DirecTV, just as
his BSkyB satellite company already does in Europe, we expect U.S. cable
operators will look to launch interactive TV soon to prevent a potential
subscriber exodus.
BSkyB has proved the concept of interactive TV by generating a remarkable $50
per subscriber per year.
Liberty Media, who owns roughly 36% of the class B shares of OPTV, has
significant influence in the cable TV industry which we believe will expedite
deployment of OPTV's technology. Liberty also owns approximately 13% of News
Corp.
On June 9, 2003, Microsoft announced its new software for the digital cable TV
industry. We believe cable operators are apprehensive of MSFT and will try to
prevent the company from becoming too dominant in the industry. OPTV offers a
choice, and is considered an insider due to Liberty Media's ownership position.
OPTV's patent position is very strong with 307 patents issued worldwide, 76 in
the U.S.
Cable TV advertising continues to pick up steam. Interactive ads, which enable
targeted marketing, are expected to be an area of significant interest as is
e-commerce, where Liberty's recent purchase of QVC offers a large and friendly
opportunity.
OPTV is moving from being a middleware provider (i.e. one time license fees) to
an applications provider with recurring revenue streams.
OPTV is currently deployed in 50 million cable set-top boxes by over 50 cable
operators in 70 countries.
OUR POINT OF VIEW
We believe that Rupert Murdoch and News Corp's (NWS) proposed acquisition of 34%
of DirecTV for $6.6 billion has U.S. cable operators running into the open arms
of interactive TV companies. Murdoch's BSkyB satellite company has already
successfully launched interactive TV services in Europe and continues to show
the revenue generation potential of the technology. U.S. cable operators are
naturally fearful that Murdoch will market and aggressively launch interactive
TV services here in the U.S. via DirecTV which could cause cable to experience
an exodus of subscribers.
We expect some of the U.S. cable operators will try to beat Murdoch to the punch
and are looking to launch interactive TV next year to thwart any potential
exodus. NWS expects to close the DirecTV acquisition around January 1, 2004 and
we would look for Murdoch to launch an "interactive TV" advertising campaign in
October 2004 for the holiday selling season. We expect some U.S. cable
operators may want to counter a potential marketing campaign with their own
service. One advantage: satellite interactive TV users need to respond via
telephone whereas cable interactive TV users can simply use their remote
controls.
We project that cable operators would need six months from the time of signing
deals with interactive TV companies to gear up for a launch. As a result, we
believe that OPTV is in position to sign deals in the near-term with those
operators looking to get ahead of Murdoch. Some operators may wait and see if
NWS will close on its acquisition of DirecTV around January 1, 2004 and then
hurry to sign deals over the following few months. Other operators may wait and
see the extent of DirecTV's interactive TV offering before deciding how to
proceed with their own. We believe that the deal for DirecTV will happen,
although it's possible that the closing date could take a few more months than
current thinking expects.
BSkyB proving the concept - BSkyB, which is owned by News Corp, is one of the
largest satellite providers in England with 6.8 million subscribers and is a
showpiece on how much revenue cable operators can generate from interactive TV.
BSkyB offers interactive advertising, gambling on slots, poker, bingo, horses
and sports. Interactive TV generates a very impressive $50 per subscriber per
year for BSkyB. Approximately $25 of the interactive revenue at BSkyB is from
gambling; the remainder is mostly interactive advertising, gaming and commerce.
In addition to revenue generation, BSkyB has one of the lowest churn rates in
the industry at 9.3%. Some of the U.S. cable operators quote digital churn
rates as high as 40%, meaning subscribers don't stay excited with digital cable
purely on the basis of having 600 channels of programming to choose from.
Interactive TV could keep subscribers on higher revenue producing digital cable
and drop the operating expense of having to send a truck to replace the set-top
box and downgrade subscribers back to analog cable.
BSkyB uses OPTV's middleware and PlayJam games channel, but uses a competitor's
(NDS) interactive advertising and gambling applications. The use of London
based NDS, Inc.'s applications is for obvious incestuous reasons: News Corp
owns a big stake in NDS.
EchoStar's DISH Network currently uses OPTV's middleware and 12 content creating
applications. We believe that this company represents a logical early mover
for interactive advertising, e-commerce and games, considering what Murdock and
DirecTV may be offering. It would be rather easy to deploy OPTV's full suite of
applications for EchoStar considering the middleware platform is already in its
customer's boxes.
Comcast is currently trialing OPTV's targeted advertising technology in 15,000
homes in Aurora, Colorado. ESPN, Lifetime, Discovery and TBS are some of the
networks participating in the trial. We believe the trial, which has been going
on for months, is already considered highly successful in proving the benefits
of the technology and value to the advertiser as well as the economics to the
cable operator. We believe that Comcast will continue to increase the numbers
of homes using this technology, and ultimately, roll out this service to its
entire digital subscriber base of 8 million. This targeted advertising platform
stands to change the current thinking on advertising and should significantly
increase the absolute number and efficiency of dollars spent to reach consumers.
One large area of potential within interactive TV is e-commerce. OPTV has
developed technology to enable e-commerce over the cable TV plant. E-commerce
can be offered over any channel by any network. Moreover, cable operators can
create an e-commerce channel and sell space to the likes of Amazon.com,
Wal-Mart, etc., much like the way Internet retailing was created. Perhaps most
significant to OPTV, on July 3, 2003 Liberty Media announced its plans to
acquire Comcast's 57% interest in QVC, giving Liberty 98% of the company. QVC
reaches 85 million homes, generated $4.4 billion in sales for 2002 and could
become a very large source of e-commerce revenue for OPTV if Liberty elects to
make it interactive through OPTV. Remember, Liberty is the largest shareholder
of OPTV.
In the U.S. market, we believe that cable operators really only have NDS,
Microsoft and OPTV in mind. News Corp is the majority owner of NDS and as a
result of DirecTV and the pricing pressure News Corp has put on cable operators
via its Fox programming unit, we find it unlikely that the U.S. cable operators
will do business with NDS. MSFT missed the boat early on in the digital cable
TV operating system marketplace by creating a poorly designed product that did
not work on all versions of digital set-top boxes. MSFT has worked hard over
the last few years to remedy this problem and currently advertises a middleware
solution that works on every version of set-top box. Despite this, Microsoft
has yet to introduce a full suite of applications, making OPTV the company to
beat.
QVC Opportunity - On July 3, 2003 Liberty Media announced its plans to acquire
Comcast's 57% interest in QVC, giving Liberty 98% of the company. QVC reaches
85 million homes and generated $4.4 billion in sales and $858 million in
operating cash flow in 2002. OPTV's e-commerce platform could enable QVC
viewers to press a button on their TV remote to purchase items shown on the
program. Billing could be made to the user's cable TV bill. The cost to handle
a phone transaction for QVC is believed to be just under $3.00. We believe
OPTV could charge around $0.50-$1.50 per transaction due to the cost savings of
bringing the QVC sale "online." This could prove to be a very significant
opportunity for OPTV. To try to quantify the QVC opportunity, investors could
look at the following hypothetical scenario: QVC is in 85 million homes and
generates 100 million transactions per year. If we assume that 20% of QVC users
have digital cable and would use their remote to purchase items instead of
using the phone, this would yield 20 million TV remote transactions. If OPTV
negotiates a per transaction fee of $1.00, this would translate into a $20
million annual fee for OPTV at a high margin. |
