research Research ) Buy $31.25
Visit 10 March 2000
ACTV, Inc.
SECTOR NASDAQ
Interactive television IATV
12 MONTH RANGE MARKET CAPITALISATION
$48.25 ? 6.03 $1,449m
YTD RETURN S&P 500 YTD RETURN ESTIMATES 1999 2000E 2001E
31.6% 4.6% EPS ($) (0.57) (0.37) 0.01
PER (x) n/a n/a n/a
ANALYST
Jason Va x +44 20 7825 9282
Email jnvaux@cazenove.com
We visited ACTV in New York last week as part of our initiation of coverage on the US interactive
television sector. We were favourably impressed by a display of the technology, the business plan
and the pragmatic approach to rolling out ACTV services over the course of this year. We believe
that ACTV is a BUY, given the scope of its addressable market and strong patent position; the
backing of Liberty Digital is a key feature. Earnings estimates stated above reflect consensus; we
have not yet formulated a DCF model to establish a target price for the stock.
In Europe, particularly the UK, excitement over the growth of interactive television has been
spurred by government initiatives to promote digital broadcasting and to replace analogue signals
over time. ?Middleware? technology, effectively the operating system contained within settop
boxes, allows digital viewers to ?respond? to information displayed on their television sets. Current
digital compression technology provides twelve separate digital channels per analogue channel;
this additional capacity gives viewers the option to make certain choices over the content they
receive. In the US, the prospect of offering internet services over the television has perhaps
created more excitement than the advent of digital television itself, although we believe that in the
near term at least, the majority of benefits of the new technology will accrue to cable operators
and developers of enhanced services for television broadcasts.
In Europe, the Multimedia Home Platform (MHP) standard has gained acceptance across the
industry as an effective operating system, but in the US there is considerable debate as to the
nature of the platform upon which interactive services will be delivered to customers. No
standard has been established and the ATVEF (Advanced Television Enhancement Forum) solution
proposed by Microsoft has many critics. Software developers are pushing for swift resolution of
this issue, but ATVEF has not met with universal acclaim, partly because of its treatment of
intellectual property rights.
Given this framework, it is important that applications and services can run on the varying
software contained within settop boxes already deployed. The memory function of ACTV?s
operating system does not require much RAM and the product is thus compliant with older
hardware. For example, 95% of the memory function on Motorola?s DCT 1000 model, which has
been deployed widely, is required to drive an electronic programming guide (EPG); ACTV is
sufficiently flexible to operate within the remaining memory, downloading enabling software when
appropriate. This gives the product a competitive advantage.
ACTV will rollout its interactive PayPerView (PPV) services in Q4 and, building on the publicity
thus generated, Individualised Television will be launched concurrently onto the Fox Sports
network, initially on Fox Sports Net (South West), with further regional deployments planned.
Services with additional cable networks are being negotiated.
Interactive sector more
established in Europe
The debate over
standards is plaguing
the US; early resolution
is anticipated
ACTV is an application
which can be deployed
on settop boxes
already deployed
Page2 of Cazennove's research (I finally found out how to do it)
Using a patented process which facilitates seamless switching between live feeds, ACTV can
provide interactive television content to an unlimited number of viewers. Within sports
programming for example, viewers can select different camera angles, elect to watch instant
match replays, or callup player statistics. Individualised television technology can also be
applied to advertising; during commercial breaks, viewers can choose to watch an advertisement
for a particular product (a car manufacturer with an ad. slot might provide a choice between four
separate models, for example). ACTV is exploiting its patents through Digital Adco.
In November 1999 Digital Adco (ACTV 51%) was formed in partnership with Motorola. This
venture is now expected to be one of the most important business drivers for ACTV, exploiting
huge television advertising budgets with its proprietary technology. Advertising agencies are
believed to view the potential of this new technology as a highly attractive means of raising the
proportion of advertising dollars spent on television.
Settop boxes are capable of storing distinct demographic profiles and it is feasible that, in the
future, neighbours watching the same broadcast will receive entirely different advertisements. It
is generally considered that advertisers will pay a premium for more precise targeting and that a
shift from direct mail towards direct television advertising could well take place. One cable
operator has estimated that Digital Adco could increase annual advertising revenue by $15$20
per subscriber. With regards to privacy issues, the cable operator, not ACTV, remains the
proprietor of subscriber profiles.
Adco will generate fees by licensing software to cable operators, by transmitting advertisements
to a particular location, by inputting interactive code into material produced by the creatives and
by offering production services. ACTV expects that a Digital Adco prototype will be running on
one of the major US cable networks by Q4 00, with full scale launch envisaged for Q1 01.
One of the main competitors to ACTV in ?tcommerce? is Wink Communications (NASDAQ WINK),
whose product can be provided over analogue systems and has therefore gained immediate
acceptance. However, the ACTV product in its entirety is probably far more flexible and exciting
to use; it holds proprietary ?bookmarking? patents for instance which enable viewers to return to
an advertisement after broadcasting, should they want further product information. Wink might
end up more focussed towards backend transaction management, a service already provided
for Liberate (NASDAQ LBRT), which has its own operating platform.
In the UK, some of the functionality of the ACTV system is offered through the BSkyB platform
developed by OpenTV (NASDAQ OPTV). Although the switch is not seamless, viewers are able to
choose from a selection of camera angles using technology developed by NDS (NASDAQ NNDS).
ACTV?s seamless switching process, which is vital for advertising applications, is patented and
could perhaps be included as an application within the OpenTV operating system in future.
ACTV has agreements with 5 of the 19 Fox Sports Nets which, in total, reach 72m US
households. The initial rollout will cover Fox South West, which has about 6m analogue and
600,000 digital subscribers. The Individualised television product will be offered as a premium
service to digital customers at a cost to the subscriber of $9.95 per month, with the cable
operator capturing half the premium and ACTV the balance (collected by the cable operator).
television
Digital Adco
Competition is not
direct?
? and proprietary
technology could be
adopted by new
operating platforms
Initial rollout of service
in Q4 00
*********************************************************************************************************************************************************
part of page 1 from Janco
COMPANY RESEARCH: Initiating Coverage
BUY
ACTV, INC.
Symbol: IATV (NASDAQ)
Recent Price March 13, 2000: $30 7/8
52 Week High/Low: $45 11/16 / $6 1/2
Equity Market Cap: $1.44 billion
Fully Diluted Shares Outstanding: 46.5 million Float: 29.8 million
SUMMARY
The advent of digital cable brings with it a myriad of choices ? for the cable
operators, the content providers and the viewers - as in the world of digital,
bandwidth is no longer an issue. Compressed digital signals utilize the given
bandwidth more efficiently, providing for additional channel capacity, higher
quality picture (HDTV) and various interactive applications. Digital media is
blurring the lines between old and new media and as technology continues to evolve,
it is becoming unclear what purpose the television and the personal computer will
play in the future ? i.e., the type of box you wish to receive your data, video, and/or
audio programming is becoming irrelevant. In the digital world, the viewer is
empowered to choose. They can choose what programming they wish to receive,
what level of interactivity they desire and where they want their content delivered.
For the first time, the viewer is in position to ?pull? information that is of interest to
them instead of being ?pushed? content that they find to be immaterial, creating
targeted advertising opportunities that have never existed before.
In the face of ever increasing competition from DBS providers, DirecTV (?GMH?
NYSE) and EchoStar (?DISH? NASDAQ), digital cable providers have already
increased the channel capacity available on a digital versus an analog tier.
However, aside of the Interactive Program Guide (?IPG?), digital has thus far
offered few interactive choices to viewers. We believe that demand for interactive
television will increase in the not too distant future for two reasons: 1) cable
operators will utilize interactive services to differentiate themselves from traditional
analog cable and DBS offerings and drive digital penetration and 2) through test
market trials and enhanced national programming, viewers will become more
familiar with the interactive services that are available and will demand them in
their homes. The digital interactive model is inherently more profitable than the
traditional model for cable operators, programmers, advertisers and obviously
(looks like some text was lost here)******************************
from Janco (part two)
Currently ACTV has been issued 19 patents from the U.S. Patent and Trademark office,
with additional patents pending. ACTV?s current patents expire at various dates between
2003 and 2016. Corresponding patents for some of ACTV?s U.S. patents (that cover
more critical applications of HyperTV and ITV) have been granted or are pending in
Canada, Japan, Australia and the European patent office. ACTV plans to defend its
patents if challenged and hopes to work towards joint ventures and/or
software/hardware/technology licensing agreements with those companies who may be in
violation. ACTV believes it holds the foundational patents for both the ITV and
HyperTV technologies. Therefore, although other companies may patent improvements
to the existing technologies, they would still be founded on ACTV?s base patents.
Although ACTV has made no such claims as to such, from our personal observation, we
believe several companies? operations, including RespondTV?s Internet-linking
technology and GO.com?s (?GO? NYSE) interactive Internet content that corresponds
with ABC?s Monday Night NFL Football live video programming, for example, may
currently be infringing on several HyperTV patents. We also believe many companies,
such as OpenTV (?OPTV? NASDAQ), on whose platform currently runs a non-seamless,
choppy transition technology to enhance sports programming in a way similar to ACTV?s
ITV enhanced programming, might be interested in licensing ACTV?s ITV technology in
the future. In addition, Wink Communications (?WINK? NASDAQ), whose software
provides consumers with the ability to request additional information about products or
purchase products over the television, although it does not appear to be violating any of
ACTV?s patents, may be an interesting partner for ACTV?s Digital ADCO in the future.
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