OpenTV beams into interactive TV fray (lots of name-dropping here)
redherring.com
By Gracian Mack
Redherring.com
November 24, 1999
The reception for OpenTV's (Nasdaq: OPTV) 7.5
million-share initial public offering was $2 billion strong.
That's the new market capitalization that investors gave
the interactive-TV service provider on its first day of
trading on Tuesday.
Merrill Lynch (NYSE: MER) and
Thomas Weisel Partners managed
the underwriting, pricing the shares
at $20 each on Monday night. That
price was at the top of an
amended range of $18 to $20 per
share. Responding to heavy
investor demand, the underwriters
bumped up the price range from
the proposed $14 to $16 per share
listed when the company filed its
registration statement with the
U.S. Securities and Exchange Commission (SEC) in
October. As the lead manager of the underwriting,
Merrill Lynch also tacked on an additional 500,000
shares to accommodate the over-subscribed issue.
As soon as the issue became effective, OpenTV's stock
opened at $56 per share, 180 percent better than the
stated offering price. In a whirlwind of 6.5 million
shares trading hands, investors drove the stock to a high
of $64.50 for the day. But some grabbed quick profits
by the time trading ended at $62.75 per share. That's a
one-day premium of 214 percent over the $20 offering
price.
COUCH POTATOES, REMAIN
SEATED
Headquartered in Mountain View,
California, and incorporated in the
British Virgin Islands, OpenTV
develops software for interactive
digital television systems, the little
black boxes that sit on top of
televisions and are currently used
primarily to access cable
programming. With OpenTV
software embedded in the set-top
box, couch potatoes can use their
remote control devices to surf TV channels and access
interactive services, such as shopping, banking, and
email. According to the OpenTV pitch, viewers can
even control camera angles and instant replays during
sports broadcasts.
There is a lot of demand for such services from the
advertising industry. They salivate to imagine viewers
using the remote control to purchase a favorite player's
jersey.
"Program guides, enhanced broadcasts, and TV-based
browsing is likely to generate $20 billion by 2004," says
Josh Bernoff, principal television analyst at Forrester
Research (Nasdaq: FORR), a technology research firm.
"If you break it down, that's $11 billion in advertising, $7
billion in online sales or transactions, and $2 billion in
subscriptions," he explains.
Advertising hasn't yet played a big part in the fortunes
of OpenTV. Its prime revenue-generators are royalties
and fees related to its software platform. In its latest
financial report, the company stated that for nine months
ended September 30, 1999, losses declined to $8.5
million, down 20 percent from $10.6 million in the
year-ago period. The company also reported that during
the same nine months it had revenues of $17.6 million,
up 187 percent over the year-earlier period, when it
reported revenue of $6.1 million.
MANY CHANNELS OF FUNDING
The potential of the burgeoning market has made
OpenTV attractive to some big-name investors. Sun
Microsystems (Nasdaq: SUNW), which was a founding
shareholder in OpenTV in 1994, now holds an equity
stake worth approximately 19.5 percent of the
company. The largest shareholder, however, is
OpenTV's parent, MIH (Nasdaq: MIHL), which holds a
post-IPO stake of nearly 70 percent. MIH is a
multinational provider of pay TV services and
technology, operating in Africa, Asia, and the
Mediterranean region.
However, there are a couple of twisty turns for
investors who want to know who really owns OpenTV.
The company's lineage breaks down as follows: MIH
Investments owns 53 percent of the voting stock of
MIH Holdings, and Naspers owns 100 percent of the
voting stock of MIH Investments, along with direct
ownership of 13.2 percent of MIH Holdings. Naspers is
a South African media house.
Recognizing what some analysts call a ground-floor
opportunity in late October, investors gave OpenTV a
quick $31.25 million cash infusion through the private
placement of an undetermined amount of convertible
preferred stock. Those investors included America
Online (NYSE: AOL), General Instrument (NYSE:
GIC), Liberty Digital (Nasdaq: LDIG), News
Corporation (NYSE: NWS), and Time Warner (NYSE:
TWX). Sun Microsystems also participated in the
convertible preferred equity investment.
Indeed, the investments from AOL, Liberty, News
Corporation, and Time Warner will help OpenTV in its
efforts to enhance its position in the U.S. and to expand
the range of interactive applications available to its
global client base. OpenTV already boasts that its
software is used in more than 4.3 million digital set-top
boxes. To date, the company says 13 television
networks use its software, including UK-based Sky
Broadcasting and France's TPS.
"There are two standards, if you can call them that,"
says Mr. Bernoff. "In the United States, interactive TV
is based on Internet-compliant protocols. Europe doesn't
care what's inside the box as long as it works. But
among other things, in order for OpenTV to establish a
viable presence here, it will have to tweak its software."
The investment by General Instrument may help the
company do just that. General Instrument, along with
Scientific-Atlanta (NYSE: SFA), is one of only two
companies in the U.S. making the set-top boxes. Also,
Time Warner's experience with its failed Time Warner
Full Service Network Five provides a helpful guide
around potential pitfalls.
INTERACTIVE INTRICACY
OpenTV faces stiff competition from AT&T (NYSE:
T) and other cable companies that expect to begin
offering their own set-top television, Internet, and
telephone packages sometime next year.
Also in the fray are two other publicly traded companies
with similar heavyweight backing. At a share price of
$42, Wink Communications (Nasdaq: WINK) has a
market cap of $1.2 billion and equity participation from
the likes of Electric Capital, Capital Partners, Toshiba,
Microsoft (Nasdaq: MSFT) cofounder Paul Allen's
Vulcan Ventures, and General Instrument.
Liberate (Nasdaq: LBRT) is another big player in the
field. With its stock price at $162.50, Liberate has a
market cap of $6.8 billion and institutional support from
Oracle (Nasdaq: ORCL), which owns approximately 48
percent of the company. Both are recent IPOs, with
Liberate launching in July and Wink in August.
In addition, the satellite market is seeing a lot of activity.
Echostar's (Nasdaq: DISH) Dish Network is scheduled
to launch interactive services using OpenTV software in
the U.S. next year. DirecTV has teamed with OpenTV
to develop a satellite-based set-top box that would
compete directly with Microsoft's WebTV.
AOL is straddling the fence, making numerous
investments in competing companies. In August, AOL
invested in Tivo (Nasdaq: TIVO) and partnered with
that company to expand its interactive TV business.
AOL also recently made a $1.5 billion investment in
Hughes Electronics, parent company of DirecTV and
satellite Internet service provider DirecPC.
"Even though you really can't call this a market yet, the
cable operators appear to be leaning toward Liberate,
while among the satellites it's a free-for-all," says Mr.
Bernoff.
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