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What is HyperTV?
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HyperTV is a patented software application that enables entertainment programmers and advertisers to seamlessly integrate Internet content and chat functionality into a video program — simultaneously and in real time. Using ACTV's patented software, programmers can "push" Internet URLs (universal resource locators) and chat functionality to viewers/users, enabling an enriched interactive TV/Internet experience. This functionality enables programmers to enrich the entertainment experience by providing additional information, chatting, playing games — all in reference to the program they are watching. More importantly for media companies, HyperTV also enables interactive and highly targeted advertising, and integrated e-commerce applications.
Examples of a HyperTV Enriched Programming
As described in detail in earlier research, ACTV has corporate alliances with TCI, FOX Sports Net, and Liberty Media. We are anticipating the roll-out of ACTV's Individualized Television technology in the sports entertainment market within months, as well as additional HyperTV enriched programming from TCI's The Box Music Network. Examples of HyperTV enriched programming in sports and music entertainment markets are below:
Sports: During the telecast of a live basketball game, HyperTV will allow the programmer to push a stream of web addresses, in synch with the video, to provide additional content from the Internet. This could include statistics on key players, interactive sports trivia questions about the teams and players, the web sites of fan clubs, recent articles on the players, and e-commerce applications like the ability to buy team jerseys, or autographed basketballs.
Music: During a telecast of a concert, the HyperTV viewers would receive a stream of web addresses for additional content — again, simultaneously and in synch with the video. Viewers could access the lyrics to the songs, bios on the artists, the band's website, the fan club's site, or a site offering concert related merchandise like CDs, DVD or apparel.
HyperTV enables the convergence of cable TV and the Internet now. Anyone with a browser that enables video can receive HyperTV. The video will appear in the browser, together with the enhanced Internet content, whether streamed over the web, a CD-rom, DVD or if the video comes from a TV tuner card. Otherwise, the video can appear on the television while the enhanced web content appears on the computer.
What is proprietary about HyperTV?
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ACTV invented HyperTV in 1995, and owns the rights to the technology. ACTV has been awarded patents pertaining to provision of video over the Internet, and integration with other information. In particular, ACTV has been awarded patents on systems that integrate and display video with information retrieved from the Internet, including URLs, or web addresses. The patents were acknowledged by personnel from Liberty Media in announcements pertaining to their recent investment, and we believe they will be a significant source of value to ACTV in the future as it commercializes its technology, either directly or through licensing agreements. We believe this week's acquisition of the Wolzien patent significantly enhances ACTV's patent position, and greatly enhances shareholder value.
Who will use HyperTV (who will be interested in licensing, buying, or acquiring HyperTV)?
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We believe a wide range of companies could benefit from using HyperTV. Television/Video programmers, faced with ever increased competition for viewers, are looking for ways to enhance the viewing experience, provide differentiated programming and increase viewership (and advertising revenues). Advertising firms, can utilize HyperTV to generate consumer profiling, enabling much more effective, targeted marketing, and interactive advertising. HyperTV viewers will be able to view ads, interact with them, and even make purchases of products in real time. Internet Portals are seeking new content to differentiate their sites — to make them more "sticky" — which enables greater advertising revenues. And Online Retailers can utilize HyperTV to enhance the shopping experience, with integrated video and chat functionality enriching the e-commerce experience.
Financial Information (New Model) and Valuation Discussion
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With the guidance of management, and based upon analysis of the business models of other Internet companies, we have updated our financial model to include the roll-out of HyperTV Networks in the entertainment industry. We have also made some changes in the assumptions about the regional roll-out plan for Individualized Television, such as increasing the roll-out schedule (number of Fox Sports Net regions entered), and modestly decreasing the penetration rate of addressable digital cable boxes.
HyperTV Networks: Before discussing the assumptions of the model, it is appropriate to review some of the reasons why we believe HyperTV Networks will be successful at signing up networks, getting programming onto their Internet "channel", and getting advertisers excited about the HyperTV Networks capabilities:
Firstly, ACTV has taken a "TV-centric" approach to the design and marketing of HyperTV Networks. Their approach requires a collaborative arrangement with the networks, and is supportive of the network's "brand" identity and their advertisers. We believe this approach will be critical to signing up a number of networks quickly.
The networks are well aware of the erosion of their audience, especially to that part of the audience that is spending more and more time on the Internet. They are also aware of the growing number of convergent users, and the demand for interactivity (as reflected in the very high level of online interest in the ESPN/Fiesta Bowl Internet experience, and events like the Victoria's Secret online fashion show). By offering an interactive HyperTV online experience, synchronized with the TV experience, networks can reclaim "eyeballs" in a very cost-effective manner.
HyperTV will allow ACTV, networks and the advertisers to collect a significant amount of information about the users — what they buy, what they watch, what they spend, what they enjoy. This will allow them to do targeted, interactive advertising, and will lead to very powerful marketing activities such as customer profiling, interactive marketing, lead generation, online coupons, prizes, and ultimately, e-commerce. We believe that HyperTV will be particularly effective in stimulating "point-of-sale" or "impulse" purchases. For example, during a TCI Box Music concert, HyperTV can be pushing the convergent user the opportunity to purchase the CD, or a concert T-shirt or hat, or even an autographed guitar from that concert. Convergent users will be able to purchase merchandise right "in the moment," at the "point-of-sale."
With respect to HyperTV Networks, we have provided a "bottoms-up" look at the business. First, we looked at the number of potential convergent users (those who surf the Internet while watching TV), number of HyperTV Network programming deals with networks, number of potential 30-minute programs and Special Events in any given month. We have assumed that they sign up three networks this year, which we believe is achievable given their arrangements with Liberty Media and Fox Sports Net.
From these assumptions, we generate a total number of "regular programming" events (30-minute programs) and a number of "special event programming" events, or marquee events like a sporting event, a concert, or another type of event (like a lingerie fashion show) that is able to draw hundreds of thousands of online users. We believe we are being conservative with respect to the number of events that HyperTV will host. If one assumes that there are roughly 80 networks providing 10 hours of programming per day, that equates to approximately 600,000 30-minute programs annually. In our model, we assume that HyperTV is only capturing approximately 9,600 30-minute programs per year in Year 5 (2003), or roughly 1.5% of the total potential market. We also believe we have been sufficiently conservative with respect to the number of convergent users, and the HyperTV penetration into that convergent market for any given event.
Revenue generation: HyperTV Networks will generate revenues from a number of sources — both direct and "shared revenues." The direct revenues will be hosting, licensing and content consulting fees which HyperTV Networks will charge to host and produce the synchronized HyperTV event. We have assumed that HyperTV will charge a fee per user, based on a volume scale, for hosting and licensing, and will charge a "fee for service" for content consulting. These fees will be paid by the network "partners" to HyperTV Networks. Please refer to the model, and the footnotes thereto, for the details on the fees. We believe that we have been conservative with respect to our assumptions.
HyperTV will participate in the advertising and e-commerce opportunities through some "sharing of revenues" agreement with the network providing the entertainment content. With respect to advertising, we have focussed on banner advertising, although advertising in general could take many different forms on the Internet (banners, gateway ads, sponsorship, etc.). All of the basic assumptions are based on current Internet advertising rates for banner ads (we have included some representative advertising rates and commentary on the last page of the model). Again, we believe that using current advertising rates is being conservative, as the HyperTV interactivity and customer profiling capabilities should add significant value to the advertising and marketing effort, thereby providing for pricing power. As an example, we have used a very typical $40 CPM ($40 per one thousand impressions) banner ad rate, when @Home charged $150 CPM in a recent interactive advertising test case involving General Motors. We have also made an assumption based on a percentage of banner ad revenue for what we call "e-commerce and other revenue." We believe that this could be the most significant revenue generator for HyperTV networks and its network partners, as it includes customer profiling, market research activities, campaign advertising, coupons and other promotional activities such as prizes and award programs, and direct online purchases (e-commerce). We have used a relatively conservative percentage, and feel that this could be adjusted upward significantly based on initial user experience over the next 12 months or so.
Lastly, we make some assumptions on "sharing" arrangements with the networks. One might ask why networks would want to include HyperTV networks in their programming to any extent, and share advertising dollars. We believe there are many reasons. First, we believe that a HyperTV Networks synchronized convergent experience will be accretive to the networks current activities, so that they will essentially more than pay for themselves right from the start. Second, we don't believe networks have the in-house experience, capabilities or desire to build, manage and maintain an Internet network such as HyperTV networks. Third, the HyperTV software and authoring tools are available now, and the network is rolling out and should be up and functional in a matter of weeks. By partnering with HyperTV, networks can begin almost immediately to test the convergent, synchronized programming capability. For this initial model, we have assumed that HyperTV Networks will be able to capture 10% of the shared revenues as defined in the model. We believe this is sufficiently conservative, given the potential of the HyperTV experience, and could possibly be quite higher over time. However, we should have a better idea in a very short time, as network agreements are put in place.
Valuation: As was done in the initial model, we have provided a variety of different valuation methodologies, including discounted cash flow, terminal P/E multiples, and terminal operating income multiples. We have also decreased our discount rates modestly, as we believe "financing risk" and "technology risk" has decreased over the past four months with the additional funds being invested by Liberty Media, and the Wolzien patent being acquired. We are raising our 12 month price target range to $32 to $35 per share, and are reiterating our BUY recommendation.
Risk Considerations
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This section of the document is provided to remind potential investors to undertake a prudent level of due diligence prior to making an investment in the securities of ACTV, Inc. For a complete description of risks and uncertainties to ACTV's business, see the "Risk Factors" section in ACTV's SEC filings, which can be accessed directly from the SEC Edgar filings at www.SEC.gov on the Internet. Other potential risks include:
Market risk: Investors should consider technical risks common to many small-cap or micro-cap stock investments, including liquidity levels, small float, risk of dilution, dependence upon key personnel, dependence upon single products or technologies, and the strength of competitors that may be larger, better capitalized and hold dominant market positions.
Business risk: ACTV has limited experience in emerging business of interactive television programming and internet educational software and support. Many of its products and services are in the early stage of commercialization. There can be no assurance that ACTV's business or the markets in which it competes will materialize or achieve the desired levels of revenues or profitability as expected.
Competitive risk: The entertainment and software industries are extremely competitive, and many perceive the barriers to entry to be low. Added competition could lead to price competition and lower margins.
For Additional Information
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Please visit our website at www.BridgeNYC.com for copies of our earlier research reports on ACTV, Inc.
Contact Bridge Technology Group LLC — 212-554-4158
Sources for Additional Information
The following are website addresses offering related information, and links to other sources of information.
www.ACTV.com ACTV's corporate website
www.BridgeNYC.com Bridge Technology Group's site for company information and research
www.FCC.gov Federal Communications Commission homepage (information on digital TV)
www.NAB.org National Association of Broadcasters homepage
www.TCI.com Tele-Communications, Inc.'s homepage
www.skyconnect.com Skyconnect's homepage
www.GI.com General Instrument Corporation's homepage
www.Scientific-Atlanta.com Scientific-Atlanta's homepage
www.pbs.org/insidepbs/dtv Public Broadcasting System digital television information
www.SEC.gov U.S. Securities and Exchange Commission, with links to EDGAR filings
The information in this report has been obtained from sources which we believe to be reliable, but we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation by Bridge Technology Group LLC for the purchase or sale of any securities. Bridge Technology Group LLC has performed investment banking, consulting or other services for or may solicit investment banking, consulting or other business from, any company mentioned in this report. Bridge Technology Group LLC or persons associated with Bridge Technology Group LLC may at anytime be long or short any of the securities referred to herein and may make purchases or sales thereof while this report is in circulation or posted on the Bridge Technology Group LLC website at www.BridgeNYC.com. This material, or any portion thereof, may not be reproduced without prior permission from Bridge Technology Group LLC. Bridge Technology Group LLC is not responsible for the contents of this document which is intended for electronic transmission and could be thus subjected to tampering or alteration. Copyright © 1999 by Bridge Technology Group LLC. All rights reserved.
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