"There isn't any question that the revenue opportunity is going to be large."
-- Gary Farber, SG Cowen analyst
Sectors & Trends
Picture gets sharper for interactive-TV pioneers
As new features prepare to revolutionize television, tech companies such as Liberate, Wink and ACTV hope investors stay tuned to their stocks.
By Mark Thompson
Propeller planes of the 1950s have been left in the dust by jumbo jets and the space shuttle. The multimillion-dollar room-sized computers of the 1960s couldn't hold a candle to the palm-held devices that cost $150 today. And televisions? They're now in color, have a sharper picture and get more channels. But otherwise, after half a century of technological progress, they are virtually the same as the ones our parents bought before the Vietnam War.
That won't be the case in a few years. With the arrival of broadband digital TV transmissions and Internet-based interactive enhancements, the television set finally is emerging from its mid-century time warp. Start Investing Community
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Several companies have emerged in the last few years, offering software and programming that they say can lead the television set into the interactive digital age. "The addition of interactive technologies to the prime viewing communications medium in the United States and, for that matter, worldwide will open up significant new marketing opportunities," says Michael Shonstrom, who follows the interactive TV sector for Neidiger/Tucker/Bruner in Denver. In fact, the inexpensive, user-friendly and ubiquitous television ultimately will help the Internet live up to the sky-high expectation that it would transform the way we shop and communicate.
Eyeing large, new revenue sources
Investors certainly have been buying that story. Virtually every company that hitched itself to the interactive TV bandwagon has enjoyed spectacular gains in the last several months. Liberate Technologies (LBRT), which provides software that can bring e-mail, Web browsing and other Internet features to the television set, surged 1,000% between last October and the end of the year. Wink Communications (WINK), WorldGate Communications (WGAT) and ACTV Inc. (IATV), which offer various interactive enhancements to television programming, have more than doubled. Gemstar International Group (GMST), which produces electronic program guides displayed on-screen through digital set-top boxes, gained more than 50% from October through the end of the year.
Analysts who follow the group are firm believers in the story of how the new wave of interactive enhancements will revolutionize television and will create large, new sources of revenue flows. According to Forrester Research, interactive TV will generate $20 billion in revenue by 2004, with $11 billion of that sum flowing from advertising, $7 billion from commerce and $2 billion from subscription fees. But analysts aren't all convinced that the recent stock-price gains can be sustained.
"There isn't any question that the revenue opportunity is going to be large," explains Gary Farber, an analyst who is keeping tabs on interactive TV companies for SG Cowen, though he hasn't initiated coverage of any of them formally yet. But it's not clear how much of that revenue any of the current group of players is going to capture. "It's the consumer, not the technology, that matters," he says. And it's too soon to tell which interactive TV features consumers will favor.
A number of interactive TV features recently have moved from the drawing board to TV sets across America. "But deployment is being done in test phases in limited geographic areas," observes Laurence Bloom, director of consumer electronics research at the Boston consulting firm TechTrends. "They're not full-scale trials at this point, so it's hard to get a good feel for mass-market appeal, especially since the price points haven't yet been established or made public."
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Price 219 1/2
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"We believe the stock has a substantial upside as buzz around Liberate's customer momentum heats up."
-- C. Eugene Munster, US Bancorp Piper Jaffray
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It's not the earnings, but the positioning
Uncertainty about the future direction of interactive TV hasn't yet dampened the spirits of investors, who apparently are willing to forgo not only earnings but also revenue increases, as long as a company is positioning itself to be at the center of interactive TV. Consider, for example, Liberate.
The Oracle spinoff went public last summer and since then has convinced a number of leading media and communications companies around the world to adopt its platform for interactive TV features. Liberate "has been rolling out a steady stream of colossal new partnerships," with companies ranging from Star TV in Hong Kong and Cable & Wireless (CWP) in the United Kingdom to US West and Excite@Home (ATHM) in the United States, observes C. Eugene Munster, of US Bancorp Piper Jaffray, in a December research report.
There will be more announcements of additional partnerships in the coming months, Munster writes. These design wins "will begin a snowball effect of translating into paying subscribers," he adds. "We believe the stock has a substantial upside as buzz around Liberate's customer momentum heats up."
For a stock that already has leapt more than tenfold in less than six months, how much more upside? In a December research note, Dain Rauscher Wessels analyst Jennifer Smith, another Liberate enthusiast, figures the leader in such a promising field is worth a whopping 300 times projected calendar year 2000 revenue of $31.4 million. That translates into a target price of $260. As high as that price target might seem, the stock promptly took it out.
That enormously generous multiple dwarfs Liberate's projected revenue growth rate of about 40% a year for the next two years. And earnings? Make that losses, which analysts expect to get bigger by the year at least through 2001.
"Liberate is kind of impressive," says Shonstrom. "But the price has gone to an extreme. So we're a little bit cautious about doing anything at current price," he says.
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Far-fetched? Yes, but popular
Shonstrom's favorite interactive TV stock is ACTV, which he rates a "strong buy."
The company has distinguished itself by rolling out an array of interactive TV services and features and, therefore, is likely to see a surge in revenue sooner than the others, Shonstrom says. His revenue projections are somewhat "subjective" at this early stage, he cautions. But he estimates that ACTV will report $2.8 million in revenue for 1999, $25 million this year and $100 million in 2001.
One service that ACTV already has launched is called HyperTV, which provides Web site content synchronized with programming on pay-per-view cable TV channels. It may seem far-fetched that TV viewers would want to surf the Web in order to do such things as call up a "secret profile" of Dr. Evil while watching "Austin Powers: The Spy Who Shagged Me." But the service apparently strikes a chord with many.
Mike Rosen, a spokesman for ACTV, says the HyperTV supplement to the Austin Powers movie showing this month should generate an additional 200,000 to 300,000 online purchases of Austin Powers merchandise.
In the first half of this year, ACTV will be rolling out several other services, including "individualized TV." Offered in conjunction with the Fox Sports channel, it will allow sports fans to select camera angles for viewing a game. Once the next generation of digital set-top box arrives, these ACTV features all will be offered on one TV screen, replacing the "two-screen" solution allowed by the current level of technology.
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The coveted 'first mover' advantage
Wink is another company that has gotten a jump on others, having offered an interactive TV service since early last year. Users with a Wink-enabled television can click on a device when an on-screen prompt appears, enabling them to do such things as order a pizza or request more information on a car that is being advertised. The capability is available only in a limited number of markets to date, but the early results indicate that it is a service people will actually use.
Bear, Stearns analysts were sufficiently impressed to name Wink their favorite interactive TV stock. The company has a "first mover" advantage. And its service is "complimentary, rather than competitive with most of the interactive players in the market today," the Bear, Stearns analysts added in a research report issued in late October.
The stock has tripled since then. Has it gotten ahead of itself? "I suppose you could argue that it has," concedes Raymond Katz, one of the authors of that report. "But not on the underlying specifics. So we haven't changed our opinion."
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