More Analyst Comments:
ACTV FILES ITS FIREST INTELLECTUAL PROPERTY PROTECTION
CLAIM AGAINST DISNEY...
Arnhold and S. Bleichroeder, Inc.
ACTV, Inc.
COUNTRY: U.S. SECTOR: Interactive Television
YEAR-END REVENUE REVENUE EPS P/E
DEC ($) Growth (%) ($) (x)
1999A 2.1 49 (0.61) NM
2000E 4.9 137 (0.58) NM
2001E 14.5 191 (0.54) NM
2002E 48.1 232 (0.13) NM
Index: NASDAQ: 2,337.31-Last Average Daily Volume: 596,200
Market Cap. (Mil.): $206.44 52-Week Range: $4 3/16 - $51 3/4
Note: EPS excludes one-time items
ACTV FILES ITS FIRST INTELLECTUAL PROPERTY PROTECTION CLAIM
AGAINST DISNEY;
RATING REMAINS BUY
ú ACTV files first patent protection claim against Disney's ABC and ESPN
networks enhanced TV.
ú Patent litigation is likely to drag out unless a settlement is reached,
which
we aren't counting on.
ú Best case: win or settlement, licensees would likely line up and we would
raise estimates.
ú Worst case: losing case won't impact our estimates.
ACTV Claims Disney's Enhanced TV Product Infringes on The Company's Patents
Earlier today, ACTV announced a lawsuit against Disney's ABC and ESPN networks
(DIS/$27-Last/Not rated) over Intellectual Property (IP) infringement. ACTV
believes that an enhanced TV product, which airs in conjunction with Monday
night and Sunday night football games as well as Who Wants To Be a
Millionaire,
infringes on several of its patents. The patents relate to television
programming which has associated internet content synchronously streamed to a
PC
(or to a single TV screen with advanced digital set top boxes). Earlier this
year, ACTV retained Baker Botts, LLP, an international law firm recognized for
its IP practice (who also represents Liberty Media (LMGa/$11-Last/Not rated),
ACTV's largest investor). The law firm has reviewed ACTV's patents and
believes
they are solid. Although we believe there is risk in alienating potential
customers by bringing a lawsuit, it is more important to defend intellectual
property, which are assets to companies such as ACTV, and set a precedent for
others thinking of infringing.
ACTV Likely Seeking a Licensing Arrangement; Disney Didn't Buy it
Over the past several months, the two companies had been in discussions
regarding a licensing deal, but in the end, Disney obviously balked. Although
there is always the possibility of an early settlement, we believe that is
unlikely given their resistance in earlier negotiations. Regardless, our
experience is lawsuits don't resolve themselves quickly. Given the complexity
of the technologies and probable ignorance of most courts related to this new
technology, we expect this to drag out. On the conference call the company
did
not provide any further details regarding the lawsuit, including potential
damages.
Best Case/Worst Case Scenarios, No Downside to Our Model or Change in Thesis
Although we believe a prolonged legal battle and ultimately a loss in court
could create negative sentiment toward the shares, it would not change our
forecasts or thesis on the company. In our model for the HyperTV division, we
were very conservative forecasting licensing fees since it was our belief that
this market would be highly competitive and assumed the patents would not
stand
up (we did so only to be conservative, not because we have any expertise on
patent law). The company would have to win business based on the merits of
the
HyperTV product and service as well as its partnerships. Overall, license
fees
represent 9% of our total estimated 2001 revenues falling to 7.5% in 2005. In
our view, a loss in court against Disney doesn't mean the company can't win
business for HyperTV, provide the same services, and most importantly, charge
a
license fee. It also doesn't change the company's relationship with Liberty
Media and its subsidiaries, or the 100+ television networks worldwide they own
stakes in. Given there were 214 television networks in the U.S. at the end of
1999, it's our view the company could easily pick up license paying customers
and exceed our estimates. Therefore, we see no downside impacts to either our
model or thesis, even if ACTV loses its lawsuit. A win on the other hand,
which
includes a settlement with Disney, could create a large upside for the company
since any programmer wanting to provide a similar service would have to step
up
and pay license fees.
Although the shares of ACTV, as well as the entire ITV industry have been
extremely weak, we expect 2001 should establish ACTV as a leading player in
enhanced TV while its targeted advertising product, SpotOn, begins to change
the
face of television advertising. We continue to rate the shares a buy.
Peter D. Lerner, CFA
Analyst
(212) 698-3148
peter.lerner@asbinc.com |
