From a cable company point of view why they would use ACTV's
and Motorola's joint venture ADCO--SpotOn service:
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New Service Description
We have used ACTV’s SpotOn service to model targeted interactive TV advertising. SpotOn allows advertisers to deliver targeted, full-motion video advertisements to individual households based on demographic profile. For example, different households in the same neighborhood, watching the same TV program simultaneously could receive different advertisements based on the specific demographics of the household. In addition, viewers can be offered a choice of advertisements and select which one interests them the most via remote control inputs.
Subscriber Penetration
For the purposes of our ROB analysis, we have assumed that ACTV’s SpotOn service is rolled out to 100% of the digital subscriber base beginning in the year 2001.
Revenue per Subscriber
Cable’s revenues will be derived from incremental local advertising sales and CPM premiums that can be generated by SpotOn’s targeted advertising technology. We have assumed that cable MSOs will initially allocate 6 MHz of spectrum to SpotOn, which would imply that 4 cable networks could utilize SpotOn’s targeting technology under current compression technology. We have assumed that a cable MSO would first launch the SpotOn service to four leading basic cable networks such as USA Networks, TNT, TBS, CNN, etc., since these largely general TV channels would benefit the most from increased targetability.
For each channel, we assume that cable is privy to 4 local avails per hour, although we assume that 1 avail per hour is used for generic cable marketing and promotion (i.e. pay-per-view events), leaving 3 avails per hour available to true advertising sales. This implies that, on an annual basis, cable operators would have over 26,000 local ad avails to sell. We assume an 80% sellout of this inventory, generating over 21,000 local ad sales sold each year. In terms of viewership and CPM assumptions, we have assumed that the four cable networks average a 1.0 total day rating and a CPM of $7.50 in 2001, $8.63 in 2002, $9.49 in 2003, $10.44 in 2004, $11.48 in 2005 and $12.63 in 2006..A B N A M RO 4 3 We believe that the ability to target and deliver specific advertisement tailored to individual households is highly attractive to advertisers. Currently, in cable systems where zoning occurs (whereby ads are targeted based on specific geographic regions in a cable system), we believe that cable operators are generating a 25% premium to traditional local cable CPMs. Although it is hard to ascertain what type of premium advertisers will pay for the SpotOn service, based on our discussions with advertisers, we have assigned a 50% premium to the SpotOn service. This assumption implies an incremental CPM of $3.75 in 2001, $4.31 in 2002, $4.74 in 2003, $5.22 in 2004, $5.74 in 2005 and $6.31 in 2006. Based on these assumptions, we estimate that cable could be able to generate incremental local advertising sales per digital subscriber per month of $1.05 in 2001, $1.21 in 2002, $1.33 in 2003, $1.46 in 2004, $1.61 in 2005 and $1.77 in 2006.
Expense Assumptions
For expenses related to SpotOn, we have taken out the traditional 15% advertising commission from the incremental local ad dollars that cable operators could generate from the SpotOn service. In addition, ACTV’s business model calls for an annual $3.00 software licensing fee per digital subscriber in 2001. Going forward, we assume about a 10% annual price increase.
EBITDA
Based on our analysis, we expect cable will be able to generate from SpotOn incremental EBITDA per digital subscriber per month of $0.64 in 2001, $0.75 in 2002, $0.83 in 2003, $0.91 in 2004, $1.00 in 2005 and $1.10 in 2006. In addition, we believe that cable would be able to generate EBITDA margin over 60% from the SpotOn service.
CAPEX per Subscriber
Similar to Wink, capital expenditures for the SpotOn service are largely upfront and one-time in nature. Capital costs include the installation of a new I/O board. One new I/O board is required per each 6 MHz of spectrum devoted to SpotOn. We model the cost of a new I/O board at $1,000. Similarly, one re-multiplexer is also required to be installed per each 6 MHz slot, which we assume costs $15,000. SpotOn maintenance expenses have been incorporated in the annual software licensing fee charged by ACTV. All in all, these costs equate to CAPEX per digital subscriber per month of $0.02 in 2001.
UFCF as % of EBITDA
After tax-effecting our cash flow estimate and adjusting for CAPEX, we expect
that 56.9% of EBITDA will convert into unlevered free cash flow in 2001, rising
to 60% in 2002 and beyond..A B N A M RO 4 4
Marginal ROIC and Total ROIC
In light of the relatively minimal capital costs for SpotOn, we calculate massive marginal ROIC for cable operators who deploy ACTV’s SpotOn service. Based on our estimates, the SpotOn service should offer cable companies a payback period in less than one year. We calculate that SpotOn would generate a 3.1% total ROIC, assuming that the invested capital base includes CAPEX related to the cable plant upgrade and digital boxes.
Return on Bandwidth
Dividing our total ROIC estimate by 6 MHz of bandwidth indicates that the
SpotOn service would generate a very attractive return on bandwidth score of
5.1, above average versus other services. We note, however that the SpotOn
service may experience diminishing returns should it be rolled out to additional
basic channels. In our opinion, niche programming channels which already
target specific demographics would obviously benefit less from the targetability
offered by SpotOn and hence would theoretically earn smaller CPM premiums
over traditional local cable CPMs..A B N A M RO 4 5
Figure 20: Return on Bandwidth (ROB) Analysis, 2001E-2006E
2001E 2002E 2003E 2004E 2005E 2006E
Cumulative
01-06
Interactive TV Advertising
Subscribers |
