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Dow Jones Business News
Analyst Sees Macrovision Losing Big Contract to Rival
Friday March 28, 1:18 pm ET
By Roger Cheng
NEW YORK -- Macrovision Corp. shares fell Friday after a top Wall Street firm indicated the company would be losing the first major compact-disc copy-protection contract.
J.P. Morgan Securities Inc. analyst Sterling Auty said in a research note that Arista Records, the first company to implement copy-protection technology, has chosen to go forward with Macrovision competitor SunnComm Technologies Inc.
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Although Mr. Auty didn't specify the value of the contract, he told Dow Jones Newswires that the total market opportunity in a few years could amount to $50 million to $100 million, given the number of CDs that need protection.
In afternoon trading on the Nasdaq Stock Market (News - Websites), Macrovision was down $1.90, or 14%, at $11.40 on volume of 2.7 million shares. Average daily volume is 551, 800.
With the popularity of online sharing services such as Napster Inc. and Kazaa, the music industry has had to deal with the explosion of online music piracy. CD copy protection prevents users from "ripping" tracks off of a CD and uploading them to the Internet.
With the deal going to SunnComm, Macrovision failed to gain a foothold in the burgeoning business, he said in the research note. Arista, which is owned by Bertelsmann AG's BMG Entertainment, may lead other music studios under the BMG umbrella to SunnComm.
Macrovision, Sunnyvale, Calif., and SunnComm, Phoenix, are two main competitors in the CD copy-protection business, although Mr. Auty noted companies are springing up to meet this new demand.
A Macrovision representative couldn't immediately be reached for comment.
Playability, or the ability of CDs to perform in different types of players, remains a primary concern for music studios, Mr. Auty said. That has also been the largest hurdle for Macrovision. He said checks into Arista's protected CDs using SunnComm's technology have a playability rate in the high 90% range, meeting the benchmark set by the labels.
Peter Jacobs, SunnComm president, said the company declined to comment on developments with Arista Records and BMG. BMG spokesman Nathanial Brown declined to comment.
Another concern with Macrovision revolves around its digital videodisc protection business. The margins for DVD copy protection are likely to fall after two major studio contracts expire in the second half of the year, Mr. Auty said. He didn't disclose the identity of the studios.
Macrovision currently receives a royalty fee of five cents for every DVD that receives protection. Mr. Auty believes that rate will fall to 3.5 cents to four cents a disc. Macrovision believes it can continue to charge a royalty fee of five cents a disc, but Mr. Auty disagrees.
"It will be very difficult, in our opinion, to maintain royalties simply by educating customers of additional features for a solution they have in essence already paid for," Mr. Auty said.
He said that two other segments of Macrovision, its pay-per-view and software- license-management businesses, have failed to step up to offset the potential decrease in DVD revenue. Macrovision has historically replaced declining margin revenue, such as switching to DVD protection from videocassette protection. Mr. Auty said the pay-per-view and software-licensing-management businesses won't show sustainable revenue growth for another three quarters.
Mr. Auty doesn't own Macrovision shares, and J.P. Morgan doesn't have an investment-banking relationship with the company. |
