12:46PM Mike Tarsala's TechWatch (ISWI) Imagine investing in a little-known company that stands to get half the income stream from up to 6 million satellite subscribers who can bet on the outcome of hundreds of individual sports plays over the course of 15 to 20 broadcasted games a week, all by punching a few remote control buttons on their TVs.
The whole concept sounded potentially ADDICTIVE to me (especially come playoffs time) so I started doing some homework on Interactive Systems Worldwide (ISWI). I'm hearing that the company is on track to make just such a play-by-play betting scenario a reality for subscribers to Rupert Murdoch's British Sky Broadcasting (BSY), home of the England Premiership soccer league - the equivalent of the NFL in the U.K
At first glance, I couldn't get over the fact that West Paterson, N.J.-based Interactive Systems' looks so bad on paper. Tiny ISWI has about a $30 mln market cap, trades at a little more than $3 a share, burns through roughly $5 mln a year, and had fiscal Q3 sales of just $15,000. Even with the $3 mln the company raised last month, it seems to have enough working capital to last just 12 months at the rate things are going. The recent fund-raising was indeed timely, though -- it helped keep the company avoid a possible Nasdaq small cap delisting threat for not having enough tangible assets.
But the potential for significant revenue could be coming soon. B Sky B is said to be in the final stages of testing its ISWI-based play-by-play betting offering. It wouldn't be a surprise for the companies to publicly announce the end of testing by the end of the year or in January. And if that happens, B Sky B should be on its way to launching a product - complete with a marketing and advertising campaign - in early 2005. We're hearing from several sources that the product has passed the first of two final testing phases, and B Sky B is now focused on completing the second phase.
"It's possible we could fail the tests, but then we'd fix things and schedule another," 72-year-old CEO Barry Mindes told me. "In my judgment, the chance that this will not go live is de minimus - I can't go beyond that."
A few British broadcasters - including B Sky B -- already allow their subscribers to bet on the outcome of games from home - either through a programming guide or by calling in bets. But that's a far cry from what B Sky B is expected to offer through ISWI. Name the sport -- soccer, basketball, hockey, or golf. While the contest is ongoing, viewers will be invited to bet time and again on penalty kicks, free throws, whether a team will score on the power play, or if the golfer will make birdie or not.
The ISWI system that's expected to make it possible for B Sky B viewers is called SportXction, a system that took several years and according to Mindes, about $15 million to build. It's more than just a collection of algorithms. Mindes says it's an entire methodology of stock-exchange-like rules that can adjust the odds during the contest automatically while new bettors are coming in, all in what's pretty close to real time. He says the odds can change as frequently as every four of five seconds, adjusting to make a market.
The goal of the system is to keep people not only watching, but betting. New scenarios to bet on are expected to pop up on an interactive programming guide every 5 to 7 minutes, giving viewers a vested interest in contests - even ones that don't involve their home teams. Think of it as a souped-up Fantasy Football league, only in real time.
To place bets, viewers must first set up an account via B Sky B that's attached to a debit or credit card. When viewers win, money is put in their accounts. When they lose, money is debited. It's up to B Sky B to handle not only the set-up of the accounts, but the financial transactions all the marketing, and the handling of customer service calls.
Investors we talked to about ISWI were attracted to the company despite its income statement because of the potential financial leverage once ISWI starts up with B Sky B. The vigorish, or the take from gambling through the satellite system, is expected to be north of 5% - which is richer than the 4.5% to 5% take in many Las Vegas operations.
The company has about $4.5 mln in fixed costs a year, and it has about $500,000 in variable costs - mainly the cost of about 20 employees. The company's fixed costs should stay about the same in '05, while the only additional variable costs will be from hiring people to run the games. It takes two - one person to pose the questions, and a low-level bookmaker who can manually override the odds if they aren't right. Mindes says he can hire bookmakers for about $13 an hour, and somebody to enter questions for about $7 an hour.
Let's say ISWI's costs will be $5 mln in 2005. Three are about 7.5 mln B Sky B satellite subscribers, and about 6 million that have the sports package. There are 1.8 people in the average U.K. home, meaning there are about 10.8 million potential sports viewers. Say just half a percent of those people (54,000) actually gamble on the ISWI system once every two weeks, and the company's take is about 6 pounds per game from an average of 50 pounds of bets. That amounts to 12 pounds per person per month, or 144 pounds a year. Multiply that by half a percent of 10.8 million (54.000) by 144, and you get about 7.78 million pounds of total revenue from the venture.
Immediately subtract from that 50 percent - what investors believe is the split between ISWI and B Sky B. That leaves 3.88 million pounds of revs for ISWI. Assume annual costs of US$5 mln, (about 2.58 million pounds), and that leaves you with 1.3 million pounds. Next, subtract taxes that could be as low as 15%, and you still have 1.1 million pounds of profit - about $2.1 million.
Now, imagine what happens if 3 percent of sports viewers actually participate on a regular basis, and the company gets a spike up to 5 percent of players for key playoff matches. As long as the company keeps costs in check, it seems ISWI has the potential to be highly profitable, based on the B Sky B deal alone.
And if the B Sky B deal goes well (the company is said to be signed up for one year initially, with an out in six months), then other cable and satellite companies in the U.K, Italy, and elsewhere in Europe could come knocking on ISWI's door.
As it stands now, it seems that no other company can do what ISWI does. The company has two patents covering a system that controls risk and seeks to balance the pool in real time while a contest is in progress. And Mindes says he plans to file a patent related to a novel take on betting on individual players in a card game while the game is ongoing. (I'm thinking of the potential of mixing that technology with popular celebrity poker shows.)
One way or another, ISWI is at an inflection point. Either the venture with B Sky B will start to take off and lead to a solid revenue stream, or it won't, and you won't want to be caught holding this speculative stock - especially if it dips below $2.50, where there seems to be little to no technical support.
Yet if the technology is a go, and Rupert Murdoch and company can market it well, there's reason to believe B Sky B will stay committed to ISWI's technology - as long as it makes them money.
I would hope a company with patents on remote-control gambling with the backing of one of the world's premier satellite broadcasters should manage to make money at some point. If it doesn't, it makes sense that 72-year-old Mindes will sell out to a willing buyer, and probably demand a premium. |
