Prior rec from NTB
---------------------------------------------------------
NEIDIGER/TUCKER/BRUNER,INC.
Investment Bankers
RECOMMENDATION
Speculative BUY- SB
September 30, 1998
Research Update
ACTV, INC.
New York, NY
(IATV-NASDAQ)
Liberty Media investment signals industry endorsement
of ''Individualized Television''
The company has developed patented programming technology for the digital and
Internet delivery of individualized content for entertainment and educational
applications.
LIBERTY MEDIA BUYS 10% OF ACTV
With an investment of $5.0MM, Liberty Media (LIBYA-36 5/8) has
purchased a 10% equity interest in ACTV, Inc. Importantly, the
agreement also includes the formation of a joint venture. The
structure and business objectives of this joint venture at present are
a closely guarded secret other than the stated objective to explore
other applications of the technology.
Our conclusion as to the importance of this agreement centers on
three factors:
First, the $5.0MM investment while small assures the launch of the
Dallas regional Sports Network. While the timing is still in the air, the
company is financially positioned to succeed.
Second, the investment by Liberty endorses the company and its
technology as a bona fide member of the cable community. A number
of executives from other cable companies attended a the introduction
of Fox Sports Net Plus in New York and exhibited a high level of
interest to demonstrations of the technology.
Third, the joint venture which will ''explore other applications'' creates
another layer of opportunity for ACTV. While the Dallas area may
have 50,000 digital subscribers by year end, a total of 1.3 million
General Instrument (GIC-21 3/4) digital set top boxes have been
installed nationwide out of 1.7 million shipped. Additionally, 600
headend systems have been installed, which is over 40% of the total
market representing 28 million homes passed. The installed total of
boxes could approach 1.8 million by year end, all of which are
compatible with ACTV's ''four-plex'' technology.
The pullback in the price of ACTV's stock appears to be reflective of
the limited nature of Liberty's investment, a still uncertain rollout
timetable and a possible lack of understanding regarding the
magnitude of the ''other applications.'' But let's at least explore the
outlines of the opportunity.
STRONG INTELLECTUAL PROPERTY POSITION
ACTV is a holder of eighteen patents surrounding individualized TV,
including seamless video switching, use of memory for video
sequencing and storing viewer choices, streaming Internet video on a
TV and so on. Further, this technology is ''eloquently'' simple, it is
extremely low in cost to deploy and will be included in the ''Open
Cable'' standards now under development.
So, ACTV programming can be offered nationally to over a million TV
sets today. Consider this - Liberty Media has a 50% interest in Fox
Sports Net and the other half is owned by Fox Sports, which is now
involved in the national broadcast of many different sporting events.
ACTV has established a high level of sports event production skills
which makes this an obvious opportunity. David Jensen, a Liberty
Media executive, has also mentioned in recent interviews music as
well as the programming offered in ACTV's Calilfornia test bed which
included news, games and children shows as areas of potential
application.
A look at the attached list of Liberty Media's program portfolio
underscores the breadth of opportunity. Importantly, using ACTV's
unique cutting edge programming technology, Liberty should
significantly improve its ability to obtain carriage agreements for this
content.
HYPER-TV BROAD BAND APPLICATION
The New York presentation also demonstrated the seamless launch of
Internet content onto a TV. During a Houston Astros-New York Mets
game, player statistics from team web sites could be instantly pulled
onto the screen. ACTV's patented Hyper-TV Technology is the basis
for this capability, which could become critical in Internet to TV
applications.
INDIVIDUALIZED ADVERTISING
But not only can ''four-plex'' technology enhance the content - it can
also individualize and target advertising. By virtue of a small amount
of memory, the set top box can record preferences and thus profile
the viewer so as to pre-select an advertisement appropriate to his or
her interests. For a media increasingly beset with channel surfing to
multiple viewing options, the ability to offer an advertiser greater
efficiency for his advertising dollar will be a compelling feature and
Liberty Media has a stable of channels on which to offer
ACTV-enhanced advertising.
It appears to us then that increasing revenues through individualized
advertising and introducing a national programming strategy are two
areas Liberty will explore.
ACTV.NET
Let us not forget that ACTV has established itself as a major provider
of Internet software for the K-12 school market. A recent survey by
the Electronic Education Report found ACTV's eSchool Online
software to be second only to Scholastic, Inc.'s (SCHL-42 1/2)
products in this emerging market, which has been estimated at
$10MM in size in 1997, growing to $30-50MM by 2000. ACTV.net
now boasts contracts with the school districts in Philadelphia and
New York City, the States of Georgia and Nebraska and the
Massachusetts Corp. for Educational Telecom-munications, a leading
K-12 Distance Learning producer. Contracts tied to federal grants for
FY99 (beginning October 1st) should add to this total.
The eSchool product allows each school to design its own content to
fit specific curriculum standards and links video with complimentary
worldwide web sites and teacher controller chat rooms. Sun
Microsystems (SUNW-48) recognizes this and has included as a
solutions partner eSchool Online which is featured in Sun's
educational market promotional efforts. Giving schools the ability to
easily customize their own Internet-based education product, as
opposed to downloading pre-developed content, which is the model
used by Scholastic, has proven to be a market winner for ACTV.
What is clear is that many schools have upgraded their Internet
connections to T-1 and now need the programs to capitalize on this
large amount of bandwidth and justify the investments made. Funds
for these implementations are coming from district operating budgets
and from Federal education programs to include Goals 2000 Title III
money which was doubled to $425MM for the up-coming fiscal year,
Technology Innovation Challenge Grants also doubled to $106MM
and Star Telecommunication Grants, a $34MM program.
As a result, it would appear that the Electronic Education projections
are low. Clearly, funds from these programs could easily drive the size
of the market up substantially. Further, the company is now, in
conjunction with General Instruments, turning its sights on the
corporate market.
OUTLOOK
The simplicity and minimal cost of creating ''four-plex'' broadcasts,
storing viewer choices in memory, launching Internet web sites to
compliment video, etc., gives Liberty Media's cable industry partners
an arsenal of unique features that will enable a strong competitive
response to Digital Broadcast Satellite while driving subscriber
growth and increasing revenue per subscriber.
With the launch of Fox Sports Plus Southwest still several months
off, the timing of other regional sports networks also unclear and the
specifics of Liberty's plans for the joint venture still not known, it is
difficult to model the entertainment side for the upcoming year.
However it is our belief that John Malone sees ACTV's programming
technology as a way to leverage Liberty Media's large portfolio of
programming and we see 1999 to be an exciting year. Our projections
assume that ACTV Entertainment's share of revenues could be
$5-10MM in 1999 and ramping through the year.
The education side should generate $2.0MM for 1998, rising to
$7.0MM in 1999. Our sense is that the year 2000 will be the breakout
year for the company with revenue potential in the $30-50MM range.
However, we estimate GI box shipments at 200,000 per month and
ramping. And, with Scientific-Atlanta entering the digital set top box
market in early 1999 (ACTV is in negotiations to adapt its code to this
pre-Open Cable design unit), the number of digital set top box
installations could grow two fold to four million by 1999 year end.
CONCLUSION
We retain our Speculative Buy rating for ACTV for risk- oriented
investors and believe the stock is poised for a higher valuation in the
market as Liberty Media's strategies unfold for ACTV's technologies.
Micheal E. Shronstrom
800.518.5615
shonstro@rmi.net |
