Richard/ALL: found the following on MF courtesy of RB. Long but worth reading IMHO.
***RAGAS SPEAKS FOR THE WEEK***
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Hopping higher
Let's lay the cards right out on the table today and stir up some good
old-fashioned controversy. Content is King. True or false? Take your
pick.
Media moguls and Internet executives could vehemently argue over this
simple
three-word statement, taking both sides of this issue until they're blue
in the
face. However, the simple answer to this question is, "it depends."
If you're Viacom chairman and content king Sumner Redstone, who
has just put the
finishing touches on a $35 billion merger of his media baby, Viacom
(VIA), with
Mel Karmazin's CBS (CBS) empire, you'd eagerly nod your head in
agreement with
this statement. Owning and developing original content over the years
has
served Sumner well, to say the least. But if you're a shareholder in
recent
digital sports content IPO Quokka Sports (QKKA), you're not quite
banging the
table at this point.
Quokka, which derives its name from a rare relative of the kangaroo,
has been
anything but "hopping" since coming public at $12 a share back in late
July. As
of today's closing price of 9 7/8, the company is still trading almost
18% below
its initial offering price. Talk about disappointing. Not that Internet
investors haven't started to get used to the sights of broken Net IPOs
over the
past few months. My, oh, my, how times have changed. Attaching a
".com" to a
Net company backed by some high-profile venture firm on Sand Hill
Road that
boasts a first-tier group of underwriters simply isn't a sure sign of IPO
success these days. Net investors have clearly gotten much choosier
about which
Net IPOs they're willing to nibble on off the cyberbuffet. After all,
there is
only so much space on everyone's plate - or should I say portfolio -
these days.
We can only gorge ourselves with endless mouthfuls of dot-coms for
so long.
However, this floodgate of recent Net IPOs has also provided a unique
opportunity for savvy Net investors to swoop in and scoop up shares
of
attractive leftovers that were largely passed up initially. Following this
strategy, for patient long-term investors under a two- to three-year time
horizon, I'm confident that Quokka Sports will turn into a dark horse
delight
for its shareholders.
Quokka in a nutshell
First of all, I suggest you head over to www.quokka.com and simply
play around
with the site for a while. Basically, Quokka is a provider of online
sports
entertainment programming for "adventure sports" to fans worldwide.
Sounds just
like a hundred other sports sites on the Web, right? Wrong. I'm not
talking
about the static text pages full of box scores from baseball games that
you
would find over at ESPN.com or SportsLine USA (SPLN). This isn't
simply
repackaging existing television content and streaming it over the Web,
either.
Quokka's team is thinking much bigger than that. In essence, Quokka's
mission
is to revolutionize the way that spectators watch sports, because in
Quokka's
ideal world, a spectator simply won't just watch sports anymore,
they'll get so
close to the action that they'll feel like they're actually taking part in the
event. Clearly, it's quite a lofty goal, but if anyone can pull it off
online,
it will be Quokka.
For example, Quokka has developed digital sports programs for
far-flung sporting
events like the Whitbread Round the World Race, which is a
32,000-nautical-mile
race that spans the globe. Sounds boring? You're not alone. I must
admit that
initially I was very skeptical of Quokka's approach to online sports
coverage
and choice of events. After all, how interesting could watching a
nautical race
online really be? Extremely interesting, when intertwined with the right
interactive tools. It's this widespread suite of interactive applications
that
makes Quokka the most compelling broadband content play I've
encountered. These
guys understand how to masterfully leverage the true interactivity of the
Web.
Here's what I mean. Quokka's typical online coverage of an event
includes a
smorgasbord of live video, audio, environmental data, an athlete's vital
signs,
graphical images, and locational and directional data, all wrapped into
one
package. For the Whitbread race, for example, Quokka's site allows
fans to
compete in a virtual simulation nautical race online, and compare their
performance to the actual Whitbread competitors as the race progresses.
Show me
anywhere else on the Web where you can do this.
Interactive programming
The widespread success of Quokka's Whitbread coverage proves there
is indeed a
surprisingly strong demand for this new breed of sports programming.
After all,
Quokka's coverage of the 1998 Whitbread race attracted over 1.8
million unique
visitors from over 177 countries. That's what I'd call worldwide
interest.
According to Quokka's S-1 filing with the SEC, visitors spent roughly
9.9
minutes per visit to the site, which is almost double the average of 5.8
minutes
per visit spent by users of competing sports sites. Quokka's
programming is
incredibly unique in that unlike traditional media broadcasts of a
sporting
event, Quokka allows users to actually choose from a wide variety of
graphical/video perspectives and various information feeds to watch an
event.
As a spectator, I am now empowered to decide how I choose to analyze
a sporting
event. Imagine if you no longer had to listen to sports commentator
John Madden
yap away about the last fumble, but could instead watch online the
quickened
heart rate of the frazzled running back who just fumbled that football.
It's
not an improbability in the future. Quokka is expanding its unique
sports
coverage to new events that include motor racing, additional sailing
events like
the America's Cup, mountain climbing, and the Olympics.
Event programming
Quokka has so far been wise in providing online coverage of sports
events that
are generally long in duration, and rich in event statistics and data that
Quokka can leverage into digital programming assets on its site. These
types of
events would be extremely difficult for competitors like ESPN to cover
using
traditional media as their delivery vehicle. Cable networks like ESPN
simply do
not have the air time or economic incentive to continuously broadcast
events
that last for days and weeks at a time.
In television's current broadcasting format, events like the Whitbread
would
appear boring without the "secret sauce" of digital programming
ingredients that
Quokka adds to each event. That's why Quokka's unique form of
programming, I
believe, will become so incredibly important to broadcasters, cable
companies,
and satellite operators as consumers move towards a high-speed
Internet
environment scattered with elements of interactive television in the
future.
In addition, Quokka has focused on covering events that generally
attract a
global audience, like sailing and motor racing, but do not cost huge
sums of
money to acquire the programming rights for each event. In essence,
this has
provided a unique opportunity for Quokka to hone its digital
programming skills
and build a strong audience without having to spend millions of dollars
in
bidding wars against the big boys like ESPN, CBS, and NBC for
programming
rights.
Clearly, however, the paths of Quokka, competing sports sites, and
offline
sports media companies will eventually converge. Rest assured that
CNNSI.com,
ESPN.com, and SportsLine USA are keeping a watchful eye on
Quokka's progress in
the meantime. This helps explain why NBC formed a joint venture with
Quokka in
February of this year called NBC/Quokka Ventures. The new company
will develop
digital coverage of the Olympics through the Summer Olympics of
2004.
Obviously, this joint venture represents a golden opportunity for
Quokka's
interactive programming to shine during the Sydney 2000 Summer
Olympics.
Problems in Oz
So far we've taken a look at the bright side of Quokka's operations,
and why I'm
enthused about what the company is developing for the long term.
However, it's
now time to dissect why the Street has so far given Quokka such a
lukewarm
reception, to put it nicely. In two words, red ink, lots of it. As of the
end
of June, Quokka had racked up an accumulated deficit of $42 million.
Right now,
an end to these losses is still nowhere in site. For the latest quarter,
Quokka
reported paltry revenue of only $2.5 million, and a widening loss of
$18.1
million. Clearly, when you're shoveling over seven dollars out the back
door
for every dollar in revenue that comes in the front, there is a reason for
investors to be somewhat skittish. Like I mentioned earlier, Quokka is
not a
Net stock that is magically going to become a profitable endeavor in
two or
three quarters. Long-lasting media companies don't get built overnight,
especially when they're attempting to pioneer a new space.
A look further back into the company's financials doesn't appear any
more
positive. If we look at the past six months as comparison, the company
generated $3.4 million in revenue for the first six months of this year,
compared to sales of $7.3 million for the same period last year. Looks
like a
Net stock that's actually showing a decline in overall revenue. No
wonder it's
gotten hammered, right? Wrong again. At this point, quarter-to-quarter
comparisons of Quokka are still virtually meaningless. Investors must
remember
that until April of this year, Quokka's revenue was largely driven per
event.
In other words, the number of sporting events Quokka covered online
and the
event's popularity has been directly related to the total sponsorship and
ad
dollars generated each quarter.
In April, the company revamped this model somewhat by now
configuring its
sponsorships as multi-year, multi-event sponsorships. To date, the
company has
entered into long-term sponsorships with only Compaq (CPQ) and
Computer
Associates (CA). Quokka's biggest challenge now will be to attract
large
advertising and sponsorship deals from traditional package goods and
consumer
advertisers like the Budweisers (BUD) and Coca-Colas (KO) of the
sports world.
With Alvaro Saralegui, the former general manager of Sports Illustrated
as the
company's new Chief Operating Officer, I am confident that Quokka
will be able
to open the purse strings of traditional sports event advertisers shortly.
In addition, in mid-August, the company announced a programming
and distribution
agreement with Time Warner's (TWX) 320,000-subscriber
RoadRunner cable modem
service. This distribution of Quokka's content in a broadband
environment will
provide another opportunity for Quokka's ad sales team to prove the
benefits of
interactive programming to these traditional broadcasts sports
advertisers.
A cadre of backers
Perhaps one of the biggest reasons to be a long-term believer in Quokka
is that
the company has amassed a blue chip list of strategic backers. More
importantly, Quokka has not just compiled a cache of "smart money"
behind its
business, but a group of investors that can actually offer the digital
sports
startup invaluable broadband distribution. Hearkening back to the
earlier
"content is king" mantra, while Viacom's Redstone loves content, he
also
understands the value of distribution, which is what helped spur the
recent CBS
merger. Just like CBS' network and radio stations will provide
distribution for
Viacom's Paramount studio content, these cable and telecom investors
will
provide the invaluable broadband distribution that Quokka will need in
the
future.
These media and technology investors include Media Technology
Ventures, telecom
giant British Telecom (BTY), broadband service ExciteAtHome
(ATHM), cable
operators Comcast (CMCSA) and Media One (UMG), publishing
magnate Hearst
Corporation, and chip giant Intel (INTC).
The company's joint venture with NBC for the Olympics will also
provide the
company with guaranteed NBC Olympics television promotion. This
agreement
obviously opens the door for Quokka to cut marketing pacts with other
NBC
Internet properties like SnapTV.com, Snap.com, MSNBC.com, and
XOOM.com (XOOM) in
the future. If NBC chief Bob Wright and NBC Sports chairman Dick
Ebersol were
really ambitious, they would go out and acquire a sizeable minority
stake in
Quokka while the company's stock is depressed at these prices, in
exchange for
Quokka receiving extended multi-year broadcast TV and Internet
promotions from
NBC.
I believe the long-term reality for Quokka's management team is that
while their
relationships with cable and telecom operators are essential, they also
must
have a strong relationship with a traditional media company that is a
big-time
sports broadcaster. Otherwise, there will come a point when not having
a
traditional media player as a sugar daddy will hinder Quokka's progress
as it
attempts to wage war with the likes of ESPN, SportsLine USA, and
others.
However, I see no reason to believe that Quokka has not already come
to this
same conclusion, and will not make the right steps in the future to
accomplish
this goal.
Multiple revenue streams
One of the weaker elements of Quokka's progress to date has been the
company's
lack of focus on developing multiple revenue streams. Last year, 81%
of the
company's revenue came from digital entertainment sponsorships,
while only 2%
came from advertising and e-commerce combined. Obviously, this
revenue mix must
substantially change over the coming year for Quokka to really ramp up
its
revenue totals. I expect to see Quokka begin experimenting with
developing
premium pay-per-view events within the next six to eight months.
There may be an opportunity for Quokka to garner some syndication
fees for its
content later down the line. However, from my standpoint, the largest
revenue
opportunity for Quokka lies in the building of vertical
membership-based
communities around these various sporting events. For example, there
would
appear to be a number of e-commerce dollars available to be mined
from the
licensing and sale of sports-related memorabilia and goods for each of
these
events.
The broadband-centric nature of Quokka's content makes it ideal for
Quokka to
develop vertical communities for sports enthusiasts around its sports
coverage
that incorporate member-created audio and video content. It's not hard
for me
to imagine athletes and sports enthusiasts with high-speed connections
in the
future uploading their home videos of their latest and greatest amateur
sports
exploits to the Quokka site.
The essential ingredients for providing the foundation to stir up all of
these
revenue possibilities is in developing a wide breadth of compelling and
"sticky"
content, which Quokka certainly has created. Therefore, it's only a
matter of
time before Quokka is able to leverage this content into juicy revenue
totals.
In Quokka's case, the vast majority of needed relationships for
broadband
distribution are already in place, and Quokka already has proven it has
the
ability to produce compelling interactive content. Now it's just a matter
of
Quokka waiting for the long-anticipated rollout of broadband services
to reach
critical mass and catch up with Quokka's high-speed content.
If you believe in Quokka's interactive programming and the Georgia
Institute of
Technology's estimate of total global revenue streams related to sports
being
worth over $130 billion annually, then it might be time to put up some
money for
Quokka stock. After all, if my long-term analysis of Quokka proves
correct,
this media company is one battered Australian rodent that's going to
end up
jumping so high in a few years, it'll look like it's wearing Nike (NKE)
Air |
