Analyst sees high growth for interactive TV stocks
More...
Media Management: Ca
C-Cube enters broadband and cable modem market
Analyst sees high growth for interactive TV stocks
AUDIO INTERVIEW: Lynn Claudy, Sr. VP, Science and Technology, NAB
11/16/2000 Despite market volatility, ING Barings analyst Spencer Wang advocates interactive TV stocks as part of a digital media portfolio.
Stocks relating to interactive TV can be difficult to follow- you have your major players such as Microsoft, Time Warner, Disney, etc – for those companies, though, interactive TV is a small portion of their overall business. Then you have companies solely focused on the technology, e.g. Liberate, ACTV, OpenTV – however their lifespan on the stock market has been brief, as is the technology itself.
Spencer Wang, director in Equity Research at ING Barings LLC studies the media/entertainment and interactive television sectors. In the following Wall Street Transcripts interview, he discusses the market prospects for interactive TV players – both big and small -- in this constantly changing, converging digital media industry.
TWST: What drew your attention to interactive TV (iTV) as an area for investment?
Mr. Wang: There are several things that piqued my interest in interactive television. In covering large cap media stocks here at ING Barings, including Disney, Time Warner,Viacom and Fox Entertainment Group, I saw that there was a clear trend toward interactivity in media, as evidenced by the explosive growth of the Internet. From the supply side, cable and DBS companies have spent billions of dollars on building digital television infrastructure, and obviously their goal as corporations is to earn the best return on invested capital with respect to their television infrastructure. We think that interactive television services, which open up new revenue streams such as television commerce (t-commerce) and interactive advertising, will provide very attractive returns for television network operators.
TWST: What does the iTV market consist of at this time, and what are your expectations for the growth of this market going forward?
Mr. Wang: Right now, iTV is a relatively small market, and it’s comprised primarily of subscription-related services, such as Microsoft’s WebTV service, AOL’s AOLTV, and TiVo’s time-shifting service. Currently, we’re estimating that the consumer interactive television market in the year 2000 will amount to about $690 million. By 2005 we’re forecasting that the consumer iTV market will be $40 billion, which will be comprised of three revenue streams. One key revenue stream is t-commerce, or television commerce, which we are forecasting will grow to a $15 billion market by 2005. Interactive advertising is projected to become a $17 billion market by 2005. Subscription-related revenues are expected to increase to $7 1/2 billion by 2005.
TWST: What kind of companies will participate in the growth? I assume there will be quite a range of companies.
Mr. Wang: You’re exactly right. As it relates to the consumer iTV market, I think a lot of the traditional media companies will be big beneficiaries -- companies such as Disney, Time Warner, AOL, Viacom and
News Corp. In terms of pure-play interactive television companies, there are companies we call enablers of interactive TV services that provide iTV infrastructure or software, companies such as OpenTV and Liberate Technologies. There is also a range of companies that develop applications for interactive television services, such as Gemstar, ACTV, TiVo, and Wink Communications, as well as interactive TV programmers such as Liberty Digital.
TWST: In your report, the Interactive Television Guide, you refer to a new breed of hybrid media and technology companies. Which fit into that category?
Mr. Wang: I think Gemstar is a great example. Gemstar innovates new technologies, patents them, and then leverages its intellectual property portfolio into media-type businesses such as the Interactive Program
Guide. This allows them to participate in media-like revenue streams, such as advertising and commerce.
TWST: Is there another?
Mr. Wang: I would say that, increasingly, ACTV and OpenTV will emerge as other examples.
TWST: Which are the stocks that an investor should own, and what are the investment characteristics associated with them that are most compelling?
Mr. Wang: The first investment characteristic is that these stocks are extremely volatile!
TWST: Beyond the volatility of the past few weeks and the past few days, are there sector risks?
Mr. Wang: Among sector risks, I would highlight that the roll-out of interactive television services as a whole is dependent on third parties. Network operators must agree to aggressively deploy iTV services, cable companies must complete their system upgrades, and TV programmers have to embed interactivity into their content. Secondly, to state the obvious, the interactive television industry is very young and, as such, consumer acceptance is still a bit untested in the US. As with many nascent industries, the majority of our companies are cash flow negative at this time, making valuing the stocks more difficult.
TWST: How have these stocks performed in 2000, year to date?
Mr. Wang: Since the beginning of October they’re down about 29%, and with the meltdown in the NASDAQ, down about 55% year to date 2000. However, to put it in perspective, in 1999 the group advanced 788.5%.
TWST: What’s the best approach to take with these stocks? Do you buy the group or just a couple of selected stocks at this stage?
Mr. Wang: We suggest that investors take a basket approach to the iTV group. In the near term, I’d say that infrastructure players or enablers of iTV services offer more revenue visibility. For example, OpenTV and
Liberate provide the software for digital set-top boxes that enable interactive television services. Longer term, we see a lot of value creation in the application companies/interactive television programmers, which we think are better positioned to capture recurring revenues.
TWST: What are the criteria for stock selection in this group? What do you look for particularly?
Mr. Wang: In any business, we always look for barriers to entry to win deployments, maximize profits, protect market share, and shield pricing. In the interactive television business, intellectual property or patents can serve as that barrier to entry. We also consider each company’s business model very carefully. Ultimately, the TV business is dominated by entrenched players that control access to consumers, content, and the services that are deployed. We believe that iTV companies whose business plans seek to extract too much value from traditional TV players are fundamentally flawed. On the contrary, we believe that it is imperative for iTV companies to bring incremental value to traditional television companies in order to succeed.
TWST: What’s the business model that you prefer?
Mr. Wang: We prefer business models with multiple recurring revenue streams that scale with a large amount of incremental revenues falling to the bottom line.
TWST: Any other criteria that you would mention?
Mr. Wang: I’d mention three others, the first being ‘here and now solutions,’ or technology and services that can be deployed today. Given its early-stage nature, the iTV business is really a land grab right now. So it’s important to capture market share and mind share, because it’s ultimately easier to upsell an existing customer than to win an
altogether new customer or to steal a customer away from a competitor. Number two is strategic relationships in the
television business. As we discussed, the TV business is really a labyrinth of interlocking relationships. We see strategic relationships as critical to success, since they can help iTV companies secure distribution commitments. In a sector with very active deal flow, strategic relationships can also provide first look investment opportunities. From a funding perspective, strategic partners can act as a stopgap solution when public markets are less receptive. Our last key investment criterion is, of course, quality of management and their ability to execute successfully.
TWST: What’s your overall message to investors who are looking at this sector today?
Mr. Wang: From a big picture standpoint, we view the iTV sector as a great way to play some of the more prevalent secular trends in the new economy: the strong underlying growth in technology, media, and communications, the transition to digital TV, and consumers’ growing craving for interactivity. Combined with a large market opportunity, we see the iTV space as the next area of high growth (and high returns) in the media sector over the next one to three years.
ING Barings will sponsor an Interactive TV workshop, Nov. 29, at the Wells Fargo Center in Los Angeles during the Western Cable Show. Click here to register.
Copyright 2000 The Wall Street Transcript Corporation. All Rights Reserved.
Forward This Article To An Associate |
