Chairman's Annual Report Letter - 2000
Dear Ampex Shareholder,
During the year 2000, Ampex Corporation continued its evolution into a company focused on intellectual property and services based on our core strength in video technology. The majority of this letter is devoted to our strategy for these business areas, but I would like to touch first on some other matters that affected the Corporation during the year.
Continuing operations in 2000 generated a loss of $26.2 million as losses from Internet video more than offset profits from licensing video technology. As predicted in last year’s letter, licensing enjoyed a good year with income of $11.2 million, a similar level to the previous year after adjustment for a one-time settlement in 1999. It is always difficult to forecast licensing activity, but we think that 2001 will also be a satisfactory year and there is a possibility that we may see revenue from some new products that we believe use our technology. Internet video operations, chiefly the iNEXTV subsidiary, lost $25.6 million in 2000 compared to $20.3 million in 1999. This loss includes non-cash charges to amortize goodwill and asset writedown of $5.4 million in 2000 versus $3.3 million in 1999. Expenditures in both years represent a high level of investment spending to create a completely new business, and we expect these costs to decline in 2001. During the year iNEXTV increased its focus on web video media and exited the commodity webcasting business, which had been primarily conducted by TV onthe WEB, a discontinued subsidiary. We also consolidated Washington, D.C. activities into our New York facility. These two operations accounted for $11.8 million of the Internet video loss for the year, so I am confident that iNEXTV’s losses in 2001 will be substantially reduced.
When iNEXTV was founded, the business plan assumed that the major traditional advertisers would not divert a significant portion of their spending to the Internet as long as banner advertisements were their only option. We also believed that broad-band deployment would create a significant audience for web video and that when this happened there would be a sudden shortage of video programming created specifically for the web. Finally, we recognized that the cost of bandwidth to deliver video programming would be the largest cost element for a successful web video provider. From today’s perspective it is clear that major advertisers are not buying enough advertisements to support the industry and, as technology and Internet companies cut spending, banner pricing and revenues are collapsing. Conversely broad-band households have already increased to 5 million in the United States and are projected to reach 47 million in 2005. This has already created the predicted demand for video programming and has resulted in recent agreements for iNEXTV’s content to appear on major web destination sites such as those of Microsoft, Juno, and Yahoo as well as specialized sites such as Autobytel and TravelNow.
Ampex’s Internet Technology Group continues to provide iNEXTV with technology and know-how to deliver improved web video at lower cost. In 2000, we began to use a second generation of ITG technology targeted to higher data rate video and we will introduce another level of improvement by mid-year 2001. iNEXTV can now deliver broad-band content at a cost saving of roughly 50%, which will become increasingly critical as new distribution agreements boost iNEXTV’s traffic levels. There may be opportunities to license ITG’s work in the future, but for the near term we are using it to improve the competitive position of iNEXTV and its partners.
In creating iNEXTV, the first challenge was to create a video product and the infrastructure to deliver it, which has been done. The second was to build an audience, which we have chosen to do by distributing our programming to the audiences of other web sites. Based on the sites mentioned above, this is progressing well. The third phase of our plan involves building advertising revenues. This process could not take place in a meaningful way until we could demonstrate content and audiences, but it is now the key objective. We expect that advertising revenues will grow in 2001, but it is not likely that they will cover a significant portion of iNEXTV’s costs this year. Our longer-term confidence is based on the fact that research is beginning to show that video commercials on the web demonstrate strong brand-building effectiveness. This is important because brand building is where the traditional offline advertisers, who spent about $85 billion in the United States last year, concentrate most of their money, and Internet video commercials enable these advertisers to extend their brand-building activities to the Internet. Major traditional advertisers currently account for a very small portion of Internet advertising revenues because they understand that banners are a direct response mechanism like coupons or junk mail, which is not a major objective for these advertisers. Our sales strategy is to work with traditional offline advertisers as they move more spending online. Large companies such as these are often slow to change, but the revenue potential far exceeds anything that has yet been seen on the web. iNEXTV’s objectives and priorities will continue to evolve, but major progress is being made in a business venture that is obviously speculative, but has the potential for exceptional returns.
Turning to the other operations of Ampex, we have planned to fund iNEXTV in large part by selling our Ampex Data Systems subsidiary. ADSC did well in 2000, moving from a loss in 1999 to a profit of $2.0 million. However, the environment for acquisitions deteriorated last year as the stock prices of potential acquirers declined. As a result, we have not yet been able to sell ADSC at a price or on terms that reflect its true value. We continue to work on selling the company and to develop alternative financing strategies in case the sale continues to be delayed.
In 2000, we closed the MicroNet disk array subsidiary. While MicroNet’s products were winning awards they were not profitable. MicroNet’s sales were also heavily directed towards Apple Computer’s customer base and Apple’s fortunes, which had been improving, began to reverse during the year. We also concluded that the introduction by Apple of a completely new operating systems further increased the nearterm uncertainty. As a result we determined that in view of our overall liquidity needs and the adverse condition of the capital markets, MicroNet should be discontinued. Its loss of $11.6 million in 2000 will therefore not recur in 2001. Our form 10-K, which is attached, contains a detailed discussion of all of the factors affecting our businesses and the Company as a whole, and I encourage you to read it for more information.
In last year’s letter I pointed out that Ampex was evolving into a predominantly Internet video-based company. As you know the capital market’s opinion of the Internet has changed dramatically in the space of a year and our stock price, like the sector as a whole, has declined precipitously. As a major stockholder I am as dissatisfied with this as I expect you are. However, we believe the steps we continue to take are essential to Ampex’s long-term future.
Many of the same weak-minded people who predicted confidently that everything would move to the Internet are now equally sure that Internet content will never succeed. Both of these extreme outcomes are equally unlikely. Content on the Internet, which until recently was paid for by stock market investors, now needs to be supported by profits. If there are no profits there will be no content, which means that the Internet as we know it will cease to exist. I do not believe that Internet content will disappear and I do not think that you should believe it either. If iNEXTV’s content and Ampex’s technology can deliver effective advertising opportunities and cost advantages, they can be as successful as any other business on the Internet or otherwise.
Everyone here is working hard to make the Company a success and deserves your thanks and mine. I would also like to thank the many shareholders who have written, emailed and called to offer ideas and encouragement and to express their support for what Ampex is doing.
Yours sincerely,
Edward J. Bramson
Chairman |
