MW, you bring up some reasonable issues which deserve a more detailed explanation.
1. SRCM's patents, their value and licensing
I am not a telecom engineer, so my details may be slightly off, but they are basically correct. SRCM owns patents on a very clever scheme called addressable frames (which was developed by another company) . Essentially, it allows a server (at the cable headend) to send a video frame (picture) that will only be received by individual set-top boxes. This was developed for analog cable so that 1 channel which has about 30 frames per second could be used to provide interactive TV to about 30 boxes at any one time. Now since a single user is not requesting a new frame every second, substantially more than 30 users could be on the system at any one time. Very neat solution, but as results from Colordo Springs, Orlando and all the other Interactive TV tests have shown, it is a tough sell to consumers.
Now we get to the Internet which is very popular, and the cable companies want to provide access. Addressible frames is one way to provide access, but there are others. Most of the other "virtual" modem companies are using a technology called Vertical Blanking Interval. I don't know all the specifics of this technology, but there is a company that holds the patents for this technology and they have a market cap of $300 million according to Source. This is where Source gets the figure that their patents are worth $300 million. VBI is used for many applications outside of Interactive TV, so that company's market cap reflect actual license revenue from many areas. Source claim VBI is inferior to their solution, an opinion that I cannot verify or discredit.
As far as the value of this patent, I have one data point. GTE has an interactive TV trial going on. SRCM sued them for use of the addressable frame technology and settled for an undisclosed amount. A careful reading of the company's 10Ks reveals that GTE paid about $750,000 in a one time fee. I don't know any of the other terms but this seems like a very small amount. So, if I combine the fact that most of the competitors are using VBI and what GTE paid for the technology, I get a lot smaller figure than $300 million for the value of the patent.
But, that isn't the real problem. The death knell for Source's Cable division is IP (Internet Protocal) over cable. Cable modems work by receiving and transmitting IP packets over the cable system. When a computer receives IP, the information is assembled into the web pages or whatever else is sent over the internet. This has nothing to do with addressable frames. Web TV will probably just take IP from the cable line instead of the phone line. All you do is substitute a cable modem for the telephone modem, and the Web TV box sits in place of the computer. But, the real threat is the advanced digital set-top boxes (ie. the GI DCT 5000). These are the Windows CE and Java boxes Source has claimed compatibility with. What Source didn't mention is that these boxes will have internet browsers in them (ex. Microsoft Internet Explorer and Netscape Navigator). So they take IP directly from the cable, and you browse the internet. But, unlike Source, you don't need a server at the headend. So, in this fight, it is Source Media vs Microsoft, Oracle, Sun and Netscape. I think it isn't that hard to predict the winner of that fight.
2: Size of market
Of the 15 million set-top boxes on order, only a few are the CE/Java machines. But they will probably be the vast majority, if not all, of the digital boxes ordered in subsequent years. I think the total addressable market for Source is only about 14 million boxes. Addressable frames is a very clever technology for analog and early stage digital interactive TV, but that window is closing. In the new digital cable world, addressable frames is a dinosaur of a technology, no matter how cleverly designed it was for the old world.
3: Direct catalog market.
As mentioned, there are other options for interactive TV that don't go through Source. And as you well know, it is the internet that will revolutionize direct catalog.
4: SRCM's technology is the way to get subscribers to digital.
No. The internet is the key, and there are much better way to get the internet than SRCM.
Also, Nathan made a few points as well.
Source is overleveraged to the point they probably go bankrupt. A lot of technology companies take big losses as they build, but most of them are heavily equity funded. The wireless players use debt, but they are building out an established service and are not developing an technology.
Ok, I have spent enough effort on this. Some very talented professional short-sellers are circling SRCM. The hype of cable modems has given them a valuation that can make this a very profitable short trade. All I can say is, be very careful going long this stock. At least do some of the due diligence I have done, and if you still disagree, fine. But don't lose money due to lack of effort when I have put all the issues in front of you.
Best of luck,
Archer |
