I'm putting this here for easy reference. Very well done.
Who will use HyperTV (who will be interested in licensing, buying, or acquiring HyperTV)?
We believe a wide range of companies could benefit from using HyperTV. Television/Video programmers, faced with ever increased competition for viewers, are looking for ways to enhance the viewing experience, provide differentiated programming and increase viewership (and advertising revenues). Advertising firms, can utilize HyperTV to generate consumer profiling, enabling much more effective, targeted marketing, and interactive advertising. HyperTV viewers will be able to view ads, interact with them, and even make purchases of products in real time. Internet Portals are seeking new content to differentiate their sites — to make them more "sticky" — which enables greater advertising revenues. And Online Retailers can utilize HyperTV to enhance the shopping experience, with integrated video and chat functionality enriching the e-commerce experience.
Financial Information (New Model) and Valuation Discussion
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With the guidance of management, and based upon analysis of the business models of other Internet companies, we have updated our financial model to include the roll-out of HyperTV Networks in the entertainment industry. We have also made some changes in the assumptions about the regional roll-out plan for Individualized Television, such as increasing the roll-out schedule (number of Fox Sports Net regions entered), and modestly decreasing the penetration rate of addressable digital cable boxes.
HyperTV Networks: Before discussing the assumptions of the model, it is appropriate to review some of the reasons why we believe HyperTV Networks will be successful at signing up networks, getting programming onto their Internet "channel", and getting advertisers excited about the HyperTV Networks capabilities:
Firstly, ACTV has taken a "TV-centric" approach to the design and marketing of HyperTV Networks. Their approach requires a collaborative arrangement with the networks, and is supportive of the network's "brand" identity and their advertisers. We believe this approach will be critical to signing up a number of networks quickly.
The networks are well aware of the erosion of their audience, especially to that part of the audience that is spending more and more time on the Internet. They are also aware of the growing number of convergent users, and the demand for interactivity (as reflected in the very high level of online interest in the ESPN/Fiesta Bowl Internet experience, and events like the Victoria's Secret online fashion show). By offering an interactive HyperTV online experience, synchronized with the TV experience, networks can reclaim "eyeballs" in a very cost-effective manner.
HyperTV will allow ACTV, networks and the advertisers to collect a significant amount of information about the users — what they buy, what they watch, what they spend, what they enjoy. This will allow them to do targeted, interactive advertising, and will lead to very powerful marketing activities such as customer profiling, interactive marketing, lead generation, online coupons, prizes, and ultimately, e-commerce. We believe that HyperTV will be particularly effective in stimulating "point-of-sale" or "impulse" purchases. For example, during a TCI Box Music concert, HyperTV can be pushing the convergent user the opportunity to purchase the CD, or a concert T-shirt or hat, or even an autographed guitar from that concert. Convergent users will be able to purchase merchandise right "in the moment," at the "point-of-sale."
With respect to HyperTV Networks, we have provided a "bottoms-up" look at the business. First, we looked at the number of potential convergent users (those who surf the Internet while watching TV), number of HyperTV Network programming deals with networks, number of potential 30-minute programs and Special Events in any given month. We have assumed that they sign up three networks this year, which we believe is achievable given their arrangements with Liberty Media and Fox Sports Net.
From these assumptions, we generate a total number of "regular programming" events (30-minute programs) and a number of "special event programming" events, or marquee events like a sporting event, a concert, or another type of event (like a lingerie fashion show) that is able to draw hundreds of thousands of online users. We believe we are being conservative with respect to the number of events that HyperTV will host. If one assumes that there are roughly 80 networks providing 10 hours of programming per day, that equates to approximately 600,000 30-minute programs annually. In our model, we assume that HyperTV is only capturing approximately 9,600 30-minute programs per year in Year 5 (2003), or roughly 1.5% of the total potential market. We also believe we have been sufficiently conservative with respect to the number of convergent users, and the HyperTV penetration into that convergent market for any given event.
Revenue generation: HyperTV Networks will generate revenues from a number of sources — both direct and "shared revenues." The direct revenues will be hosting, licensing and content consulting fees which HyperTV Networks will charge to host and produce the synchronized HyperTV event. We have assumed that HyperTV will charge a fee per user, based on a volume scale, for hosting and licensing, and will charge a "fee for service" for content consulting. These fees will be paid by the network "partners" to HyperTV Networks. Please refer to the model, and the footnotes thereto, for the details on the fees. We believe that we have been conservative with respect to our assumptions.
HyperTV will participate in the advertising and e-commerce opportunities through some "sharing of revenues" agreement with the network providing the entertainment content. With respect to advertising, we have focussed on banner advertising, although advertising in general could take many different forms on the Internet (banners, gateway ads, sponsorship, etc.). All of the basic assumptions are based on current Internet advertising rates for banner ads (we have included some representative advertising rates and commentary on the last page of the model). Again, we believe that using current advertising rates is being conservative, as the HyperTV interactivity and customer profiling capabilities should add significant value to the advertising and marketing effort, thereby providing for pricing power. As an example, we have used a very typical $40 CPM ($40 per one thousand impressions) banner ad rate, when @Home charged $150 CPM in a recent interactive advertising test case involving General Motors. We have also made an assumption based on a percentage of banner ad revenue for what we call "e-commerce and other revenue." We believe that this could be the most significant revenue generator for HyperTV networks and its network partners, as it includes customer profiling, market research activities, campaign advertising, coupons and other promotional activities such as prizes and award programs, and direct online purchases (e-commerce). We have used a relatively conservative percentage, and feel that this could be adjusted upward significantly based on initial user experience over the next 12 months or so.
Lastly, we make some assumptions on "sharing" arrangements with the networks. One might ask why networks would want to include HyperTV networks in their programming to any extent, and share advertising dollars. We believe there are many reasons. First, we believe that a HyperTV Networks synchronized convergent experience will be accretive to the networks current activities, so that they will essentially more than pay for themselves right from the start. Second, we don't believe networks have the in-house experience, capabilities or desire to build, manage and maintain an Internet network such as HyperTV networks. Third, the HyperTV software and authoring tools are available now, and the network is rolling out and should be up and functional in a matter of weeks. By partnering with HyperTV, networks can begin almost immediately to test the convergent, synchronized programming capability. For this initial model, we have assumed that HyperTV Networks will be able to capture 10% of the shared revenues as defined in the model. We believe this is sufficiently conservative, given the potential of the HyperTV experience, and could possibly be quite higher over time. However, we should have a better idea in a very short time, as network agreements are put in place.
Valuation: As was done in the initial model, we have provided a variety of different valuation methodologies, including discounted cash flow, terminal P/E multiples, and terminal operating income multiples. We have also decreased our discount rates modestly, as we believe "financing risk" and "technology risk" has decreased over the past four months with the additional funds being invested by Liberty Media, and the Wolzien patent being acquired. We are raising our 12 month price target range to $32 to $35 per share, and are reiterating our BUY recommendation.
Risk Considerations
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This section of the document is provided to remind potential investors to undertake a prudent level of due diligence prior to making an investment in the securities of ACTV, Inc. For a complete description of risks
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