Archive for April, 2008
Can You Hear Me Now?
Don’t you hate your movie having a greater dynamic range than your hearing? Is that explosion too loud and the dialogue too faint? Getting tired of having to increase your TV volume for DVDs only to reduce it again to watch TiVo?
Me too. Now there’s hope.
Dolby Laboratories (DLB) this morning announced the first market availability of its Dolby Volume technology. Dolby Volume automatically adjusts for differing volume among separate video sources, which means that video streamed from your PC will be the same loudness as your TV, which will be the same as the DVD you’re playing. Should help with commercials blaring at you, too.
What’s more, it also adjusts the frequency response at lower volumes to optimize the sound and account for what’s happening on the screen. So for example it can boost the midrange so those explosions on Iron Man won’t drown out the concurrent dialogue.
Dolby continues to find ways to make itself indispensible to CE manufacturers. It’s business model is sound, and I have a bias for IP models with big moats that generate lots of cash. It’s going to have to come up with a bit more growth, however, to justify its current valuation. At 35x Free Cash Flow, it’s not exactly trading in the nosebleed seats, but it doesn’t leave much room for error.
Still, Dolby Volume should help. Good stuff, coming to your TV soon.
Disclosure: I hold no position in any of the stocks mentioned here.
Stage6 Resurrected?
Davis Freeberg has a piece out discussing the apparent return of Stage6, or at least a potential clone. Vreel.net (previously DivxIT) is said to be ready to launch a site that it hopes will recapture the spirit, if not the user base, of the original. It also seems to have the blessing of DivX to use its webplayer and codec.
Davis did a nice bit of investigative work here. Some in the blogosphere have commented that it won’t fly, since Veoh (originally endorsed by DivX when Stage6 folded) is where all the old Stage6 users went. But if you look at recent Alexa stats, there’s no uptick in Veoh traffic that corresponds with the dramatic drop in Stage6 as it went off the air. So they’re still out in the Ether somewhere.
I hope Vreel (or someone) succeeds, but I have my doubts. The ties between Stage6 and DivX’s software, community, forums, and tech people had a lot to do with its original success, as well as Jordan Greenhall’s vision. Further, there seems to be no paid subscriptions and therefore no business model (yet). Presumably an ad-based model can be added later, but in the meantime it’ll be damned expensive if traffic builds to anything like Stage6.
We’ll see.
Disclosure: I hold no position in any of the stocks mentioned here.
DivX: Juvenile Delinquent?
Did everyone see this morning’s announcement from DivX (DIVX)? TVs that are DivX Certified, from HP and LG. Yawn. DivX has had an HP TV certified for some time, and the rest of this was distressingly devoid of details. (Nice to see the SKU count up, though.)
Particularly curious was the mention of Internet video streaming capability on some models, but the wording suggests DivX isn’t involved in this part. If any of these SKUs incorporated DivX Connected technology I’m sure it would have been announced.
All in all quite a fluffy release, without much new in it. I wouldn’t have thought DivX was one to use puff pieces prior to earnings. But then…
Parents are always on the lookout for those telltale danger signs in their kids: falling grades, withdrawal from family involvement, strange friends, mood swings, glassy eyes, smoky odors clinging to clothes, etc.
I wonder. Is DivX a troubled kid?
First, there was the Stage6 imbroglio, with Jordan Greenhall and most of the founding team leaving for parts unknown. Stage6 was neither retained as an (expensive) venture investment nor spun off to others, but simply value destroyed. Complete with swirling rumors of hot tempers and incompetence.
Then the departure of SVP Sales & Marketing Pamela Johnston early this month. These things are rarely explained adequately, or truthfully. Might be poor performance, might be strategic disagreement. But it could have been “time to get the hell out of Dodge”.
Third, sagging guidance for 2008, leading to a reduction in analyst estimates on the stock. The 2008 mean estimate has fallen 8% to $0.47, while the 2009 estimate dropped 15% to $0.55. The stock price followed. Everyone had been holding their collective breath for the end of the Stage6 drag on costs, but the MainConcept deal has brought unanticipated expenses and 2008 is now being billed as “an investment year”. I thought 2007 was the investment year.
Finally, I have heard rumblings lately about layoffs at DivX. If true, this could really hit the stock where it hurts, although any associated cost is almost certainly already in management–if not analyst–estimates.
DivX is cheap. It’s trading at about 15 times forward earnings, and has an enterprise value on the order of only $100M. This is simply nuts for a company with high gross margins and rapidly growing license revenue. It generated $13.3M in free cash flow last year, and that was when it was burdened to the tune of about $20M by Stage6. But some of the points above help explain why this thing has been so badly ostracized by the investment community, which is understandably nervous after a long roller coaster ride.
I like DivX. I use their tech and it’s excellent, especially DivX Connected. Their user base is rabid and involved. I like the management team. They’ve made impressive announcements recently about licensing and content deals which should prove lucrative. The DivX format will soon incorporate perhaps the best H.264 codec.
But like a good kid going through a rough patch, their potential always seems to be receding into the future. And like most teens, DivX can rightly complain that “nobody understands me.”
On the other hand, maybe it’s just puberty.
Disclosure: I hold no position in any of the stocks mentioned here.
A One-Channel TV
Got to thinking the other day about the last 10 foot problem, i.e. getting media from either your computer or the Internet to the TV. No shortage of available or announced solutions: TiVo, AppleTV, XBox, etc. Even Nintendo is apparently trialing a service in the U.K. to get the BBC’s iPlayer to your living room via your Wii console.
I’m still a bit puzzled about the underlying strategy for this, however. There’s obviously an attempt to differentiate each box, but I just can’t see how it might drive sales by itself. XBox delivers movies, AppleTV allows YouTube access, Wii incorporates iPlayer, DLink’s DivX adapter had Stage6 (sigh). I guess for a select few this might make sense, that the service tail might wag the electronics dog.
Me, I want it all. I want YouTube, Hulu, iPlayer, Veoh, as well as any video currently on my PC. Not to mention whatever hot new thing comes out tomorrow. But since nobody offers a consumer electronics solution to provide all these, I guess I’ll just….wait.
And wait.
After all, who would want to buy a TV that only receives a few channels?
Certainly, one could always hook up a PC to their TV directly. Or use a Media Center PC of some type that provides most/all of this. But that’s likely too much trouble (and technical savvy) for joe sixpack and sally soccer-mom.
Is it any wonder that there is no surefire convergence solution? It the holy grail here simply a browser on your TV?
Until that time, perhaps the PC still needs to be in the equation somehow. After all, everything on the internet is already accessible via the PC, including not-yet-dreamed up video sites and (this is important) easy billing solutions. Maybe trying too quickly to bypass the computer is a mistake. Maybe this is a two-phase process:
- First, something that allows easy, format-agnostic streaming of anything on or accessible by your PC.
- Evolution to a pure Internet TV (or a simple internet front end to the TV).
Why would I ever buy a box that didn’t do at least one of these things, unless it had another purpose (e.g. gaming, DVR)? The problem, of course, is that the industry is trying to manage the profit stream by linking boxes to services, cutting special content joint ventures, building new advertising paradigms, etc. That approach largely ignores the consumer.
Where would the television industry have been if RCA had cut a deal to deliver ABC content and local news, while Panasonic TVs showed only CBS and the weather? What if Sony VCRs had only played movies from Disney and Sony?
Disclosure: I hold no position in any of the stocks mentioned here.
Another Nice Ceragon Quarter
Ceragon Networks was out today with 1Q08 results: Revenues $47.2M (up 39% year over year) and pro-forma EPS of $0.13, up 30% from 2007. (Net income rose 63% over 1Q07, but share dilution from last Fall’s secondary offering reduced the bump in EPS.)
Israel’s Ceragon is a favorite of mine, arguably the best “pick and shovel” play on the growth in mobile data. It’s backhaul radios are used in both WiMax and Cellular networks, and are leading edge in technology.
The stock’s been beat down mercilessly, largely due to Hedge fund shorts piling onto a very high price last Fall, as well as the dilutive stock offering. Still undervalued at todays prices, in my view (up 7% today in pre-market trading).
Conference call is just starting, I’ll add more if there’s anything interesting.
Disclosure: I hold no position in Ceragon Networks.
CinemaNow, Technicolor Become Enablers
CinemaNow and Thomson’s Technicolor (NYSE: TMS) just announced a partnership to provide an end-to-end platform for online content delivery to consumers. CinemaNow will contribute its studio-licensed content and a storefront, while Technicolor will provide encoding, encryption, rights management, and content delivery services. (I hadn’t known until now that Technicolor runs its own CDN, but it does.)
The platform will extend all the way from content origination to consumer devices. The press release mentions CinemaNow partners such as Samsung, Archos, Dish Network, and HP as providing compatible hardware for the platform.
What isn’t mentioned is the engine “inside” that will make this work at the device level. I’m sure Macrovision (NASDAQ: MVSN) is in the mix, as it already has deals with CinemaNow and Samsung for its Macrovision Connected technology. Presumably Dish/Echostar set-top boxes will get the Connected treatment also, which is certified DLNA compliant.
There are advantages to the middleman model, especially in providing a mechanism to drive digital living technology into more electronics gear. But is it a long-term solution?
Making it easy for anyone to become an online content retailer will lead to… well… lots of online content retailers. Most of them poorly differentiated and few with any staying power. And when the customers dry up, where will the middlemen be?
Imagine the early days of television, except with dozens of TV networks. If they had all broadcast the same programs, or nearly the same, how many of those networks would have survived? Sort of like Internet video portals today. Home video delivery will be no different.
I think to succeed as an online retailer will require one of two things:
- Exclusive content. Not really in the best interests of the content providers, who want as broad a reach as possible and who are tired of being restricted by their distribution partners.
- Something to make the channel sticky. My best guess remains either unsurpassed ease-of-use (e.g. iTunes) or most likely some form of social networking. DivX’s Stage6 had a fair amount of success here.
Those few online retailers that get the formula right will probably try to disintermediate the enablers. Or the middlemen will acquire the portals. Or both. (Me? I’m a big fan of horizontal separation.)
In the meantime, look to partnerships such as this one to facilitate the home viewing transition from discs to a full media download market.
Disclosure: I have no position in any of the stocks mentioned here.
Tainted Water
Quote of the Week: Paul O’Neill, former Treasury Secretary, is asked by the NY Times how the subprime problem could have escalated so far out of control. He alludes to how AAA-rated bundles of mortgage securities became untouchable when he says
If you have 10 bottles of water, and one bottle had poison in it, and you didn’t know which one, you probably wouldn’t drink out of any of the 10 bottles.
I certainly wouldn’t. Neither, apparently, did the market.
No Waders Needed
I’ve commented before, here and also here, about P2P traffic, net neutrality, and broadband ISPs.
Nate Anderson at Ars Technica has a long, detailed, but very comprehensive post concerning the Internet and capacity concerns, including whether the Internet will crash due to a catastrophic “exaflood” of data.
He interviews Andrew Odlyzko, of the Digital Technology Center at the University of Minnesota. I met Andrew some years ago, and he is as authoritative as they come on the Internet.
For those lacking the time, here are the Cliff Notes:
- To paraphrase author William Gibson, Internet capacity is more than adequate, it’s just not evenly distributed.
- Upstream bandwidth from consumers is the key bottleneck, but gradually the ISPs will be forced to make their networks more symmetric.
- While it’s true a small minority consume the majority of local bandwidth (hello, ever hear of Pareto’s rule?) it turns out it’s not always the same minority.
- There’s as least as much politics in the Net Neutrality debate as there is business. Or science.
While the concept was not discussed in the article, I still maintain that in the absence of competition, U.S. providers will begin moving to a pay-per-byte model as capacity strains in local networks increase. But this could change if the telcos and cable providers butt heads in more markets, or some form of wireless gains traction at scale.
Ultimately, populist politics and public opinion will continue to vie with telecableco lobbyists and PR experts before meaningful progress in the last mile occurs.
Anyone who really wants to gain a better understanding of this issue would be well served by reading the whole 4-page article.
Carl Icahn Channels Ed Lampert
Well that was quick. Just sitting down to my morning eggs when I get them all over my face.
The Wall St. Journal reports this morning that Blockbuster offered back in February to buy Circuit City (NYSE: CC) for $6-$8 per share, a hefty premium to current prices. Apparently there’s been no (positive) response.
Contrary to my previous post where I argued Blockbuster should be shuttering stores, it seems to be embracing retail. The game’s afoot! With what looks like a generous price (in cash, yet) I wonder why Circuit City hasn’t been cooperative? Could it be that Circuit CIty’s board has no interest in becoming part of a REIT?
This deal smells like a private equity-type play for real estate driven by Carl Icahn (Blockbuster board member and dealmaker extraordinaire). I hadn’t considered this angle before, since I was focused on the digital media point of view. But if your biggest asset is real estate, you might as well take advantage of it. Ed Lampert has done this with Sears and K-Mart, where the real estate is still probably worth more than the underlying businesses and the company’s market cap.
Presumably Icahn and Blockbuster CEO Jim Keyes think they can squeeze inefficencies out of operations, shutter underperforming locations, and introduce product/service synergies. Yadda, yadda. You can take the man (Keyes) out of 7-11, but you can’t take the 7-11 out of the man.
No other motivation makes sense. Vertical integration seems a wrongheaded strategy these days. Though it would make it easier for Blockbuster to market an otherwise doomed standalone movie rental set-top box (rolling my eyes, here).
Who knows, maybe they could pull this off and end up adding value to both companies. Still, with market-savvy Apple (NASDAQ: AAPL) using content to sell boxes, I love the irony of someone thinking that buying a box retailer was going to help move the needle on film rentals.
Disclosure: I have no position in any of the stocks mentioned here.
Blockbuster: Driving Off A Cliff?
The Hollywood Reporter had a story last week that Blockbuster (NYSE: BBI) will soon announce a movie rental set-top box. Everyone who has written about it has noted it will compete against–among others–Apple TV (NASDAQ: AAPL).
That’s true, if you can call “eating dust” a competition.
To the extent such dedicated set-top boxes ever catch on (and I have doubts), Apple TV is Lightning McQueen to Blockbuster’s Mater. Apple is in the hardware business, you can bet it’s in this race to win. Frankly I doubt it even cares that much about the movie revenue. But those rentals are Blockbuster’s raison d’etre.
Blockbuster still seems like a deer caught in the headlights, and has been playing follow the leader with Netflix (NASDAQ: NFLX) for some time. This recent development simply copies the deal Netflix announced with LG Electronics awhile back. While I wouldn’t go so far to say it is doomed (yet), Blockbuster needs a serious strategy tune-up.
First it has to rid itself of the retail store “boot”. For too long Blockbuster has focused on driving traffic to its locations, which it naturally feels obligated to earn money on. But this is the digital age, and despite trying desperately to leverage them, Blockbuster’s locations aren’t the assets it thinks they are. Instead of trying to earn a return on real estate, Blockbuster should have been shedding stores. I understand the real estate market was pretty good last year, probably a great time to divest. Oops.
This is the same mistake Toys-R-Us made, dipping its toes into the on-line pool but afraid to jump in until it was too late.
Blockbuster does have some options left. The purchase of Movielink gives it a leg up in on-line delivery. Going to market with its own STB is a mistake, however. First, it’s not at all clear there would be much demand for the box; just look at Vudu. Second, Blockbuster doesn’t exactly present a compelling co-branding opportunity for CE manufacturers. And depending on the arrangement, the costs associated with such a move could easily outweigh any additional revenue generated.
Far better to package Blockbuster-to-the-TV as a service. True, Apple and TiVo (NASDAQ: TIVO) aren’t likely to sign on. But it could partner with multiple CE manufacturers who can build home media transfer capabilities into their DVD or Blu-ray players, using technology from the likes of DivX (NASDAQ: DIVX) or Macrovision (NASDAQ: MVSN).
These solutions (perhaps not so coincidentally called “Connected” by both firms) are licensed to CE manufacturers, vendor neutral, and built-in at the chip level. Movielink gets films to the PC, and “Connected” easily gets them to the DVD or STB, without requiring an additional box. In fact, DivX has a good relationship with LG already–wouldn’t surprise me to see Netflix go with DivX Connected on an LG box instead of with a branded version.
This makes even more sense when you consider the other advantage Movielink brings to Blockbuster: a partnership with Sonic Solutions (NASDAQ: SNIC). Sonic’s Qflix is the only legal way to burn a studio DVD remotely, which allows Blockbuster to say goodbye to much of its costly inventory. It will soon be feasible to download movies to PCs and then burn them at home. (The disc is dead, long live the disc.)
Blockbuster still has a chance in this race, but it had better get out of first gear. Fast.
Disclosure: I don’t hold positions in any the stocks mentioned in this article.
by Michael Mauboussin
