Posts filed under ‘Digital Media’
Widgets And Idjits
Intel (INTC) and Yahoo (YHOO) recently announced a venture to develop a platform–dubbed “The Widget Channel”–that in effect turns your TV into an Internet thin client. Seth Gilbert over at Metue.com has a great summary.
Developers can write software widgets that can be uploaded to your TV and run in the background. You could check email, share photos with friends, bid on eBay, anything a widget on your Mac or PC can do. All while watching your favorite TV show or sports event.
Of course, you’ll also have to buy a new TV or Set-Top Box (STB) that is equipped with Intel’s CE3100 Media Processor. Good luck with that.
[I wonder sometimes whether anyone ever sees the obvious disconnect between relatively fast new media business development cycles--i.e. "Internet time"--and the much slower frequency with which people upgrade expensive items like TV sets. Many, many firms are vying to deliver a "convergence" solution. Which, if any, will be sufficiently compelling and have enough staying power to become embedded within a sizable share of TVs or STBs?]
Overall, I’m a bit skeptical of this and other similar initiatives.
What I do like is that it’s expected to be a relatively open standard (from the software point of view, at least–you still need Intel processors). Tapping the creativity of the wider software development community is a proven method for both good product and built-in viral marketing. iPhone apps, Google Maps mashups, and Firefox extensions are just a few examples. However, this alone won’t guarantee consumer adoption of the platform, just ensure functionality is available.
At the end of the day, do consumers even want this? Here’s what I think is true:
- People like to use the Internet for a growing variety of things, including watching video.
- People enjoy watching TV, preferably on a TV set. (I’d hazard a guess that most people watch TV with someone else in the room, but typically watch video on the PC alone.)
- Many do some form of Internet activity (surf, email, etc.) while they watch TV.
- Past attempts at interactive TV–at 15 years and counting–have been underwhelming, and that’s being charitable.
What isn’t at all clear, is whether those surfing are paying any attention to the program while doing so. What also isn’t clear is what the other people in the room are doing. Most likely, they’re actually watching the program.
So what happens when the surfer starts fiddling around with widgets, essentially “doing Internet stuff” while others are watching the show on the same screen. Even if the video portion of the screen is undisturbed, wouldn’t that be a bit distracting? Why does everyone seem to assume the surfer wants or needs to use the TV screen anyway? Aren’t they using a computer already?
Sometimes it seems like much of the Internet/TV/PC convergence is a supplier-driven attempt to create a market where there isn’t one. Perhaps it’s simply another self-reinforcing delusion, where media and equipment companies living in an echo chamber of trade shows, developer conferences, and press events convince themselves a market exists where it doesn’t. The 21st century’s equivalent of the videophone–a technology so compelling that consumers must want it. Except they didn’t.
I’ve seen this kind of thing countless times, especially in large, bureaucratic companies like Intel.
Someone somewhere (fairly high up in the management ranks, to be sure) has a brainchild for a new, compelling offering. A sure-fire way to help the company grow and break into new markets. So it’s funded, momentum builds, staff are assigned, and hilarity ensues.
Soon, lower level employees–who actually do the market research and understand what’s going on–figure out the idea is D.O.A. But nobody wants to tell the top brass they’re wrong, or especially that they’re “idjits” (idiots), in a shoot-the-messenger world. Particularly when their whole department was formed around the initiative. Job security will out, you know.
As the old joke goes, as you go up the management chain, crap becomes manure, then turns into fertilizer, which is recast as a way to grow the company. That’s when the flowery press releases begin. Companies rarely issue a release about how the initiative is abandoned some months later when the market fails to materialize.
Is The Widget Channel crap, or dynamic growth? It’s probably too early to tell. I suspect it’s got a decent chance to beat the competition, whatever that means. However, what’s more important is whether there is even a market to win.
Disclosure: I hold no position in any of the stocks mentioned here.
Rim Shot
Here’s an object lesson in how stocks with thin trading volume can get hammered.
Monday, Rimage Corporation (RIMG) reduced 2nd quarter guidance, citing the economic slowdown. Revenue expectations dropped from $24-26M to a new target of $20-22M. Earnings projections plummeted, to 9 to 12 cents per share, from previous guidance of 22-27 cents. Analysts estimates were–predictably–within the previous guidance ranges.
Rimage (pronounced like the French, i.e. “rim-AHZH”) makes high-capacity disc publishing systems that replicate CDs and DVDs as well as customize discs and print/apply labels. It also does a high-margin business selling blank discs and labels.
If you’ve ever ordered a custom-mix CD from Wal Mart, it was printed on one of Rimage’s units.
While Rimage sells its publishing systems into the media industry for music, movie, and software storage, it does a substantial amount of business with large enterprises that create custom discs for product promotion or employee training purposes. It also sells to data-intensive industries needing quick, simple records storage. In particular, the medical industry is one of Rimage’s most important end markets.
I never wrote on Rimage as an analyst, but I do keep it on my radar screen, as its business model not only ties into Digital Media but also fits a theme I’d developed on creating value at the edge of markets (in this case, disc replication). However its trading volume, averaging about 77M shares daily, is less than 1% of the float.
This makes for a very illiquid stock, especially one that until Monday was at a market cap of $170M. Which is the biggest reason it’s covered by only 2 analysts.
As you might expect, Monday the stock dropped a hefty 22%. I’m convinced a good piece of that was due to a lack of buyers for an undercovered, thinly traded name. But many pundits will claim a major reason is that Rimage’s business model is dead. After all, we’re in the iPod generation, discs are passe. With high speed broadband everywhere, and ubiquitous media players, nobody needs plastic anymore.
Bzzzt! Wrong answer.
Sure, any company that reduces guidance so much, particularly one that’s so thinly traded, is going to get a serious haircut on its stock price. And I do believe that eventually, all data storage will be on drives, and delivery will be via broadband. But the key word is eventually.
Recall Amara’s Law (often erroneously attributed to forecaster Paul Saffo): “We tend to overestimate the short-term impact of technological change and underestimate its long-term impact.” As much as we think broadband has already taken over, we forget that not everyone has fiber to the home, nor have they all junked their CDs for a portable mp3 player. The iPod has not reached 100% penetration. Netflix still expects to be renting DVDs for some time. Hell, 20% of Americans have never even sent an email. Not to mention the fact that there are numerous other applications for discs besides personal entertainment media.
These transitions always take longer than we think. Expect discs of some type to be with us for at least another 10 years.
Even at less than half its recent earnings growth rate (8% vs. a 2-year CAGR of 17.4%), Rimage has a PEG ratio hovering around 1.0, based on trailing twelve month earnings. And with a solid cash flow (price-to-FCF ratio is about 7), it’s likely to be able to milk that disc market for some time to come. Perhaps not a value play, but certainly not overvalued either.
Just watch that trading volume and liquidity. Yes, an upside surprise can really rock a thinly traded name like Rimage. But risk management is the name of the game, and you don’t want to be the last one out of the exits if the bottom falls out.
Disclosure: I hold no position in any of the stocks mentioned here.
I Want MyTube, Not YouTube
Maybe I should have called this “A One-Channel TV, Redux”.
There are two recent bits from NewTeeVee about the last 10-foot problem, and especially getting YouTube to the TV. Whether via a special-purpose set-top box, or integrated into your TV, both still fall short.
How difficult can it be to get all the video services (current and future) into my TV? The answer may not be as simple as a browser, which is probably not the right user interface for the living room. But perhaps something close to that. Couple that capability together with a simple way to stream all the content you already have on your PC, and it’ll sell like hotcakes.
But yet another box with only a couple of services? No thanks.
Disclosure: I hold no position in any of the stocks mentioned here.
Ass Backwards, Again
Blockbuster (BBI) has outdone itself now. It just announced a trial of in-store kiosks that will allow consumers to download movies directly into a portable media player (PMP) to take with them. For now, only the Archos player will be supported.
Let me get this straight.
Blockbuster wants you to hop in your car and drive to one of their outlets. Using soon-to-be-five-dollar gasoline. Just so you have the privilege of downloading a movie onto a portable player.
They do seem to have this whole thing ass backwards, don’t they?
Hello! Ever hear of the Internet? Why in the world isn’t this a download to your PC and then a transfer to the PMP? (Yeah, I know, the answer is the studios and their oh-so-customer-friendly Digital Rights Management fixation.) Blockbuster’s insistence on driving consumers to their increasingly useless stores has clearly reached new heights.
Meanwhile, Netflix (NFLX)–while noting its ultimate future is in downloads–predicts that its DVD mailing business won’t PEAK for 5 to 10 years. That tells me the smart money is on DVDs (either standard or Blu-ray) to last some time. I agree.
It’s not that downloads aren’t the preferred solution–personally, I can’t wait–but that universal adoption is a long way off. Why?
- The studios’ love affair with DRM, artificially reducing the availability of video fare and making it difficult to transfer media to other devices
- Still no inexpensive, simple solution in sight for getting video from the PC or Internet to your TV.
Here’s an idea: If you insist on making people drive somewhere, at least let them leave with a disc. Use Qflix technology from Sonic Solutions (SNIC) to print a fully licensed DVD out of the kiosk instead. That’s portability and ease-of-use in a single package. As I’ve noted before, this would allow Blockbuster to reduce/eliminate inventory, and get more Hollywood back catalog titles into customers’ hands.
[Sonic holds the key technology patents on download-to-burn, which has been approved by the DVD Copy Control Association (DVD-CCA). This allows discs to be burned with CSS encryption, pleasing the studios and making such copies legal commercial DVDs.]
Sonic was working with MovieLink, prior to its purchase by Blockbuster, to push this tech into the end user market. While disc burners for consumers probably won’t go mainstream anytime soon, Sonic is in trials with kiosk makers. It’s a nice transitional solution until discs are truly dead. Why Blockbuster has made no use of this technology is a puzzle.
But then so is everything else it does these days.
Disclosure: I hold no position in any of the stocks mentioned here.
Book ‘em, Dano
Goldman Sachs analyst James Mitchell is out with a report that estimates sales of the Kindle electronic book reader from Amazon (AMZN) were between 25,000 and 50,000 in the first quarter. This is hot on the heels of another estimate of 30,000 from Citi analyst Mark Mahaney.
I certainly can’t fault Mitchell’s methodology, which backs out non-Kindle items from Amazon’s unearned revenue line to arrive at an estimate (roughly 10% of that line item) for Kindle revenue and units. Except to note that he’s made some rather broad assumptions about the other items. If so, his subtraction is suspect. Notice also that Mitchell assumes his estimates of unearned revenue for the Kindle could be higher (up to 20%), but not lower, which reveals his bias.
Citi’s Mahaney has even gone so far as to suggest 3% of Amazon’s revenue (about $750M) will come from Kindles within 2 years. Worse yet, he assumes a sales ramp roughly half of the original iPod. Frankly, he’s smoking crack.
If Eliot Spitzer hadn’t brought an end to the practice some years ago (cough, cough), I’d almost think these two were trying to drum up business for their investment banks. Instead it’s probably something much more innocent, like say pumping the stock for the traders.
Why do I think e-books are, at best, a niche item? Because end users don’t need them. Yes, it saves money for publishers and retailers. But it’s unclear whether the savings that trickle down to users overcome the hassle of another $300+ device that needs to stay charged. Plus I like paper. Apparently, so do the multitudes who continue to print things out instead of reading them on a screen. (Remember the paperless society that computers were going to bring?)
Think about it: what problem is the e-book solving for consumers?
- Gee, if only my book was portable, I could take it with me…
- Pushing a button to bookmark my place is SO much easier than bending a page corner.
- Those nasty paper cuts.
- I can take my whole library with me. (Sure, I often read 10 books at a time. And I wish I could read fast enough to finish several books on a long flight.)
- I can download a new book whenever I need one. (Yep. And how long does that take over a pokey wireless link? EVDO isn’t everywhere. And can I read the first page while the rest is downloading?)
- I want my reading material to break if I drop it.
- It’s cheaper. (True, true. Unless you want to read blogs at $2/week or newspaper feeds at $15/month. That’s a lot to pay for portability.)
Kindle isn’t going to take off in its present incarnation. Yes, there will always be technophiles and other early adopters that get one because it’s new, or somehow cool. But regardless of whether the Kindle succeeds or fizzles, the buzz-induced sales ramp will tend to look the same at this early of a stage in a product’s life.
Have you seen hordes of gadget geeks flashing a Kindle around the way they did iPods or Razrs in the early part of the adoption cycle? I sure haven’t.
But let’s assume for the moment that the analysts are right, that Kindle will ramp smartly, that reports of large orders from Chinese manufacturers are accurate, and that Amazon won’t take a bath on the units.
Let’s even go so far as to assume e-book sales are completely complementary to paper books, that Kindle entices people to read more books and doesn’t cannibalize the traditional book revenue stream. (Live dangerously, I always say.)
How does that move the needle for Amazon? Whether you think the stock is a buy or not, is 3% of revenue really going to make it a game-changer? I don’t think so. Amazon’s a visionary company, they do a lot of things right, and I wouldn’t bet completely against Jeff Bezos.
But put your money on the whole company, and don’t pay attention to the noise.
Disclosure: I hold 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.
MacroStar: Vision or Hallucination?
This morning Macrovision (MVSN) reported it has completed the divestiture of its software business, including the FLEXnet and InstallShield product lines, raising $200M. With the previously announced sale of its games unit to RealNetworks (RNWK), Macrovision is well on its way to completely transforming its business. What remains is to consummate the merger with Gemstar/TV Guide (GMST).
The company believes that with the cash raised from these recent sales, it has reduced the amount of debt needed to finance the Gemstar purchase by nearly 20%, to just $650M. Expect to see a good portion of this remaining debt retired early, as Macrovision spins off non-strategic portions of Gemstar once it’s folded in–notably the TV Guide print business, which I believe is orthogonal to MVSN’s core strategy. This could significantly shorten the loan payback on the purchase from the 2011 date CFO James Budge originally estimated.
That all assumes, of course, that the deal goes through. Many Gemstar shareholders were none too happy when the merger was first announced in December. Ditto many Macrovision investors, who either did not understand or did not believe the vision management articulated. I would argue Budge and CEO Fred Amoroso did a poor job of explaining it at the time, using lots of effusive, scripted prose but leaving behind what felt like a distinctive snake oil residue.
However, there is a method in the madness here, a bit more visible now that extraneous bits have been spun out. The key is to understand Macrovision’s three key constituencies: Hollywood studios, consumer electronics manufacturers, and cable companies (MSOs). Traditionally, the studios paid for copy protection, manufacturers licensed the tech for VCRs and DVD players, and MSOs paid to ensure compatibility between studio copy protection and their headend gear. Great high-margin cash business. All good.
But a year or so ago, Macrovision acquired Mediabolic, which gives it technology to enable (copy-protected) video transfer between PCs and multiple devices within the home. Say, to cable set-top boxes. They have already signed Scientific Atlanta (CSCO) as a customer, and I believe either Motorola or NDS is also on board.
Next, they bought All Media Guide, which provides metadata for video and music. By acquiring Gemstar, Macrovision gains television guide info–again, metadata. MVSN can now license both algorithms and information to device manufacturers and cable companies, while helping Hollywood protect its content wherever it is transferred. In the bargain, consumers would get a seamless home video capability.
Your existing set-top box becomes a media hub. Can you say “AppleTV“? I knew you could.
Arguably, Macrovision has made some missteps with its strategy in the past. The software business had low margins relative to MVSN’s licensing unit, and games was pretty much a bust. But unlike many firms, it has been fairly quick to recognize errors and dispose of losing businesses. And this vision, however poorly spelled out by management, feels right.
Based on April 1 closing prices, and assuming no change in the original terms, the Gemstar deal is now valued at about $2.22B, 21% below the original $2.8B figure but slightly above the current market cap. This compares to a 9% drop in the S&P500 over the same period, and largely reflects the poor reaction of traders to both sides of the deal. The SEC just declared the S-4 effective and proxies are being mailed out. As both boards are already signed up (including Rupert Murdoch, with 41% ownership), it looks like the merger will go through.
Given the margin expansion that will follow the spin out of the poorer performing Software and Games units, Macrovision may be somewhat undervalued, even allowing for the anticipated share dilution. But for Gemstar investors who believe this vision could become reality, there’s substantial upside post-merger if the firm can execute properly.
Disclosure: Author holds no positions in either Macrovision or Gemstar.
Music Fees Sound Flat
Warner Music Group (WMG) has announced they’ve hired industry vet Jim Griffin to take a look at whether collecting fees from ISPs will rescue the music industry. The idea is that users would be assessed a fixed amount (included in their monthly internet bill) and would then have unlimited access to music. They hope to cover losses from illegal music sharing.
We already have numerous versions of this plan that are optional: Yahoo Music, Rhapsody, Napster, etc. We also already have many similar fees that are not optional. They’re called taxes.
You don’t have to be a libertarian to see this is not an “essential service” that ought to be subidized by all. Yes, we’ve all said the music industry’s business model is dead, and it has to wake up and search for new, innovative methods to survive. But this ain’t it.
Imagine you’re a retail bank. You and your competitors, from time to time, lose money to thieves who hijack your armored trucks and drive them away down the interstate. In order to cover your losses, you lobby for a new highway toll that collects compensation from every driver using the interstate system.
Silly, isn’t it?
by Michael Mauboussin
