Cold As A Banker’s Heart
February 14th, 2007 Davis
Watch Out For Sharks Hosted on ZooomrPosted in Photos | No Comments »
Watch Out For Sharks Hosted on ZooomrBecause It’s Better To Have Loved And Not Lost Then To Have Loved At All
February 14th, 2007 Davis
People always have pretty mixed feelings when it comes to Valentine’s day. If you happen to be married and/or in love, then it’s a great opportunity to stop and appreciate your significant other for a day, but if you happen to be one of the estimated 27 million households living by yourself, then Valentine’s day is the dumps.
It’s bad enough not having that special someone in your life, but having to spend an actual holiday being reminded that your social life is a complete and utter disaster, is enough to drive anyone into a druken frenzy of chocolate gorging by the end of the day.
If you do happen to be dating someone though, it doesn’t make the day much better. Because Valentine’s Day is the holiday of love, it’s pretty much a mandatory event (or at least it is, if you plan on spending President’s day with your sweetheart ;)) Because businesses know that they’ve got you caught in a love trap, they take full advantage of the situation by extracting as much money from your pocket as they can. On any day of the year, you can go into a florist and pick up a dozen roses for $12, but on this one day, singles are helpless against the profit gouging from the florist cartels and grudgingly pay whatever the market demands, if that’s what it takes to please their lovebird.
Between the high prices and the overall misery that Valentine’s day causes, it would be easy enough for me to just write the whole day off and ignore it, but that’s not really my style. With so many unhappy people trying to find love and with so many people willing to pay so much to fill that void, I’d rather use the day as an opportunity to figure how to cash in on all that grief.
There are a couple of ways that one could try and make a play on Valentine’s day. It would be easy enough to try and invest in a florist and wait for them to report results from their busiest day of the year or you could try buying a chocolate company and use the proceeds from your stock sales to help offset the $50 gouging you are going to take when you buy your spouse a box of chocolates today, but legendary investor Peter Lynch always said that it’s safest to invest in what you know and for me that means internet dating. Online dating services, as one would expect are raking in the dough. Some are better then others, so in the interest of providing my readers with “hands on” investment analysis, it would only make sense for me to do a little “due diligence” to offer my personal insights on the best opportunities in the online dating world.
Match.com - There are essentially two ways to build an internet dating service. You can structure your site to appeal to a targeted niche audience and build from there or you can keep your site as general as possible and try to build the largest dating pool for customers to dip into. When it comes to Match.com, they are the big gorrilla in the dating world and this critical mass continues to propel the company forward. With more listings then any other service, their success continues to drive the company forward and last quarter, the company reported that not only were listings up by 7%, but that revenue was also up 17%. Investors can’t make a direct play on Match.com because it’s owned by IAC/Interactive Corp (IACI), but even beyond Match.com, I like what the company is doing and with Barry Diller being wiling to “buy anything that walks” investors should be looking at IAC more like a VC fund then a diversified internet company. With IAC trading at slightly less than 1.5 times their book, there may be quite a bit of value locked up inside of the company, even if Match only plays a small role.
Consumating - I first came across Consumating a year ago when CNET bought the company for an undisclosed amount. I’ve never had much luck actually dating off of the site, but the community makes looking for a date a lot of fun. The site uses a number of advanced social tools to encourage communication with other members and the community they’ve built is a blast to be part of. People love to use Consumating to play games and there are a constant stream of “Consumeetings” where you can meet people in a low pressure environment. From an investing standpoint though, Consumating isn’t quite ready for prime time just yet. While good for consumers, the lack of monthly fees makes this internet dating play less then ideal for those trying to capitalize on the lack of love in the world. I can understand why CNET would want to build their community out first before tyring to monetize it, but even once the community grows, Consumating isn’t going to be an easy site to monetize. With $2.5 billion in retained losses, CNet is an attractive takeover target right now, but between their widely publicized issues with stock option back dating and questions about them bleeding traffic, make this is one love story that I’m not sure that I want to be part of.
Yahoo! - Yahoo! (YHOO) has been offering personals on their site for years, but anyone who has ever tried to actually meet someone through the service knows how bad Yahoo! really is at finding love. The ads are poorly written, the layout is confusing and searching for the right match is more work then it’s worth. Fortunately, for Yahoo! though, the company does have a dating gem in their portfolio. When most people think of Flickr, they think of photo sharing site, but for single people who are interested in meeting the sensitive artist type, there is no better place to find love on the net then through Flickr. With regular community organized meet ups and plenty of social tools built into the site, there are a lot of Flickr users who take advantage of the passive nature of comments and faves to do a little flirting on the site. Yahoo! isn’t necessarily making a boatload of cash from the activity of course, but it’s still a nice compliment to what they do overall. The p/e on their stock makes the company look a little expensive right now, but given all the doom and gloom about the company and with their stock price down about 6% from where it was trading at last Valentine’s day, there may be an upside if Yahoo! can turn things around and tap into the Google love they’ve been missing out on for the last few years.
Spark Networks - Spark Networks (LOV) is one of the few pure plays on the internet dating scene that an investor can make. With a market cap of only $188 million, this is a high risk/high reward type of stock. The company runs a number of international dating sites, but their flagship brands are American Singles and Jdate. In the last quarter Jdate had about 75,000 paying customers and brought in revenue of $7.2 million. For all of 2006, JDate did $28.3 million in revenue which was up 9% from the prior year. When you look at American Singles, the numbers aren’t quite as strong. For the fourth quarter they brought in $4.7 million, which was down about 30% from the same quarter a year prior and had about 68,000 customers at the end of the year. In addition to American Singles and Jdate.com, the company also has another 92,000 customers that belong to other various sites in their portfolio. While I like the pure play exposure, the international angle and the small market cap, Spark Networks may be a little too high risk for my blood. In looking at the numbers it’s hard to tell whether this is a growth or a value play and without seeing a clear indication that the business is back on track, investing in their stock may be a bit like going out on a blind date, you’re never quite sure what to expect. If the company can reignite their subscriber growth, there could be love in the air, but without seeing more significant growth, I don’t feel any sparks when I look at this stock.
PlanetOut - PlanetOut (LGBT) is really more of a publishing company then a dating portal, but no internet dating list would be complete without a way for my friends in San Francisco to invest. While not really my cup of tea, the site provides a place for people from alternative lifestyles to meet. In looking at the financials on the company, there isn’t really a whole lot to like. The stock has an $80 million market cap, so in order to invest you need to be comfortable with penny stocks. Over the last year, the company has seen their gross margins absolutely whacked, SG&A has continued to climb and is now causing the company to bleed money, and unlike many of the other internet dating sites, this company is saddled with a healthy amount of debt for their size. If PlanetOut were to cut their staff by 50% or boost their subscribers by 100%, then I could get on board this stock, but given their current status, there isn’t much room in my own portfolio for this type of alternative investment.
Lavalife - Of all the ads that I see for internet dating sites, Lavalife is the best. They are clean, entertaining and unlike all the big breasted ads for True.com, they attract a core audience that tilt the demographics into my favor. Lavalife is owned by a company named Vertrue (VTRU) and while they boost a healthy 3.1 million paying subscribers, other parts of the business are under pressure right now. The company makes up the lionshare of their revenue from marketing income and with recently things have gotten really tough. Nonetheless, with a current p/e around 19 and a forward p/e of less then 15, this stock is poised to make a run. If Verture can continue to grow their dating business and are able to shore up their marketing revenues, this stock should be love at first sight for investors getting in now. While there is still a healthy degree of risk to investing in a company like Vertrue, of all the dating sites profiled, they appear to have the best risk/reward equation for finding true love in my own portfolio.
It’s easy to get upset about not having a date tonight or bothered by the high cost of having take a girlfriend out, but if you look at Valentine’s day from a capitalist point of view, plenty of profit opportunities exist. While the Beatles are famous for saying that you can’t buy me love, I think it’s still worth giving it a shot.
Posted in Technology, Search, Web 2.0 | 8 Comments »
Zatz Not Living Digitally
February 13th, 2007 Davis
I’m a little late posting this, but still wanted to get this out there. For those of you who haven’t heard, Dave Zatz has agreed to join Sling Media in their marketing department. The change is a pretty big change of pace compared to his work as a network administor, but I’m sure that if anyone is up for the challenge it will be Dave.
I think that Sling made a really smart hire by picking up Dave. I’ve known Dave for a couple of years now and I can’t think of anyone more qualified for being an evangelist for a tech company. Dave is filling some pretty big shoes in his new role at Sling though. Previously, Jeremy Toeman had been in charge of making sure that the lines of communication between Sling and their customers stayed open, but when he left to start his own consulting practice, Sling was left with a pretty big void to fill. I’m sure that that the Zatzman will do a great job in his new role, but it won’t be easy with the bar having been set so high.
Ironically, Netgear has gone on to hire Jeremy to do some consulting work for them and initially he is going to be helping to develop out the Netgear blog that Dave Zatz guest blogged on at CES this year. I had also applied to be a Netgear guest blogger for CES, but lost out to Dave. I’ll be excited to watch how Jeremy uses his expertise to build out and optimize Netgear’s blog. He writes some really great reviews, one of my favorite articles from CES this year was Jeremy’s review of Netgear’s EVA8000 Digital Entertainer HD. This machine looks really hot. Hopefully, it won’t take long before Netgear turns on comments and starts up an RSS feed to make it easier to monitor the site.
Posted in Slingbox | 4 Comments »
Davis Freeberg’s Site Of The Week
February 9th, 2007 Davis
This week’s winner of the site of the week contest was The Maobot. Technically, the site is actually a sub-page that is being hosted at Kevan.org (which also has a ton of other fun stuff), but the game of Mao is the crown jewel on the site. It was a tough race this week, but I’m really pleased that the Maobot won out because the game of Mao has special memories for me. I first became aware of the game of Mao about ten years ago when a Mao grand master introduced me to the game during a late night drinking session and I’ve been in love with the game ever since.
One of the cardinal rules about the game of Mao is that you are not allowed to reveal the rules, so I’m limited in what I can tell you about the game, but I can say that it’s a lot of fun and if you ever get invited to play, I’d encourage you to try it out. After playing the game for almost a year, I was finally promoted to a Mao Grand Master myself and I went through a bizarre and surreal ceremony where all of the rules were finally explained.
As a new player you are thrown right into the thick of things without knowing any of the rules behind the game. Part of the fun is figuring it all out. When I first played the game, it took about five minutes and I had already been heavily penalized for a variety of violations. After a few rounds I quickly began to figure it out, but by then there was little chance of beginners luck helping me win the game. Because you are not allowed to talk in the game of Mao (unless it’s during a point of order), it makes it more difficult to figure out what the heck is going on.
The Maobot is a site that contains a program that does it’s best to simulate the game of Mao. You can also play two other derivatives of the game, but by far my favorite is Mao. You can only play one on one against the computer, so it’s not as much fun as playing with a group of friends and because the computer is in control, it gets to dictate the rules, but nontheless playing around with the site this week has been a lot of fun. Over the last week, it’s been really neat rekindling my love affair with the game and I’ve already wasted far too much time trying to beat the computer after a three rounds.
Congratulations to the Maobot on winning this week’s site of the week contest and for helping me to remember how much fun the game really is. The nominations for next week’s site of the week are listed below, you can vote for your favorite in the sidebar. If you’d like to nominate a site for the site of the week, you can email it to me at Davis
Posted in Site Of The Week | 3 Comments »
Is DivX A Black Hole For Investors Or Are They Gathering Mass?
February 9th, 2007 Davis
If you can say one thing about DivX, it’s that it’s not an easy company to understand. I’ve been following the company pretty closely ever since they went public, but last month, DivX CEO Jordan Greenhall said something at an investor presentation at CES that really caused my head to spin. Greenhall was responding to investor concerns over DivX potentially being replaced by a technologically superior codec, when he told investors that DivX wasn’t really a codec company.
When I first heard him make the statement, I had to go back and listen to it a couple of times for the ramifications to sink in, but after spending the past several weeks mulling over the implications of what this statement means, I now believe that it was the single most important thing said at the conference. Given how much confusion the statement caused among investors at the conference and given the importance of this concept to understanding DivX’s business model, it came as no surprise to see Greenhall return to this idea on DivX’s quarterly conference call yesterday afternoon.
“It’s extremely important to understand that DivX is not a codec company. Clearly the DivX codec is a core piece of our technology portfolio, however it is only one element of our overall value proposition, which is the Divx community itself.”
What made this concept so hard for me to understand was that I’ve always thought of DivX as a codec company. Their technology allows you to compress digital video into the highest quality experience possible. Not only does the picture come in crisp, sharp and in vivid detail, but they accomplish this using very small files, that are much quicker to download, at the same time.
If you compare the video quality on DivX’s Stage6 with the quality from YouTube or .wmv downloads, you’ll see how much of an advantage that DivX really has. How is it then that they aren’t a codec company and why is this important for investors to understand?
It’s important because if you build a business around technology, then as soon as superior technology is developed, it puts your product at risk, but if you build your business around community, then each user that you reach with the DivX language represents a deepening of the moat that protects DivX’s brand.
The codec itself is really a means to an end. It’s the way that DivX is able to transport their technology into the digital home. In order to understand DivX’s core business, you have to step back and take a more simplistic view about what it is that the company actually sells.
To say that they are a codec company is like saying that they are in the business of selling zeroes and ones, while technically true, it’s not what they are really selling. What DivX is really providing is a way for consumers to create, share, transfer and consume digital video in their homes. Consumers don’t care if their TV comes from DivX, .wmv or mpeg2, they care about being able to enjoy a high quality experience, while watching their videos within their own entertainment eco-system.
The problem with looking at the company as a common media language is that it makes the idea behind DivX much more theoretical and significantly more difficult to grasp. If they are not a codec company, then how do you value what they are worth and if the technology itself doesn’t have any intrinsic value, what then is it that DivX owns and what makes them worth so much?
In order to answer these questions, you must look at the DivX community. DivX makes their money from their CE partners and the value that DivX provides to these partners is access to their community for a fee. Essentially, they have positioned themselves to be a gatekeeper that can charge CE companies in order for them to be able to plug into the DivX community that they’ve built. This concept is both brilliant and terrifying at the same time. On one hand it reduces their dependency on technology, but on the other hand it means that DivX must continue to grow in order to protect their community and if they want to see revenues expand. Divx’s monopoly on open source video is what gives them value and if you can assign a value to this, then you’ll have a better understanding of how much DivX is really worth.
In order to determine how to value this monopoly, you must look at how effectively DivX can monetize this community as well as how competition will affect their future ability to monetize the consumers that use their brand. In looking at just the past quarter, the results are impressive, but not the mind blowing numbers that some on Wall St. will need to see before they’ll understand the true value that DivX has. For the fourth quarter, DivX had $16.7 million in revenue and $7.4 million in net income. For all of 2006, DivX earned $59 million in revenue and $16.4 million in net income.
With a market cap of about $735 million right now, DivX is trading at a pretty nice premium if you only look at earnings for the last 12 months. Looking forward, if all that DivX does for the next 12 months is to maintain their quarterly profit of $7.4 million, it would give the company a p/e ratio of approximately 25, if they stayed at their current price. If they actually continue to grow their earnings each quarter, then the company will start looking ridiculously cheap after not too long. The analysts understand this which is why five of the six analysts have a buy recommendation on the stock.
I believe that the company deserves to trade at a growth multiple because they stand on the precipice of a digital revolution that will transform the way we think about video. They are well positioned to capitalize on an industry that is still in its birth years and if they execute properly, the payoff will be huge. What makes me so excited about this company is the potential for explosive growth. This is why Greenhall isn’t nervous about competition and why investors should be wiling to pay up for that future growth. During the earnings conference call, Greenhall addressed their competition by saying that he was largely unimpressed.
“There is nothing out there in the marketplace, either currently in the market or on any of the R&D blackboards of any entity that we are aware of, that is particularly awe inspiring. With regards to existing technologies that are interesting, things like the open centered h.264 or the proprietary technology of On2. While both of those certainly have a role to play in the digital media market, neither places a substantial amount of competitive pressure on DivX, no more so than Apple’s use of AAC puts any particular pressure on mp3.”
What Greenhall understands, but the market is missing, is that the digital video market will not be a winner take all game. DivX clearly faces competitive threats. They come in large sizes and they come in small sizes, but the threats are real and being addressed. With Microsoft and Apple breathing down their necks, DivX could find their industry standard threatened by other codecs, but what protects DivX from these threats is their open standard solution that appeals to more then just the big guns.
Sure Apple is quickly becoming a media powerhouse and from the looks of Vista, it appears that Microsoft finally has the studios in their back pockets, but these aren’t considerable threats to DivX because the proprietary nature of their systems won’t allow other players into the market. AppleTV is great for iTune fans, but it doesn’t help Toshiba, Panasonic or Phillips bring digital video to the living room and that is DivX’s real advantage over the various closed systems that have been coming out. DivX is a company that wants to be everyone’s friend. They are not only willing to license their technology to just about anyone, but they do so at a very reasonable price. This makes them an ideal solution for the thousands of other companies who want into the digital video game, but don’t have the critical mass of an Apple or a Microsoft to bully their way in. Wall St might not understand why DivX isn’t trying to jack up prices and increase their profits, but luckily for them DivX management does.
The DivX entertainment ecosphere is still in a fragile state. The company has proven their business model through their relationships with the DVD manufacturers, but they need to increase the number of devices that DivX can touch. The more licensing deals they can get, the stronger their monopoly on open source video will become and the more pricing power they will eventually have. Someday in the future, there will come a time when DivX will raise prices, but doing so at the birth of an emerging market would be a serious misstep. For investors who are looking to make the quick buck, DivX is the wrong stock. This is a growth company in a developing market, but it will take time for DivX to prove the long term viability of their business model.
In the meantime, DivX could find that investors might grow fearful of Apple and Microsoft’s inroads into North America, but investors will be foolish if they overlooked the real global potential for the DivX brand. Two of the more exciting developments that DivX saw over the last quarter was an agreement to offer Spanish content from a distributor in Mexico and an agreement to use the DivX codec for Bollywood content in India. These are important moves by the company because content ultimately drives consumers to adopt the technology and it’s this audience that provides so much value to their CE partners.
In looking at the potential for DivX to succeed on a global basis I am remarkably optimistic. The company doesn’t break down where CE devices are being shipped globally in part because their partners don’t share that information, but there is no doubt that DivX isn’t really a domestic stock, it’s an international play on the VOD market. If you look at the troubles that Apple is having in Europe right now, you’ll see that the rest of the world isn’t very comfortable with letting one company control how you can consume your content. Interoperability, has been a huge issue in Europe, where DivX has their largest consumer penetration and will become a greater issue as DivX continues to gain critical mass in more countries.
In looking at how this market will unfold, I get very excited when I think about the number of potential DivX consumers in places like India, Latin America, China and Japan. These are large addressable markets that will be fertile ground for a system that puts all CE manufacturers on equal footing. Between DivX’s price sensitive policies and their willingness to allow anyone to license their technology, they’ve put themselves into a position to take the VOD beachhead that they’ve establish and turn into a global standard for digital video.
Between the increases in the number of users who will interact with their content and the increase in the types of consumer electronic brands that can support their common media language, DivX is in a great position to capitalize on the emerging markets without the same level of political risk that would be required if you made a direct play in India or China. When you think about the opportunities for expansion, you have to think globally when it comes to DivX and when I look at the number of cell phones, DVRs, DVD players, portable electronic devices and digital cameras that are sold on a global basis, my eyes pop out of my head.
One of the things that investors got hung up on at DivX’s CES investor conference in January and on yesterday’s earnings call, was DivX’s reluctance to start heavily advertising through Stage6. Investors understand that the company gets a decent amount of traffic, in fact Greenhall told analysts that Stage6 is now receiving 3 million unique page views a month, but what investors don’t understand is how DivX is leveraging the site to build their brand. They desperately want to be able to look towards a revenue line item that they can understand from a more traditional aspect, but when it comes to DivX, things will always be complex.
Stage6 will eventually have a revenue component, but it will look less like Yahoo’s banner ads and more like Google’s ad sense program only for video. More importantly though is the role that Stage6 plays in marketing the DivX to their end consumers.
The amazing thing about what DivX has created is that they’ve done this with almost no marketing expenditures. You don’t see DivX commercials on TV, no Super Bowl ads, the technology is spread virally because the videos they encode are viral. Every time a consumer touches a DivX file, it really contains a commercial for DivX’s software inside because you need their technology in order to unlock the content that consumers want to get at. This is an extremely powerful marketing network and it is why investors should be looking at Stage6 more as a marketing expense, then as a revenue driver. The hedge funds and day traders may want DivX to capitalize on their traffic to make the quick buck, but without a large community using their files, there won’t be any advertising opportunities and until Divx can establish their brand as the undeniable de facto standard for video, they are well served in using this channel to increase the number of people who come into contact with the DivX brand, instead of trying to spam the consumers that have played such an important role in building DivX’s brand. During the conference call, Greenhall described the power of this marketing channel much better then I ever could.
“You can imagine DivX being a form of black hole that the more that a consumer uses DivX, the more content they create in the DivX format. The more they are personally invested in the software, consumer electronics devices and personal learning, the more relationships they have with service providers. The more people who use DivX as a common media language, the more mass there is in that overall black hole.”
In looking at the competitive threats to DivX it’s not the big companies that scare me, it’s actually the small ones. Because DivX’s business model is built on providing access between CE devices, anything that can take out the middleman by translating the DivX language into another codec is the real threat. For the most part, these solutions have been confined to the early adopter crowd, but when I see software like DVD Flick, that allows consumers to burn DivX files that will play on non-DivX certified DVD players, I see this as the scary threat.
One major concern that has surfaced over the last six months has been rumors that DivX plans on doing a secondary offering once their lockup expires on March 20th. The company tried to dodge the question the first time analysts asked, but later in the call, they admitted that there wasn’t a big need for cash, but left open the possibility that we could still see an underwriting.
Only DivX really knows if they are planning on doing another underwriting, but I believe that fears of an underwriting are misplaced. The company doesn’t necessarily need the cash, but with more cash in place, it would increase the number of options available to DivX to help them expand. Investors would face dilution of their shares, but one of the biggest problems with DivX’s stock is that there simply isn’t enough of it to go around. Since DivX has gone public their stock has been extremely volatile because traders are forced to pay a significant premium to buy large dollar amounts and a significant discount if they want out. With only 33.5 million shares outstanding and 10.6 million shares that are actually floating in the market, all it takes is about $10 million worth of interest in the stock and the market cap can easily jump up or down by $100 million. With such a small float, there simply isn’t the liquidity necessary for many institutional investors to be attracted to the stock, but by completing another offering, DivX could help to increase that liquidity and could bring new buyers into the market for their stock. There might be short term volatility associated with such a move, but over the long run, I believe the additional capital would greatly benefit the stock.
Divx’s business model is incredibly tough to understand, but where there are misperceptions in the market, alpha exists. What DivX is trying to accomplish with video is the same thing that Adobe accomplished with .pdf. They faced a larger rival with Microsoft’s word format, but their openness allowed the .pdf to become an industry standard despite the advantages Microsoft had with their operating platform. DivX has developed a large open source user base that can interact with their files and are well past the first step towards creating the critical mass necessary to monetize their common media language.
Management’s commitment to driving growth and profitability, while remaining frugal in how they invest will help prevent the company from flaming out like many technology companies did in the dot com bust. Meanwhile, they face a growing international presence, they are seeing a dramatic increase in the number of consumer devices that could utilize DivX’s standard and there is still an amazing upside potential to DivX’s stock if they surprise the market with a miracle deal with Xbox, PS3 or Nintendo. At a market cap of $735 million, Wall St may not understand the true value of the stock, but for high risk investors who step back and consider the possibilities of their common media language, tremendous value exists.
Posted in Technology, DivX, Movies, Media, VOD, TV, DRM | 14 Comments »
I Found My Thrill On Telegraph Hill
February 6th, 2007 Davis
I Left My Heart Hosted on ZooomrPosted in Photos | No Comments »
TiVo And Amazon Bring UnBox To The TV Set
February 6th, 2007 Davis
We heard early rumblings, but when it comes to TiVo, you never quite know which rumors will turn out to be true. As it turns out though, TiVo and Amazon actually have been in negotiations to bring Unbox to TiVo subscribers and they are almost ready to roll it out. It goes into testing on Wednesday, but initially it will only be in a few hundred homes. In order to use the service, customers will need to first purchase their movies directly from Amazon’s website. Even though you can download the movie right to your desktop, you’ll still need to download the film directly to the TiVo box because TiVo needs to use a different codec on their linux box. Amazon allows you to download 2 copies of any film without any additional cost, but because of the system’s dependence on downloading, it means you’ll still have to wait to see your content. I would have prefered to have access to streaming content instead, especially given that it’s already connected to my TV set, but hopefully we’ll see something like that introduced further down the road. TiVo refused to give a timeline on the broader rollout, but it would certainly make a nice update, if they could enable it at the same time as when they launch TiVoCast for their series 3 boxes. 
This is an exciting development for TiVo and is a great feature to be able to offer their subscribers. With Series 3 owners having been forced to give up access to pay per view, the addition of the content helps makes for a better trade off. Amazon’s movie selections is still pretty limited, but hopefully as the studios become more comfortable with internet distribution we’ll see more content show up.
I tried out Amazon’s Unbox service when it first launched, but watching it on my computer and having to wait 6 hours to download a DRM file was a huge turn off. With TiVo, Amazon solves the problem of getting the content to my TV set, but I think they would have even more success if they could offer instant streaming access.
As a heavy movie renter, I’d prefer to see Amazon adopt an all you can eat subscription model instead of a la carte, but until they have more content, I’m probably still better off with a la carte pricing. As the service develops, it will be exciting to watch what content becomes available. I hate catching old reruns on the cable channels because they are always out of order and you’re never sure if you caught every show, but if Amazon starts licensing more television, I’d definetely pay to go back and watch all the A-Teams from the start. Being able to use TiVo not just to fast forward the commercials, but to be able to rewind to the past will be a huge enhancement to service, especially as the content becomes more robust.
The potential for TiVo to be a platform for delivering on demand movies has always been there, but TiVo’s never been good at getting the movie studios to play nice. By partnering with Amazon for the content, TiVo has put themselves into a position where they can take advantage of Amazon’s clout to help bring premium content to their users. When TiVo tried to license films with Netflix two years ago, the studios freaked out. When Netflix couldn’t get the deals in place, the partnership disolved. Hopefully, at some point we’ll see TiVo open up their software so that any internet site that offers films or video content can show up, but in the meantime, bringing Unbox to the TiVo community is a great first step.
Posted in Media, Movies, Technology, TV, VOD, TiVo, Disclosure - I own stock in co. mentioned, Netflix | 3 Comments »
Movie Gallery Negotiates Sequel - Will Restructure Debt
February 6th, 2007 Davis
I never thought that Movie Gallery would actually pull it off, but the company may have just saved themselves from bankruptcy for another five years by agreeing to restructure their senior credit facility in a deal with Goldman Sachs. The exact terms of the deal weren’t disclosed, but the transaction is expected to close sometime in the first quater. Like their existing debt, there will be covenants that the company must meet to maintain the debt, but the restrictions on the new debt are likely to be much less restrictive then their current arrangement.
The restructuring comes at a desperate time for Movie Gallery. After borrowing heavily to make an ill advised acquisition of Hollywood Video in 2005, the company soon found themselves in serious trouble as the bottom of the video store market began to fallout. With bondholders getting nervous and the fundamentals of their industry rapidly deteriorating, in early 2006, Movie Gallery was forced to convince debt owners to renegotiate the covenant terms on their debt. The move bought Movie Gallery an extra year to help figure out how to turn their firm around, but as 2006 dragged on, liquidity concerns continued to intensify for the company.
In November of last year, things got even worse. Movie Gallery was forced to delay their quarterly earnings filing for almost three months over questions on how to value their store leases. When they did release their quarterly results in late January of this year, the numbers weren’t pretty. Losses continued to accumulate, cash was dwindling down and come April 1st, Movie Gallery was going to have to either file chapter 11 or pay off $780 million to bond holders.
In the filing, Movie Gallery told investors that between cash and access to their line of credit, they were only left with $50 million in liquidity as of Oct 1st, 2006. Because of the increasing likelihood that they would miss their covenant tests in 2007, Movie Gallery was also forced to reclassify their senior credit debt from long term debt to current debt in the same filing. This move prompted analysts to warn that Movie Gallery was facing a cash crunch and could slip into bankruptcy if they couldn’t figure out a way to get a refinancing done. At the time of the filing, Movie Gallery had said that they were researching a sale/lease back transaction with bondholders or possibly a massive equity underwriting to pay off the debt.
Without knowing the terms of the restructured debt, it’s too early to say if this financial engineering will actually turn out to be a home run for Movie Gallery, but undoubtably it will be welcome relief for shareholders who had been faced with the prospect of losing their equity through a bankruptcy filing or losing most of their equity in a massive dillutive underwriting. Even after the restructuring, Movie Gallery will still have many challenges to overcome, but with the new credit facility in place, it will give Movie Gallery five more years to focus on cutting costs and closing unprofitable stores, as the company fights to get back on track.
While shareholders are celebrating the move by Movie Gallery to restructure their debt, not everyone will be quite as pleased with this development. Over the last few years, Netflix has been cleaning house with their DVD by mail program and the success of the program has put a lot of pressure on Movie Gallery to close more stores. Each store that closes only drives more people online. If this move by Movie Gallery is able to slow down the decline of the video store, it won’t necessarily have a negative impact on Netflix’s business, but it could impact their growth rate if video stores hang around longer then people expect.
Perhaps even more importantly though, is the effect that this restructuring will have on Blockbuster’s core business. Because of the economics of the video store business, Blockbuster and Movie Gallery operate with heavy fixed costs, but relatively low variable costs. This means that if a store is profitable and you can increase revenue at all, the increase contributes almost entirely to the bottom line. It also means though, that if you see revenue move away from your store, it becomes increasingly difficult to keep stores profitable and to meet those high fixed costs. Over the last few years, Blockbuster has faced an incredibly tough market for video stores and with Movie Gallery’s business on the ropes, many investors had jumped into Blockbuster’s stock, in anticipation of the profit increases that they would see, if Movie Gallery had to move aggressively to close stores.
With Blockbuster and Movie Gallery competing head to head in many of the same markets, the strengthening of Movie Gallery’s business will likely mean that Blockbuster will be forced to continue their operations on razor thin margins, as they struggle to adjust to this rapidly changing industry. In the past, Blockbuster management has indicated that if a Movie Gallery store near them closes, they could see an increase in revenue in excess of 25% at nearby competing stores. Because of the high amount of leverage used for video stores, this 25% can be almost pure profit for those stores and with Movie Gallery’s financial situation having gotten pretty bleak, many investors made aggressive bets on Blockbuster Video, in the belief that the lionshare Movie Gallery’s revenue would go straight to Blockbuster’s brick and mortar stores instead. With Movie Gallery having reinvigorated their balance sheet with their Goldman Sachs deal, Blockbuster now faces a much stronger opponent in these markets where they are forced to compete head to head.
While many investors have been focused on the recent success of Blockbuster’s total access program in their war with Netflix, this is really the wrong battle for Blockbuster investors to focus on. Blockbuster may have had no choice but to get rid of late fees and to offer their own online program, but they made this move as a defensive step to help save customers from leaving their stores, not as revenue or profit driver. For every customer that Blockbuster signs up for the program, they move a high gross margin transaction oriented customer into a lower gross margin monthly renter. While the move was important for Blockbuster to make to protect their business, ironically, the more successful the program is, the greater pressure it puts on Blockbuster’s highly leveraged fixed costs.
Blockbuster’s battle with Movie Gallery however could have had a much more direct effect on the profitability of their business. If Movie Gallery would have been forced into chapter 11, it would have put Blockbuster in a position to directly capitalize on aggressive store closings or by buying out Movie Gallery stores in a fire sale. Because Movie Gallery is a direct competitor to Blockbuster, any store closing would transfer high gross transaction customers straight back to Blockbuster. Now that Movie Gallery won’t be forced to liquidate the business though, Blockbuster will continue to have to compete not just for lower gross margin online renters with Netflix, but will also continue to face a very tough market for transactional customers as well.
It’s too early to say how Blockbuster or Netflix will react to this renewed competitive threat, but it is clear that Movie Gallery has gotten a new lease on life from their deal with Goldman Sachs. While the fundamentals of the video store market continue to be challenging, with this deal in place, it buys the company at least five more years, before we’ll know how this movie ends.
Posted in DVDs, Disclosure - I own stock in co. mentioned, Netflix | 2 Comments »