Tech Beat: Prime time for downloadable movies?
What if movies adapted to the digital age as music did? Download a movie anywhere, anytime, and watch it with any device whenever you want. The idea of going to a movie theater is already archaic to entertainment seekers who have home theaters or digital TVs with large screens. And DVDs get damaged and take up space – just like their CD ancestors.
The current turmoil in the movie world is reminiscent of the music industry just before Steve Jobs shook things up with iPod and iTunes. Consumers spurned the unwanted music bundled in discs with the tracks they did want. They revolted by using file sharing software to download individual tracks for free. The music distributing companies cried intellectual property theft. Eventually, the dust settled, and the music companies learned to live in the digital world. And Apple Inc (Nasdaq: AAPL) made pots of money, along with its shareholders.
In the Internet video world, something similar is afoot. Clever entrepreneurs such as YouTVpc.com and peekvid.com store movies in overseas servers and use file sharing software to let consumers download movies free. Hollywood is crying copyright theft.
But digital media is unstoppable; large video files are easy to distribute when they are compressed with technologies such as MPEG 4. And the broad acceptance of broadband networks makes the distribution of internet video files feasible.
No surprise, then, that peer-to-peer Internet telephony network entrepreneurs Niklas Zennstrom and Janus Friis of Skype fame have launched a start-up, Joost.com, for the distribution of movies to PCs. BitTorrent, long known for its video piracy, has made its peace with the Motion Picture Association of America and now legally sells movies and rents them for as low as $3.99 for new releases and $2.99 for older titles.
Clearly, this is prime time for the business of movies and similar digital media distributed over the Internet or IP networks. According to estimates of eMarketeer, a market research company, 60% of all users of the Internet watched videos online at the end of 2006, and this figure is expected to rise to 80% at the end of 2010. According to a survey by Accenture and the Economist Intelligence Unit, business executives in the industry are “fairly confident” about the prospect of rapid growth of revenues in the sector (7.38 on a scale of 10) over the next three years and “a little confident” (4.44) about the next twelve months. Distribution of movies over the Internet or IP networks is potentially a disruptive technology, as it will lower costs of distribution, help to customize content and target ads.
JumpTV Inc. (AIM, TSX: JTV) is an archetypal momentum stock driven by wild expectations generated by a bold new business model; this company brings together programming from all over the world for distribution through the Internet. JumpTV more than doubled its subscribers from 11,572 at the end of 2005 to 24,554 at the end of 2006. With revenue of $2 million, the company incurred a loss of $25 million in 2006, largely on account of $21 million in operating expenses. On the London Stock Exchange's Alternative Investment Market (AIM), the stock rose from 260 pence, or about $5.17, in August 2006 to 410 pence, or about $8.16, in February 2007 and then fell back to 260 by April 2007.
While the market prospects of digital media are strong, its operational environment is challenging, as success depends on the integration of several different technologies. Many companies are running into losses as a result of inordinate development costs incurred for market promotion and technology development. The market performance of stocks in this industry will be driven by future prospects.
Among small-caps, one Chinese company, Comtech Group (Nasdaq: COGO), is experiencing rapid profit growth of 40% compounded for the last two years, which it expects to increase over the coming years. Comtech develops encoding solutions for digital set-top boxes required for downloading video content, and it collaborates with Microsoft, which provides source code, to help design its solutions. The revenue from digital media applications grew 11% in the fourth quarter of 2006 over the third quarter. According to W R Hambrecht and Company, margins will increase from 18.7% to 20% in 2007 as a result of the expanded digital media business. The stock currently trades near its 52-week high of $19.89 at a trailing P/E ratio of 40 and forward P/E ratio of 22. Consider buying Comtech if shares dip to around 15.
Watch for Limelight Networks, a content delivery network specializing in delivery of video content over the Internet, which filed for an IPO at an unscheduled date. It received a strong endorsement from Goldman Sachs, which invested $130 million in 2006. Limelight’s revenue tripled from $21 million in 2005 to $64 million in 2006. Akamai Technologies Inc. (Nasdaq: AKAM), with a market capitalization of nearly $9 billion, is the well-entrenched incumbent.
