December 15, 1998 RECOMMENDATION:BUY
to Capitalize on the Convergence of the Internet and the Broadband Cable Infrastructure
Summary Investment Considerations
ACTV, Inc. ("ACTV") is both developing innovative, proprietary software technology, and managing relationships with leading programming and distribution entities, that we feel position the Company to capitalize on the opportunities arising from the convergence of the Internet and digital cable TV -- the broadband cable infrastructure. Looking ahead a couple of years, we believe the commercially interesting impact of broadband digital cable is not going to be driven by higher-definition TVs (bigger, pretty pictures) or multi-casting (500 new channels to surf). It is going to be about delivering a host of enhanced video, telephony and data services into the home that will enrich the home entertainment, computing and communications experience -- such as interactivity with the television, high-speed data and voice telephony, combining video and internet information, viewer-defined programming and advertising, and virtual environments for learning, shopping, gaming, etc. As the cable operators deploy digital technology and digital cable boxes throughout their networks, ACTV stands ready with innovative software content, programming and authoring tools to capitalize on the additional bandwidth in this broadband cable infrastructure.
ACTV is developing innovative, patented technologies it calls Individualized Television and HyperTV that create state-of-the-art programming for the emerging digital TV and Internet platforms. The first application of Individualized Television is the sports entertainment market, and the first application of HyperTV is the on-line education market. As the cable operators deploy the next generation of digital cable boxes throughout their networks, the Internet and broadband cable infrastructures will converge, as will the potential applications of ACTV's technologies. We believe the potential applications for Individualized Television and HyperTV are very broad, and include interactive advertising, electronic commerce and a host of enhanced, interactive entertainment programming. We recommend purchase of ACTV common stock by investors tolerant of the risks associated with micro-cap and small-cap equity investments.
I. Proprietary, Enabling Software Technology -- Individualized Television and HyperTV
II. World Class Corporate Alliances and Customers
III. Compelling Valuation -- Follow the Smart Money
Convergence of Cable TV and Internet -- What's it all about?
Companies like General Instrument and Scientific-Atlanta are adding manufacturing capacity to produce digital cable boxes as fast as possible. Cable companies like TCI, Cox and Comcast are rushing to deploy these digital cable boxes throughout their cable networks. AT&T is acquiring TCI to gain access to TCI's broadband cable distribution into homes (incidentally, this ensures the upgrading of TCI cable network to fully digital, which, in turn, will force other cable operators to upgrade their systems). And AOL is spending time and money in Washington, D.C. to make sure they have equal access to that broad cable infrastructure. What's it all about?
We believe these companies, and others, are jockeying to get ownership, control or access to the cable entering your home. As the infrastructure is deployed, companies will offer a wide range of products, services and programming through that cable, including Internet access, telephony, and enriched entertainment programming. This latter category, the enriched entertainment programming, will include interactivity with the television, combined video and Internet information, viewer-defined programming and advertising, and virtual environments for learning and shopping.
Question: With respect to the question of HDTV, or higher-definition television, are you going to watch more TV because the picture is bigger, or "more blue," or a bit clearer? We don't think so.
Question: Are you going to watch more TV because the broadband cable network provides for "multi-casting," or the ability to bombard the homes with 500 channels instead of 60? Again, we don't think multi-casting represents the real value in the broadband cable infrastructure.
Answer: We believe the real value in the broadband cable infrastructure -- value for viewers, programmers, distribution companies and advertisers -- will be in the provision of enriched home entertainment programming and services. ACTV has cleverly positioned itself to capitalize on these trends, with unique patented software technologies, content and tools for programmers and educators, and with strategic alliances and partners who stand to gain economically from the deployment of ACTV's technology.
Nota bene: The buzz at the Western Cable Show in Anaheim
earlier this month was the convergence of broadband media, and all of
the new businesses in which cable operators are now participating --
high-speed Internet access, interactive advertising, voice telephony and
high-speed data, e-commerce and e-banking, and enhanced video services.
We believe investors will be rewarded by looking beyond the pure-play
Internet companies to companies like ACTV that provide content and technology
for the converged broadband media.
ACTV, Inc. ("ACTV") is developing innovative, proprietary software technology, and managing relationships with leading programming and distribution entities, that we feel position the Company to capitalize on the opportunities arising from the convergence of the Internet and digital cable TV -- the broadband cable infrastructure. ACTV's two principal subsidiaries are ACTV Entertainment, Inc. ("ACTV Entertainment"), which is developing Individualized Television for the entertainment industry, and ACTV Net, Inc. ("ACTV Net"), which is developing HyperTV for the converged media and is currently marketing the first application (called eSchool Online() to the online education market. While each business is currently focused on only one targeted segment (sports programming for ACTV Entertainment and the on-line education market for ACTV Net), the potential applications for ACTV's software technologies are quite broad. Most importantly, the foundation of ACTV's business is an extensive intellectual property portfolio that we believe will attract suitors interested in joint venturing and/or licensing that technology.
Important Recent Developments: In September 1998, Liberty
Media Corporation invested $5 million for a 10% equity stake in ACTV,
with options to invest an additional $5 million. We believe the investment
by Liberty Media, clearly one of the shrewdest operators in the entertainment
industry, is reflective of Liberty's commitment to ACTV's planned roll-out
of its programming service. The structure of the investment and comments
in the media by Liberty Vice President David Jensen, illuminate additional
value opportunities within ACTV:
ACTV Entertainment has developed software technology called Individualized Television that provides for interactivity of the viewer with the television. The technology allows the viewer to respond to on-screen prompts and to make requests, enabling the television to provide each individual viewer with "viewer-directed" and "viewer-targeted" programming and advertising. By simply pushing the four buttons on the remote control, viewers can take control of their television experience.
FOX Sports Net -- In December, 1996, ACTV and FOX Sports Net signed a multi-year master programming agreement granting ACTV the right to license FOX Sports Net programming in each of its 22 owned and affiliated networks, through the year 2003. FOX Sports Net (which is equally owned by Rainbow Media Holdings, Inc. and FOX/Liberty Networks), is the first truly nationwide, regional and local supplier of sports programming, reaching more than 60 million homes. Essentially, each of the 22 FOX Sports Regional Networks will provide ACTV with its sports programming feeds. ACTV, in regional production facilities, will create its individualized, multi-signal sports program (called FOX SportsPlus, in this case), and provide it to any cable operator that is carrying the Fox Sports channel.
Tele-Communications, Inc. ("TCI") -- ACTV has signed an agreement with TCI, the largest cable TV provider in the US, with an excess of 10.5 million subscribers. Under this agreement, TCI will distribute ACTV's FOX SportsPlus individualized sports programming to subscribers in the region served by FOX Sports SouthWest, with the potential of nationwide distribution by TCI in the future. So, ACTV will create the FOX SportsPlus programs and deliver them to TCI, which will make them available on a premium subscription basis to its subscriber base that is outfitted with digital cable boxes (this does not eliminate the possibility of certain cable operators positioning ACTV as a basic service). In parts of the region where TCI is not the cable provider, ACTV will sign affiliated distribution agreements to broaden its in-region reach. The Company anticipates that competing cable distribution companies will be eager for additional, higher value-added programming to enhance profitability, and to grow their "digital-cable" subscriber bases during the current transition from analog to digital-cable.
ACTV Entertainment's Strategy
ACTV is currently working on the integration of its programming with the delivery systems for national programming distribution. Upon completion, ACTV will announce a date for the launch of FOX SportsPlus, which is currently anticipated to be no later than mid-year 1999. ACTV is currently planning for the roll-out in the next two FOX Sports regions, which are as yet unannounced. Consistent with the strategy used in selecting the SouthWest region, we expect the next few regions to include FOX Sports West (based in Los Angeles), FOX Sports Bay Area (based in San Francisco) and FOX Sports NorthWest (based in Seattle).
The economic model for ACTV Entertainment's business is detailed later
in the report.
HyperTV is a patented Java-based software technology that enables the simultaneous delivery of streamed video and WEB Universal Resource Locators (URLs) directly to users. We believe that it is in two key commercial areas -- e-commerce and interactive advertising -- that ACTV's HyperTV and Individualized Television converge. An example application is as follows:
HyperTV's First Application -- eSchool OnlineTM
Target Markets: ACTV has initially targeted the K-12 education market for a number of reasons. First, the current management team had some experience and knowledge of this potentially very large market. Second, there has been considerable political emphasis and public spending on this market -- providing Internet access to public schools, and increased spending on technology and teacher education. Estimates are that approximately 80% of the nation's 100,000 public schools have Internet access, up from roughly 40% one year ago. However you slice it, the potential size of this market is huge. Industry sources predict that the total US online learning market could reach $3 billion by the year 2000. Lastly, the K-12 education market lends itself well to the resale of eSchool Online content, allowing ACTV to leverage the development of content across multiple school districts and contracts. Other Markets: ACTV is currently evaluating several other markets for eSchool Online, including the College and University market, the Corporate Education market, and other potential applications, including the integration of educational instruction and electronic commerce for the Corporate market.
Intellectual Property and Know-How: ACTV has been awarded patents pertaining to provision of streaming video over the Internet, and integration with other information. In particular, ACTV has been awarded patents on systems that integrate and display streaming video with information retrieved from the Internet, including Universal Resource Locators (URLs), or web addresses. The patents were acknowledged by personnel from Liberty Media in announcements pertaining to their recent investment, and we believe they could be a significant source of value to ACTV in the future.
Contracts and Corporate Partnerships
ACTV Net has recently signed eSchool Online contracts with the New York City Board of Education and the Massachusetts Corporation for Educational Telecommunications (MCET). The contracts have a total value of more than $1 million over the next 12 months. Under the New York City agreement, ACTV Net will implement eSchool Online in select non-public schools for staff development and instructional applications for the elementary, middle and high school levels. In addition to licensing the eSchool Online software, ACTV Net will provide content development, system implementation and technical support to the schools.
The School District of Philadelphia is now using eSchool Online
for professional development and integrated classroom instruction for
the second consecutive year. Since August 1997, eSchool Online
has enabled the School District of Philadelphia to deliver staff development
training to more than 2,500 teachers. The district has also deployed eSchool
Online for direct student instruction in language arts, math and science
at various grade levels. Over the coming year, ACTV Net will work with
the district to create 25 new professional development seminars delivered
via eSchool Online. The School District of Philadelphia is one
of the largest in the U.S., with more than 212,000 students and 13,000
William Samuels joined ACTV in August of 1989, and currently is the President and CEO of ACTV, Inc. and serves as the Chairman of the Board of Directors. Prior to joining ACTV, Mr. Samuels founded and built a multimedia education company, which he sold in 1988. Mr. Samuels is a graduate of Massachusetts Institute of Technology and has a J.D. from Harvard Law School. In addition to the executive officers mentioned below, Mr. Samuels has assembled a team of seasoned TV and Internet programming executives.
David Reese joined ACTV in December of 1988 and currently is the Executive Vice President of ACTV, Inc., President of ACTV Entertainment and serves as a member of the Board of Directors. Mr. Reese oversees all aspects of business development, programming and day-to-day operations for ACTV Entertainment. David Reese joined the Company as Chief Financial Officer, and prior to working at ACTV, he worked with Deloitte and Touche. Mr. Reese is a graduate of the University of Pennsylvania.
Bruce J. Crowley joined ACTV in July of 1994 and currently is Executive Vice President of ACTV, Inc., President of ACTV Net, and serves as a member of the Board of Directors. Mr. Crowley oversees all aspects of business development, programming and day-to-day operations for ACTV Net. Prior to joining ACTV, Mr. Crowley was Corporate Vice President for KDI Corporation. Mr. Crowley also served as Senior Vice President for KDI's wholly-owned subsidiary, Modern Talking Pictures, Inc., a company involved in providing distance learning programming and multi-media products to education. Mr. Crowley is a graduate of Colgate University and has an M.B.A. in Marketing and Finance from Columbia University Graduate School of Business.
Christopher C. Cline joined ACTV in November of 1993 and currently is Senior Vice President and Chief Financial Officer of ACTV, Inc. Prior to joining ACTV, Mr. Cline was employed by Showcase Communications Network, Ltd., a multimedia computer software and publishing company, as Vice President, Finance, and later President and CEO. Previously Mr. Cline was Vice President of Intercontinental Trade and Finance Corp., a cross-border financial trading and consulting company. Mr. Cline is a graduate of Haverford College and has an M.B.A. from Stanford University.
David Alworth joined ACTV in June of 1996 and currently is Executive
Vice President of ACTV Entertainment. Prior to joining ACTV, Mr. Alworth
worked in the Office of the Commissioner of Major League Baseball and
was a lead negotiator in 1993 for Major League Baseball in renewing the
national cable television agreement with ESPN, the agreement with CBS
Radio and in establishing The Baseball Network (TBN) partnership with
ABC and NBC, where he served as Vice President of Broadcasting and Production
Brent Imai joined ACTV in April of 1995 and currently is Vice President of ACTV. Prior to joining ACTV, in 1985 Mr. Imai became one of the original creators of the Prime Ticket Network (now Fox Sports West). From the network's inception through 1994, he served as Executive Producer. He was in charge of the channels creative direction and all original program production. Mr. Imai received four Cable Ace award nominations and three local Emmy award nominations for his work at Prime.
With the guidance of management, and based upon analysis of comparable companies, we have generated five-year financial projections for ACTV (see below).
ACTV Entertainment: With respect to ACTV Entertainment, we have provided a model of the FOX Sports SouthWest region, the first region in which ACTV Individualized Programming will be launched. We have provided a "bottoms-up" approach, looking at the number of subscribers, deployment of digital cable boxes, penetration of the "addressable" market, and so forth. These projections are consistent with the publicly made statements of other players, such as General Instruments and TCI, that impact the launch and success of ACTV. We have made per-subscriber revenue assumptions (both subscriber fee and advertising), and margin assumptions, that we believe are achievable. With respect to regional roll-out, we have made a conservative assumption that ACTV rolls out in five of the 20 available markets in the next five years.
Not only do we believe it is likely that the roll-out will occur at a faster rate, we believe there could be opportunities to license the technology to other programming companies, for different programming genres or to broaden reach. Also, the model does not include any revenues pertaining to the recently announced joint venture with Liberty Media, which could contribute in the near term, and in a significant manner, with marquee pay-per-view sporting events using ACTV's technology.
ACTV Net: As the market for internet educational software and content is quite new, it is more difficult to predict the revenue ramp on this side of the business. Clearly the target markets (K-12, university, corporate e-business, advertising, etc.) are large. We believe our projections for the next 24 months are achievable, and the long term potential for this business could be substantial. Also, we believe the technology and intellectual property is compelling, and that it would lend itself to corporate partnering and licensing, not only in the university and corporate markets, but also in the areas of e-commerce and advertising.
Valuation: We have provided a variety of different valuation methodologies, including discounted cash flow, terminal P/E multiples, and terminal operating income multiples. Regardless of the valuation methodology, ACTV's share price appears undervalued at its current level. We believe current fair value to be in the range of $14 to $17 per share. Based upon the expected growth in net earnings and EBITDA, and approaching corporate milestones, we believe an appropriate 12-18 month price target of $7 to $9 is achievable.
This section of the document is provided to remind potential investors to undertake a prudent level of due diligence prior to making an investment in the securities of ACTV, Inc. For a complete description of risks and uncertainties to ACTV's business, see the "Risk Factors" section in ACTV's SEC filings, which can be accessed directly from the SEC Edgar filings at www.SEC.gov on the Internet. Other potential risks include:
For Additional Information
Contact SmallCaps Online LLC -- 212-554-4158
The following are website addresses offering related information, and links to other sources of information.
The information in this report has been obtained from sources which we believe to be reliable, but we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation by SmallCaps Online LLC for the purchase or sale of any securities. SmallCaps Online LLC may have performed investment banking, consulting or other services for or may solicit investment banking, consulting or other business from, any company mentioned in this report. SmallCaps Online LLC or persons associated with SmallCaps Online LLC may at anytime be long or short any of the securities referred to herein and may make purchases or sales thereof while this report is in circulation or posted on the SmallCaps Online LLC website at www.SmallCapsOnline.com. This material, or any portion thereof, may not be reproduced without prior permission from SmallCaps Online LLC. SmallCaps Online LLC is not responsible for the contents of this document which is intended for electronic transmission and could be thus subjected to tampering or alteration. Copyright © 1998 by SmallCaps Online LLC. All rights reserved.