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-- ACTV
-- Advanced Tissue Sciences, Inc. -- AMBI Inc. -- ARIAD Pharmaceuticals, Inc. -- Cubist Pharmaceuticals, Inc. -- CytRx Corp. -- Exigent International, Inc. |
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March 4, 1999 RECOMMENDATION: BUY
ACTV, Inc. (NASDAQ: IATV)
as ACTV Launches HyperTVTM For The Entertainment Market
Market Data:
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ACTV Corporate Information:
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Research Update
ACTV announced the introduction of HyperTV for the entertainment market this week at two industry conferences. We believe ACTV's patented HyperTV software application will be a "killer ap" for the converged broadband cable TV and Internet infrastructure, and has broad applications in the areas of entertainment, advertising and e-commerce. ACTV has proven the HyperTV software application in the online education market, and is currently generating revenues and repeat business in that sector.
HyperTV is a patented, innovative software application that enables the convergence of the broadband cable TV and Internet infrastructures today. HyperTV enables television programmers and advertisers to seamlessly integrate Internet content and chat functionality into a video program -- simultaneously and in real time. Using ACTV's patented software, programmers can "push" Internet URLs (uniform resource locators) and chat functionality to viewers/users, enabling an enriched interactive TV/Internet experience. This functionality enables programmers to enrich the entertainment experience by providing additional information, chatting, playing games, etc. -- all in reference to the program they are watching. More importantly, HyperTV also enables interactive and highly targeted advertising and integrated e-commerce applications.
We are reiterating our BUY recommendation on ACTV, and raising our target 12-month price range to $14 to $17 per share. We will revisit our earnings model from the December 15, 1998, report as the Company moves ahead aggressively in the promotion, licensing and commercialization of HyperTV.
- HyperTV and Individualized Television -- Patented, Enabling Software Technologies
- ACTV's HyperTV software technology uniquely enables simultaneous delivery of video and Internet content to television users; ACTV launches HyperTV to the broader entertainment market, which we believe will lead to innovative license agreements and other commercial opportunities;
- ACTV's Individualized Television technology provides the tools needed to create, encode, distribute, decode and view live or pre-recorded television programming that individualizes what the viewer sees and hears for an unlimited number of simultaneous viewers. The proprietary software remembers every viewer's response, enabling the television to literally "talk back" to each viewer with individually tailored programming and advertising content. We expect launch of FOX SportsPlus in the SouthWest regions the second half of this year;
- ACTV's proprietary technology enables and enhances potentially large programming applications, from sports to music to interactive advertising and e-commerce.
- World Class Corporate Alliances
- To drive commercialization of its technologies, ACTV has partnered with top quality companies, including Liberty Media (an equity owner), Tele-Communications, Inc. (TCI), General Instrument (an equity owner), FOX Sports Net and Sun Microsystems.
- Compelling Valuation
- We believe ACTV's investment case is not widely understood or appreciated by the investment community, and that its shares trade at a significant discount to comparable Internet/convergence investment opportunities;
- ACTV is a unique, small-cap way to play the investment opportunities evolving from convergence;
- We are raising our 12-month price target to $14 to $17 per share.
"Convergence" -- What is it, Who's in it, and Why?
The Internet and television platforms are converging. This "Convergence" of the broadband cable TV infrastructure and the Internet backbone will provide an extremely robust conduit -- the proverbial "Fat Pipe" into the home -- through which a broad range of producers of products and services will dramatically change the way consumers communicate, shop, and experience home entertainment.
Large entertainment, telephony, and Internet companies are jockeying now to position themselves to take advantage of this converged broadband platform, reflecting the significant economic opportunities and challenges that will arise from this convergence over the next few years. We believe that the priority these large companies are placing on convergence is positive for ACTV, as it ensures the opportunity for broad deployment of ACTV's HyperTV and Individualized Television software technology. The following corporate events reflect the attention large firms are paying to the converged media:
AT&T/TCI/Time Warner -- Through the acquisition of TCI and the recent joint venture with Time Warner, AT&T gains access to the broadband cable into 43% of all US cable homes. We believe additional joint ventures with major cable providers could push that up to 70% or higher. Through the TCI acquisition, AT&T becomes the largest shareholder in @Home, the fast-growing, high-speed Internet access service. There is speculation that @Home and RoadRunner (Time Warners' Internet Business) may even merge. AT&T wants to control the "last mile" into the home, through which it can sell a integrated package of telephony, Internet and other services.
AOL Lobbying Effort -- AOL senior executives have spent months lobbying Washington to gain access (ideally free access) to the broadband cable infrastructure into the homes. Clearly, AOL wants access to the large bandwidth capacity of cable, which is significantly greater than the traditional dial-up capacity of the installed twisted-pair copper network.
USA Networks/Lycos Inc -- Barry Diller is planning to merge the Internet assets of his Home Shopping Network with Lycos, the third-largest Internet portal. This gives Diller's TV-based retail business a wider outlet to the Internet, accessing 30 million online people through Lycos' four national and 19 regional websites. We believe Diller understands the power of convergence and its impact on entertainment, advertising and e-commerce, as reflected in his recent quote in BusinessWeek, "Any media company that doesn't have a large footprint in the world of electronic commerce on a worldwide basis is going to be in trouble."
@Home/Excite -- This planned merger combines @Home's broadband cable technology platform and cable TV distribution agreements with Excite's 20 million registered users of their Internet portal. This merger provides @Home with the enriched Internet content of Excite, including Excite's MatchLogic division, which is building one of the largest predictive consumer databases which will offer advertisers the ability to delivery highly targeted marketing solutions.
All of these companies, and others, are jockeying to get ownership, control or access to the broadband cable entering your home. As the infrastructure is deployed further (digital cable boxes and cable modems), these 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.
Why care about Convergence? Usage of the Internet, and business generated thereon, is growing at significant rates. It is estimated that approximately 73 million Americans, roughly 35% of the population, are using the Internet. Of the 72% of American homes that have at least one personal computer, 45% of them have a TV in the same room. And, increasingly, people are surfing the Web while watching TV. Recent market studies have shown that over 10 million households (approximately 25 million TV viewers) surf the Web while watching TV, and this number is expected to grow as more synergistic TV/Internet programming and applications develop.
Recent TV/Internet events show the popularity and potential of the converged infrastructure. All of these events (including ESPN/Fiesta Bowl, this year's SuperBowl, the ESPN/Monday Night Football, even the recent Victoria's Secret fashion show which was widely publicized through TV advertising) triggered floods of Internet users to their sites during the events, crashing their websites. Producers of these events greatly underestimated the potential demand of this interactive TV/Internet experience. We believe this reflects the strong desire of TV viewers and web users to interact.
Online business is booming as well. According to market studies, 1996 Internet shopping revenues were approximately $425 million, and are expected to grow to $37.5 billion by the year 2002. Online advertising revenue in 1997 was approximately $850 million. This figure was expected to double in 1998 to approximately $1.6 billion. This explosive growth in e-commerce (including e-advertising) is one of the key drivers behind the corporate positioning mentioned above.
ACTV Launches HyperTVTM in the Entertainment market
This week, ACTV announced the introduction of HyperTV for the entertainment market. As described in our initial report of December 15, 1998, and in more detail below, HyperTV is a patented, innovative software application that enables TV/Internet convergence today. HyperTV has proven itself in the online education market, where ACTV is currently a market leader in this small, but rapidly growing market.
What is HyperTV?
HyperTV is a patented software application that enables entertainment programmers and advertisers to seamlessly integrate Internet content and chat functionality into a video program -- simultaneously and in real time. Using ACTV's patented software, programmers can "push" Internet URLs (uniform resource locators) and chat functionality to viewers/users, enabling an enriched interactive TV/Internet experience. This functionality enables programmers to enrich the entertainment experience by providing additional information, chatting, playing games -- all in reference to the program they are watching. More importantly for media companies, HyperTV also enables interactive and highly targeted advertising, and integrated e-commerce applications.
Examples of a HyperTV Enriched Programming
As described in detail in earlier research, ACTV has corporate alliances with TCI, FOX Sports Net, and Liberty Media. We are anticipating the roll-out of ACTV's Individualized Television technology in the sports entertainment market within months, as well as additional HyperTV enriched programming from TCI's The Box Music Network. Examples of HyperTV enriched programming in sports and music entertainment markets are below:
Sports: During the telecast of a live basketball game, HyperTV will allow the programmer to push a stream of web addresses, in synch with the video, to provide additional content from the Internet. This could include statistics on key players, interactive sports trivia questions about the teams and players, the web sites of fan clubs, recent articles on the players, and e-commerce applications like the ability to buy team jerseys, or autographed basketballs.
Music: During a telecast of a concert, the HyperTV viewers would receive a stream of web addresses for additional content -- again, simultaneously and in synch with the video. Viewers could access the lyrics to the songs, bios on the artists, the band's website, the fan club's site, or a site offering concert related merchandise like CDs, DVD or apparel.
HyperTV enables the convergence of cable TV and the Internet now. Anyone with a browser that enables video can receive HyperTV. The video will appear in the browser, together with the enhanced Internet content, whether streamed over the web, a CD-rom, DVD or if the video comes from a TV tuner card. Otherwise, the video can appear on the television while the enhanced web content appears on the computer.
What is proprietary about HyperTV?
ACTV invented HyperTV in 1995, and owns the rights to the technology. ACTV has been awarded patents pertaining to provision of video over the Internet, and integration with other information. In particular, ACTV has been awarded patents on systems that integrate and display video with information retrieved from the Internet, including URLs, or web addresses. The patents were acknowledged by personnel from Liberty Media in announcements pertaining to their recent investment, and we believe they will be a significant source of value to ACTV in the future as it commercializes its technology, either directly or through licensing agreements.
Who will use HyperTV?
We believe a wide range of companies could benefit from using HyperTV. Television/Video programmers, faced with ever increased competition for viewers, are looking for ways to enhance the viewing experience, provide differentiated programming and increase viewship (and advertising revenues). Advertising firms, can utilize HyperTV to generate consumer profiling, enabling much more effective, targeted marketing, and interactive advertising. HyperTV viewers will be able to view ads, interact with them, and even make purchases of products in real time. Internet Portals are seeking new content to differentiate their sites -- to make them more "sticky" -- which enables greater advertising revenues. And Online Retailers can utilize HyperTV to enhance the shopping experience, with integrated video and chat functionality enriching the e-commerce experience.
We believe ACTV's patented HyperTV software application, and the enriched programming content that it enables, creates great opportunities for all types of companies mentioned above. The simultaneous and real-time delivery of Internet content (including e-commerce capability) and chat functionality, together with video, is the future of television, the Internet and the converged broadband infrastructures.
Commentary on Valuation
In our initiating coverage research piece of December 15, 1998, we provided a comprehensive five-year financial model for ACTV (see our website at www.SmallCapsOnline.com for a copy). In that model, we provided a detailed model for ACTV Entertainment pertaining to the planned roll-out of Individualized Television in the FOX Sports SouthWest region. We alluded to the roll-out of that programming in other regions, and the Company has recently announced the opening of its facility in Los Angeles, within TCI's National Digital Television Center. We believe this program is on schedule as per our initial report.
With respect to ACTV Net, now renamed HyperTV, our model reflected only the online education market. As stated, that market is quite new, and is more difficult to predict. We believe this week's announcement reflects management's expanded focus on the commercialization of HyperTV in the entertainment market, in its broadest definition, and believe that the Company could aggressively license this technology across many sectors over the next couple of years. These "sectors" include television programmers, Internet portals (which, like @Home/Excite, could become the new media companies), advertising firms, and other e-commerce focused firms.
Valuation: We are increasing our 12-month price target to this $14 to $17 per share range, based upon the launch of HyperTV for the entertainment market, recent movements in the share price, and what we perceive as increased institutional investor interest in convergence opportunities in general, and ACTV in particular. We will revisit our earnings model from the December 15, 1998, report as the Company moves ahead aggressively in the promotion, licensing and commercialization of HyperTV.
Risk Considerations
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:
- Market risk: Investors should consider technical risks common to many small-cap or micro-cap stock investments, including liquidity levels, small float, risk of dilution, dependence upon key personnel, dependence upon single products or technologies, and the strength of competitors that may be larger, better capitalized and hold dominant market positions.
- Business risk: ACTV has limited experience in emerging business of interactive television programming and internet educational software and support. Many of its products and services are in the early stage of commercialization. There can be no assurance that ACTV's business or the markets in which it competes will materialize or achieve the desired levels of revenues or profitability as expected.
- Competitive risk: The entertainment and software industries are extremely competitive, and many perceive the barriers to entry to be low. Added competition could lead to price competition and lower margins.
For Additional Information
Please visit our website at www.SmallCapsOnline.com for copies of our two earlier research reports on ACTV, Inc.
Contact SmallCaps Online LLC -- 212-554-4158
Sources for Additional Information
The following are website addresses offering related information, and links to other sources of information.
| www.ACTV.com | ACTV's corporate website |
| www.SmallCapsOnline.com | SmallCaps Online's site for company information and research |
| www.FCC.gov | Federal Communications Commission homepage (information on digital TV) |
| www.NAB.org | National Association of Broadcasters homepage |
| www.TCI.com | Tele-Communications, Inc.'s homepage |
| www.skyconnect.com | Skyconnect's homepage |
| www.GI.com | General Instrument Corporation's homepage |
| www.SciAtl.com | Scientific-Atlanta's homepage |
| www.pbs.org/insidepbs/dtv | Public Broadcasting System digital television information |
| www.SEC.gov | U.S. Securities and Exchange Commission, with links to EDGAR filings
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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 has 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 © 1999 by SmallCaps Online LLC. All rights reserved.