Archive for the ‘Cord Shaving (TV)’ category

The Demise of the Set-Top Box Makers

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 How does change happen? Slowly, then all at once.

I recently wrote about the disruption of cable TV (note here). As I dive further into the Cord Shaving theme, I find myself struck by the unnecessary complexity of the set-top box industry. And I can’t help but consider the parallels between today’s set-top box makers and Nokia, which went from a dominant handset maker to irrelevant in just a few short years (background here).

Instead of reviewing the maze of middleware, software and protocols that defines the set-top box market, I think it is more helpful to abstract the complexity away and start with a very simple question:

What is a set-top box?

To me, it’s just a technical layer that translates input to output.

Once you understand that part, you get to the question that really matters:

What’s proprietary about this “technical layer”?

And the answer to that question may surprise investors: Nothing.

Rentrack (RENT) – Mark Cuban is Selling Shares Hand Over Fist. I’m Joining Him.

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Note: this write-up was sent out to my network on the morning of 9-Apr when RENT was trading at $55 / share. It has since fallen to $46.50. If you are an accredited investor / buysider and want to get on my VIP research list, email me at analyst @ this domain.

I am in the middle of diving into my 7th investment theme – a theme I call “cord shaving” (you can read about it here). Inside of this theme is an interesting little company called Rentrack.

Rentrack measures TV and movie engagement and then sells this data to movie studios, TV networks / stations and advertisers / ad agencies. RENT currently has 2 divisions, but is trying to sell the second (source):

  1. Advanced Media and Information (AMI) which is a recurring fee-based business model with 3 units:
    1. Box Office Essentials: Box office ticket sales
    2. TV Essentials: TV viewership information
    3. OnDemand Everywhere: measures performance of on demand content
  2. Home Entertainment (HE) which includes DVD distribution services and data measurement on home video rentals

The HE division has been in a structural decline for years (revs have gone from $82MM in 2009 to $45MM in 2013); it’s a rather lousy business to boot (gross margins of 28% in 2013). Given these two characteristics, I’m not certain that Rentrack will be able to find a buyer – EBIT has come down from $11.4MM in 2011 to just $7.1MM in 2013 (note: it’s unclear to me if management is properly allocating overhead to that EBIT number). If a buyer does step in, any number over $30MM would be a big surprise to me – in any event, it’s now considered a “discontinued operation” per their 20-Mar-14 press release (source).

For investor purposes, RENT is now a media information pure-play focusing on box office data, TV viewership data and on demand data.

RENT’s box office business is a decent little business. Decent is probably an understatement; it’s a monopoly (it became a monopoly after the Dec-09 acquisition of Nielsen EDI). Using a call center, RENT contacts over 85,000 movie theaters in 36 countries and reports global box office ticket sales to the seven major Hollywood studios, plus +650 theater customers. I suspect it’ll stay a monopoly as building reporting capabilities on RENT’s scale is an incredibly difficult task and it’s not a big enough market for anyone else to bother (revenues in this segment were just $18MM in 2011, $21MM in 2012 and $24MM in 2013; low teens annual growth has been driven by price increases and new clients – particularly in China).

RENT’S TV Essentials unit combines consumer viewership information with other databases (purchase behavior / customer segmentation data / marketing data / advertising data) to provide intelligence on TV viewers. This data helps TV networks optimize their ad inventory and it helps advertisers and advertising agencies make better ad purchasing decisions. TV Essentials is currently tracking the viewing patterns from more than 29MM televisions in 13MM households.

RENT’s OnDemand Everywhere reports help content providers analyze the performance of on demand content. The Company has partnered with every operator that offers VOD programming and is ingesting information from over 107MM televisions in North America.

The common thread between RENT’s TV Essentials business and their OnDemand Everywhere business is how the Company sources their information: by buying it from cable, satellite, and telco partners. You see, it isn’t RENT’s data… they have no proprietary claim to it. RENT is simply buying TV viewership data on multi-year (2 – 4 year) contracts, combining it with data they buy from marketing companies, and delivering reports to customers. Let me repeat this very important point: none of this data is proprietary to Rentrack; they simply operate as a middle-man between data warehouses and add a reporting layer on top. The company confirms this in their K under the ‘Risk Factors’ section:

The Disruption of Cable Television Has Arrived

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We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don’t let yourself be lulled into inaction.

– Bill Gates

What is the future of television? This is a question I have asked myself multiple times over the past few years – lately with increased frequency. The answer, I believe, is starting to reveal itself.

Let me begin with a basic premise: viewable content is viewable content, irrespective of the form. It doesn’t matter if you’re watching a broadcast TV show, a YouTube video, or a movie on demand – all of these are just different forms of the exact same thing.

So why then do we have to access them differently? Why do you have to toggle between different TV inputs and navigate different UIs to find something to watch? (First world problems, I realize, but the investment implications here are enormous.)

My answer is this: we are forced to toggle between multiple inputs because we’re in the midst of a transitional period where new competitors are beginning to overtake the incumbent television companies. Multiple inputs are merely a symptom of this transition.

The trend away from traditional television to internet-based content delivery has been enabled by a few key developments (hat tip: Mark Suster):