The trend toward next-generation video delivery, consumption, navigation and audience analytics is the single most interesting place in our entire TMT and consumer stock universe. We believe that there are significant investment opportunities at the intersection of increased consumption of IP video, enabling video content to connected devices, navigating massive amounts of content and delivering highly-targeted advertising that is chasing the consumer online and to the mobile device.
It’s a dynamic space, complicated by rapid consumer adoption, thousands of content publishers, disrupted incumbents, the uncomfortable presence of Google and many small companies scrambling to serve the market. In fact, it’s really two distinct ecosystems – the legacy, closed, highly curated subscription video product delivered by cable and satellite and the open, chaotic, limitless world of IP video to browsers and apps. We have investments in legacy pay TV programming, the emerging streaming video content and advertising and also in technology vendors that are bridging the gap between conventional video, the second screen, navigation and streaming.
Fully distributed content providers in the legacy ecosystem benefit enormously from the video bundle – as artificial as it may be – enjoying consistent, recurring subscription revenue and, in most cases, a fantastic platform from which to sell advertising. Only poorly positioned or mismanaged pay TV networks are forecasting less than mid-high single digit revenue growth in both subscription and advertising in 2014. In other words, despite nervous chatter about cord-cutting and cord-shaving, the pay TV network business remains in possession of a wonderful business model characterized by high operating leverage, a negotiating advantage over distributors and enviable profit margins in the mid-high 40s. Our investment play on the enduring, legacy pay TV network business has been Crown Media (NASDAQ: CRWN), owner of the two Hallmark Channels, for two years. I personally believe that in a world of much better capitalized entertainment giants and consumers migrating to online video, the exit window may not be open forever for Crown.
Occupying the murky position between legacy and next-gen, QAM and IP, the set-top box and the cloud, linear and time-shifted, lean-back and lean-forward, consumer retail and enterprise is TiVo (NASDAQ: TIVO). We view favorably the company’s cash reserves and its well executed business transition from consumer DVRs to provider of advanced video solutions to service providers. A TiVo service provider can elegantly provide its retail and MSO customers conventional pay TV channels alongside OTT offerings like Netflix as well as deliver features like a user-friendly guide and advanced functionality like multi-room DVR and multi-stream recording capability. The Wall Street Journal recently touted TiVo as the best-featured advanced TV product. In an increasingly crowded field now occupied by Amazon as well as Google, Apple and Comcast, it’s probably in TiVo’s best interest to find a merger partner before too long.
Not too far away from TiVo on the spectrum, also as a technology vendor to video service providers and content providers, sits Envivio (NASDAQ: ENVI), an enabler of video to the mobile device, aka the second screen. Known as TV Everywhere, it is cable and satellite’s attempt to add value to the costly video bundle while minimizing the need for additional set-top boxes in the home. It’s a nice feature for the video subscriber but provisioning live and recorded TV from a QAM set-top box to an IP-based mobile device is no simple engineering task. That’s where Envivio comes in – managing video across platforms and networks. The company has had a rocky existence in the public markets; its stock trades at about 35% of its 2012 IPO price. But with 300 service provider customers worldwide, improving execution, a price-to-sales ratio well below 1 and a tidy net cash position, and in my opinion it’s difficult to see much downside in the stock.
Over-the-top (OTT) video — bypassing pay TV service providers to deliver content over the Internet directly to consumers — has quietly become a $6 billion business in the US, the vast majority of the dollars flowing in the form of advertising. As in online search, Google is dominant, generating about 60% of that $6 billion in online video advertising with its YouTube platform. Another 15% of the market is occupied by Hulu, the SVOD streaming service controlled by Disney and Fox.
That leaves a browser and emerging app video advertising marketplace of about $1.5 billion in 2014 for a company like YuMe (NYSE: YUME) to pursue. YuMe expects to generate about $300 million in revenue in 2014 serving as an ad rep firm to the fragmented universe of online content publishers. It has relationships with 73 of the top 100 advertisers at last count. The company aggregates, analyzes and delivers third-party online, mobile and app audiences to video advertisers at a premium CPM and takes an agency fee for making the connection. Proprietary technology enables YuMe to sell effectively into the cookie-less world of apps, an advantage over those more reliant on the browser (like YouTube).
The stock is priced as if online video advertising CPMs will collapse under the weight of programmatic and real time bidding ad buying. But we think YuMe’s early-mover advantage is sustainable, its advertiser relationships difficult and costly to replicate, its forecasted 30% revenue growth attractive and perhaps someday it too will make an attractive acquisition target.
DISCLAIMER: The investments discussed are held in client accounts as of April 30, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.
Twinleaf Management LLC is a Connecticut-based Investment Adviser dedicated to constructing concentrated, separately managed client portfolios that consist of overlooked, out-of-favor, misunderstood or mispriced publicly traded US equities with under $2 billion of market capitalization. Our "sweet spot" is investing in sub-$1 billion companies. We consider our approach to resemble private equity investing in the public markets.
Our primary investment research is in technology, media and telecom. We are especially focused on the digital revolution in media and technology that is creating investment opportunities in mobile and IP connectivity, SaaS platforms, data analytics, content creation, distribution and highly targeted advertising. We seek to invest in "disrupters" with the potential to become very valuable companies or acquired before they get there.
Spencer Grimes has 17 years of private equity investing and investment analysis of public companies, primarily in the media and communications sector. He founded Twinleaf in January 2012. He began his career at Viacom, Inc. before moving to Wall Street. From 1996 to 2000 Spencer was an equity research analyst at Salomon Smith Barney covering the cable television industry. He was named an All-Star Analyst by The Wall Street Journal in 1999 with recognition for accuracy in earnings estimates and stock picking. In 2000, Spencer moved to Technology Media and Telecommunications sector-focused private equity and helped deliver a positive return for fund investors with the sale of a group of data centers for $100+ million in 2008. More recently, Spencer was a partner in Sequence LLC, a media software company that enabled content personalization and real-time ad insertion. It was sold to R.R. Donnelley (Nasdaq: RRD) in 2011. He also serves as an adjunct professor at the New School in New York, teaching a graduate-level Media Economics course.
Spencer holds a BA from the University of Virginia and an MBA from Emory University's Gouizeta Business School.