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Kagan's Column: P&G Anticipates the Couch Potato Famine

Cable World, July 11, 2005

By Paul Kagan

Come writers and critics who prophesize with your pen

And keep your eyes wide, the chance won't come again.

And don't speak too soon, for the wheel's still in spin,

And there's no tellin' who that it's namin'.

For the loser now will be later to win,

For the times they are a-changin'.

How unbelievably timely it was on June 12, to see a CBS 60 Minutes film clip of Bob Dylan singing his classic 1964 anthem. The week before, Procter & Gamble had told the TV industry it would cut its advance buying of spots by 25% so it could spend more on exotic advertising like product placements in programs and on interactivity. (You read all about it, well in advance, in this column in the July 19, 2004, CableWORLD. Check it out in the archives at cableworld.com.)

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The focus of most comments on the P&G story was the negative impact on cable and broadcast network revenue, and the negative influence on ads of TiVo and other DVRs. Incredibly, consumers have been accepting product creep onto their movie and TV screens without argument. And pundits and the public alike still tend to ignore the positive changes created by the growing interactive dynamic (which has become a given outside the U.S.).

For proper perspective, search for a thoughtful article on ITV by Peter Grant in the May 26 Wall Street Journal. Three sample phrases are worth noting: "Some believe that the stars now are aligning in the $60 billion-a-year TV commercial business to make that change [to interactivity] occur...Initial results from some of the [experimental] interactive campaigns are encouraging...Technology has advanced to the point that interactivity is possible on a massive scale." Bravo, Peter! It's a balanced piece that ends up with a list of hurdles (many of them contractual) that ITV must leap in order to live. But it's likely to be seen later as the first of many headlines that the times are finally a-changin'.

Grant's reference to scale is the key to breaking the code. For the first two decades of my cable writings I emphasized the ability of the cable industry to scale, i.e., to financially leverage, first into size and then into value. In recent years, with the plateauing and slight shrinkage of subscribers, cable has used its technology to scale into higher revenue and cash flow. But when each new tier of service is taken by only a percentage of the subscriber base, you can count the limits. Interactivity, however, works on a scale with an infinite horizon. Because our future population is growing up interactive (computers, video games, all portable devices), it will take TV with it. And once the general population gets its digits hooked on programs and ads, there's no end to that habit. P&G is thinking: An interactive storm could cause a couch potato famine.

So who will benefit in this future media climate? One candidate is OpenTV, after seven years in the wings. As I write this, it trades at only $2.70, which means its 122 million shares are worth only $329 million. Yet its ITV software already resides in nearly 50 million active set-tops worldwide, and it's just starting to supply its sister company, United GlobalCom, the largest MSO in Europe. J:COM, the largest operator in Japan--another member of the John Malone portfolio--is likely next on the list. That's a potential 20 million more set-tops. Net of $64 million in cash, the market's valuing OPTV at only $5.30 per currently occupied box. If it was $15, on 70 million boxes, the stock price would be nearly $9. True, it has taken seven years to break even, and on a run- rate revenue of $100 million/year. But back in 2000, 8 million OPTV boxes were briefly valued as high as $1,475 each, like a satellite sub. They're 278x lower now. And, in Y2K, the stock was $245. It bottomed at 70 cents on March 6, 2003, at $1.82 on July 7, 2004 and at $2.07 on May 3, 2005. Seems like investors remained fed up just as ITV was finally about to take off.

Analyst/investor Paul Kagan is chairman/CEO of Kagan Capital Management, Inc. in Carmel, Calif. He owns shares of OpenTV and Liberty Global, which has acquired both UGC and J:COM. Information in his columns is not intended to be a recommendation to buy or sell securities.

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Kagan's Column: P&G Anticipates the Couch Potato Famine

Cable World, July 11, 2005

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