Our 2014 Double: Destiny Media

Well, it's the time of the year when many Seeking Alpha contributors are putting out their best stock ideas for the coming year, so we're joining in here, because we think we not only have a great stock, but the timing is also likely to be quite favorable. So here it is, our double for 2014: Destiny Media.

Destiny Media (OTCQX:DSNY), a little tech company with 52M shares outstanding with no debt. The company finally launched a commercial version of its revolutionary video streaming solution Clipstream, in the form of Clipstream Cloud, a solution in which users can simply upload and convert their own video's in one click. Its ambition, in the words of CEO Steve Vestergaard, is to become the YouTube for business.

It's worth revisiting this company since our last article. The company is profitable and cash flow positive, and has no debt. Destiny has reached an inflection point with both its products, but we also want to highlight the quality of management, a critical dimension in the smallcap world.

New growth in PlayMPE on the horizon

PlayMPE is an automated service record labels use to distribute their pre-release music, videos, album covers, meta data and other content to recipients including radio, press, industry professionals, internal staff, DJs, film and TV, sports stadiums, VIPs and others. It is secure, instant, and protected by three patents.

Instead of sending out couriers with demo CDs, music label can send pre-release music and other critical content instantly and securely over the internet to a list of accredited recipients. The critical content is protected by features such as locking it to a specific computer, and watermarking it which enables the company, in cooperation with the IFPI (the global anti-piracy group) to located it within 15 minutes and identify the person responsible for the breach.

Revenues have been stagnating for a couple of years, the result of the company to greatly enhance features and reach on request of and in cooperation with the major record labels, who are taking PlayMPE global. Investments have been made in server locations around the world (in 27 languages).

Those upgrades and investments have now been done, and the company has signed a new global contract with the biggest record label, Universal (45% of the major label market). Part of the flatlining revenue at the moment is caused by that new contract (replacing a host of contracts with sub labels under the Universal umbrella).

The new contract was signed in April 2013 and locks in a guaranteed minimum revenue for two years and the company is still a little below that minimum, per the Q4 CC. So usage will rise and it's a matter of time when the minimum will be exceeded, it's like paying a small, short-term loss for a long-term gain.

Destiny is taking new initiatives and making adoption of PlayMPE for their labels way easier:

• There is the new PlayMPE Go Play branded website, which allows access from all HTML 5 supported browsers, without the need for a plug-in, opening up the market for tablets and phones.


• A new social media website (daily.plaympe.com), music can be completely automated in real-time charts and automatically pushed out to Twitter and Facebook channels. It also offers the possibility of streaming samples.


• It has launched players for the iPhone and Android.


• Building a strip-down, web-based encoder (in process).

On the latter:

We think the web-based encoder will really help increased usage, because it will let people to -- who are not using the system today, send music from within the label. And again, the system is all transaction based, the more the use, the more we make. [Steve Vestergaard, CEO Q4 CC]

Universal just merged with EMI and together they hold about 45% of the major record labels. The $15B a year music industry is trusting Destiny with their crown jewels when it's most vulnerable, their pre-released music and music videos.

At present, PlayMPE generates roughly $4m in revenue yearly, but this can grow 10-fold to $40M, according to CEO Vestergaard in an interview with Three Part Advisors (the market is bigger but there are low-tech, MP3 based cheaper solutions available without any DRM security features and there are still lots of physical CDs sent by courier).

The PlayMPE process is highly automatic, this means that considerable economies of scale are operating and increase in volume will go disproportionally to the bottom line.

the nature of the systems that are fixed costs are high, or a variable cost are negligible, making incremental margins to new business near 100% [CEO Vestergaard, Q2 CC]

But the company is also benefiting from what's known as Metcalf law, the value of the network grows exponentially with each new node added. For instance, Destiny owns the largest network of industry recipients and an enormous database of pre-released music. Here is CEO of Vestergaard (on the Q2 CC):

we are in a position to generate the most accurate real time charts in the industry. We're building the most accurate data base meditated data from music all over the world.. our growing network is creating derivative business opportunities and captive audio so we could sell our Clipstream offering into.

The latter points to cross selling opportunities between PlayMPE and Clipstream. Record labels can be amongst the first users of Clipstream for secure music video streaming (Clipstream has similar locking and watermark features as PlayMPE). Present solutions like Microsoft Silverlight are being discontinued and HTML videos have no security whatsoever.

if I have a movie trailer for example, or let say a movie that I am developing and movie is only partially done and I send it out to producer or something. I don't want that to show up on the internet anywhere. So we are the only streaming technology where I can lock that, I can secure and protect who has access to that content [CEO Vestergaard Q2CC]

PlayMPE saw other worthwhile initiatives like Android and iPhone apps, the development of a web-based MPE encoder that will make encoding easier for clients, and the automated DOV PlayMPE website:

This intuitive site will really add extreme previews shortly so this site features music that can't be found anywhere on the internet and its driving social media marketing network systems which is creating a demand from labels to use the system so far this site has been a great success. [CEO Vestergaard Q2 CC]

On the back of the global roll-out with Universal/EMI, new geographic markets, new labels and new user categories can now be addressed, like journalist and DJs. Radio stations are just the tip of the iceberg. For every radio station, there are ten journalists and for every journalist there are ten DJs.

The upshot

We can expect revenues to start ramping up, because the record labels are taking PlayMPE global and radio is just the tip of the iceberg. So new categories of users will be served as well, especially as the product becomes easier to use. Because the necessary investments have been made, the labels themselves develop the client lists in new markets and the delivery process is almost completely automatic, operating margins are in excess of 90% on additional revenue so most of the revenue growth will go to the bottom line.

Pre-release film and video

What PlayMPE does for record labels can also be done for the film and video industry, a much bigger market. Send films and videos securely to theaters, critics, personnel, etc. and lock them to the recipient computer. It needs work and investment, Destiny will embark on this in the near future.

Consumer market

Another expansion possibility is the consumer market. Destiny has already released applications for Android and the iPhone, those for Blackberry, tablet and iPad are under development, as is a web-based encoder.

One advantage for consumers is the loss-less quality (much higher than MP3), but the main driver will be the state of the art DRM locking and watermarking features, which would make it quite an attractive proposition for record labels, and independent musicians alike.

Clipstream G2

Undoubtedly the bigger revenue opportunity comes from the newly commercialized launch of Clipstream G2, Destiny's streaming media solution at the end of November. Where PlayMPE sends media files securely over the internet, Clipstream G2 streams them, securely and efficiently. Clipstream G2 offers numerous benefits:

• It plays on all devices, as long as these use a HTML5 browser


• It's always up to date and doesn't need plug-ins, like a media player


• It doesn't need to be transcoded into different formats


• It doesn't require a streaming server (or several streaming servers, each for every format)


• It doesn't require the use of content distribution networks as it is sent like normal web content and hence cached locally by your ISP and re-used locally, reducing bandwidth by 90%


• It has the same DRM safety features as PlayMPE (locking, watermarking)


• "The Clipstream® solution is less intrusive and, as a result, safer for users. Alternative solutions control a user's device and can be used by malicious sites to install malware. Clipstream® content will never crash or compromise your machine." (from the 10-K filing)

This is a big deal. It means that Clipstream offers the only streaming media format that doesn't need a media player or plug-in, plays everywhere, doesn't need to be transcribed into different formats (a $1.6B market), doesn't need content delivery networks (a $3B market) and has state of the art DRM features like locking to a recipients computer or domain, and watermarking and some interactivity features that are especially interesting for the advertisement market.

Not only is it a much cheaper solution, the addressable market is near 100%. Only those without an HMTL5 browser cannot play it and files can be played in 15 years time.

Market research sector trials

This was the first market where the product (Clipstream Surveys) was tested with paying customers (if you click the link you also see a host of clients who already use the product), and this had two big advantages:

• It enabled Destiny to improve Clipstream with feedback from live (and paying) customers


• It introduced Destiny to a host of their clients, usually big brands

After months of tweaking and trials with market research companies, the engine is stable and ready.

they are very happy with the quality, they are very happy with the penetration. Generally, they haven't been using mobile at all, because it's just too difficult. Even if you get something like Android, there is so much variation from one Android to the next. Just because you have video that plays on Android, doesn't mean it plays on all Android. [Vestergaard Q4CC]

This is a $30B market, testing movie trailers, TV commercials, product launches, etc. and, as a nice side effect, introduces Clipstream to big brands:

So when they test market you know an ad we can then try and sell Clipstream to the advertiser or the test market movie trailer while they should be using Clipstream on their website to show that trailer as an example.

We already talked about the opportunities in the ad market in our previous article.

Clipstream Cloud

After Clipstream Surveys, this is the second Clipstream product that has been launched at the end of November. It is a simple DOY product where users can upload and convert their videos in one click into Clipstream so that they can play everywhere without a media player. The videos will be hosted on DSNY servers that are initially outsourced to Amazon. What kind of users would be interested?

Permanent users of the cloud include advertising agencies, large websites who need to reliably service large volumes of impressions; marketing professionals; distance learning companies; web developers and others. So we expect the initial audience to be very broad. [CEO Vestergaard Q4CC]

Users will pay by the minute, much like mobile phone usage and can embed the videos in their own website easily. Clipstream Cloud will be profitable from the start, as the fees more than cover the hiring of servers from Amazon. The launch will be accompanied by a big marketing push starting imminently.

DRM solution

Both PlayMPE and Clipstream offers some of the best, patented digital rights management (DRM) software solutions available anywhere. Clipstream and PlayMPE offer:

• An undetectable watermark the media file/stream without losing quality, even when its compressed or conversed into another format. Tracking the MPE file so that any infringes can be tracked back to the violating (and receiving) party. It provides even information about the date and time of the transaction, operating system, IP address and even the date and time of the illegal transaction are available to the original owner of the content using this technology. [HTFBS March 2012]


• Locking the media file to a single device (PlayMPE), single recipient device (Clipstream) or locking it to only play from the source URL (Clipstream) Blocking screen scraper program.

Here's what the 10K says about their digital locking patent:

This patent provides a method of locking digital content which prevents play back on unauthorized machines and devices. Claims include separating security from the content, so that content files can be shared securely over peer to peer networks. This is one of the earliest patents for securing peer to peer distributed content. One of the more important claims in this patent is the ability to uniquely recognize a particular computer.

Uniquely identifying a person's computer is a common issue which is usually approached by saving cookies or beacons to the user's computer or by tracking IP addresses. These are not reliable solutions as cookies are easily deleted and IP addresses easily changed. Destiny's propriety hash code process creates a serial number that can be used to recognize the user on subsequent visits without ever saving anything to that user's computer.

This is a pretty big deal. In the future, the company could very well offer this as a stand-alone product. In practice, the biggest market is likely to be media anyway, so these DRM features offer both PlayMPE and Clipstream; another very important competitive advantage.

There are many media companies looking for a safe way to monetize their media files whilst at the same time being able to reach all of the addressable market. At present, it's very difficult for companies to that due to the fact that HTML5 is inherently weak on safety, there is a considerable battle going on whether to include some basic DRM standard into its (proposed 5.1) specifications.

If not via the web browser, DRM can be included through proprietary apps (this is the solution many content owners use, like Netflix), but these apps are proprietary and cumbersome (users have to download an app for every different and beat the open standard web approach though).

Consider the music studios. They already trust Destiny with their crown jewels, their pre-release music. Their music videos (often costing big bucks) are often housed on YouTube, where others reap part of the ad income:

We are getting a lot of demand for that, and also outside of music. Our music label customers could be our first Clipstream customers. Obviously, they have music videos that we are currently protecting and distributing for them, but they also want to stream those videos. They are heavy users of YouTube. They could pull a lot of that and put it on their own artists websites. [CEO Vestergaard Q4CC]

And it doesn't have to stop there:

For those (inaudible) music industry, we will be talking to a lot of movie studios, that have come to us saying, we love your solution for music, could you adopt it, work for us for our movies, and the business could be big there. They spend $250,000 to duplicate and send a video out. [CEO Vestergaard Q4CC]

The simple truth is that apart from being much cheaper and addressing the whole market, the DRM features in Clipstream (and PlayMPE) enable content holders much bigger control over their content, where to embed it, how to monetize it, locking it to a specific device or URL, blocking screen scrapers, etc.

Content owners can do this at present, but not with universal web technology. They have to build their own proprietary apps for that, and for every platform, they have to build another app. Clipstream is much simpler, cheaper, more efficient, and universal. This doesn't hold for just the big content owners, with the Clipstream Cloud self-uploader, anyone can do it.

Clipstream G2 eliminates the need for a media player on the user site, and these players are known security risks, as they have all kinds of exploits. Players have full access to your entire computer and can create an open security channel with the internet, even turn on your camera and microphone, for instance.

How Destiny makes money from Clipstream Cloud

In essence, anyone can buy a plan that is not dissimilar to those of mobile phone carriers. You buy packages that can vary from $5 to $5000 a month which represent minutes. The bigger the package, the lower the fees for overage minutes, so there is an inbuilt incentive to trade to a bigger package. Vestergaard (Q4CC):

So the concept is, we'd like people to get in for $5 that they can try it, but very quickly, they would be bucking up to the $20 and $50 monthly packages, or even higher.

Destiny will make money right out of the gate, as the packages are priced above the fees for the Amazon Cloud servers. The video they host can be embedded elsewhere, such as a website, or marketing newsletter or blog or some third party site, and it's possible to sell or syndicate the content. According to CEO Vestergaard on the Q4CC, Clipstream:

disrupts $5 billion in existing business, and which we see potentially a $3 billion market size, $3 billion annual revenue opportunity... we will grow revenue sequentially for the foreseeable future. In both cases, revenues are recurring, and the revenues are sticky.

Worst case, margins are 60%, but these can improve if the content gets recycled locally (remember, Clipstream doesn't need streaming servers, the streams are normal web content that is cached by your local ISP) that will improve as no Amazon server has to be paid for locally cached streams. In that case, the margins are near 100%.

Marketing

One of the first targets of a marketing campaign will be the web developer community, as they are the market that "can kind of run with it, that go into the tech longs and they talk about the system." Search term advertising will also ensue, and they recently went to Japan.

But the company has noticed that whenever they put out a PR, big companies come to them, interested in the system. Unfortunately, the product isn't yet ready until now, but there is a considerable rolodex of contacts to pursue. And as we explained above, their PlayMPE customers and some of the trials they did in the market research vertical introduced Destiny to big brands already.

Interactive video

From their 10K filing we know this (in a noteworthy list of Clipstream advantages on p13-4):

Dozens of parameters provide functionality not available from any other streaming solution. For example, Clipstream® provides the only technology available to link every pixel or group of pixels in a banner to a different audio stream. This technology can be used for audio navigation of a website or to provide ads that do not require the visitor to leave the host site to listen to an ad.

Here is Vestergaard during the Q4CC:

so advertisers are telling us that they are excited that Clipstream videos can be interactive, unlike any of the new HTML 5 standards. So as an example, you have a video, and you can make something in the video clickable, or you can make the video change, depending on what you click on. So if you click on one thing, then it goes one way, if you click on another, it goes another. Or, you can give feedback. So from an advertiser, I may want to know, what part of the advertisement I am losing people on, and so the reporting is real time with our interactive technology.

These are major steps forward in video advertising, and they come on top of other advantages that Clipstream enjoys (cost, market reach, etc.), but there remains some work to be done still:

So, we think advertisers are going to love the current offering, but there is a lot of things that they want from us, that are not in the current offering. So to get 100% of the ad market, there is things that we need to build out. So for example, in North America especially, they use real time bidding networks, add insertion technology, they audit the streams of third parties. They audit to make sure that everything is working. They only got reporting systems. So, there is not so much development, as much as integrating our metadata with servers from other providers, that will be part of that ecosystem. [Vestergaard Q4 CC]

More possibilities ensue:

• Pay per view revenue option


• Tracking the IP addresses of viewers


• Inserting hyperlinks


• Ads depending on viewer action

Clipstream Site License

This will be the next big product launch, it's meant to be for big customers who buy a license for all the streaming content on a website. The target is to launch in the spring, hiring a sales team and possibly setting up a sales office in Silicon Valley. Contracts can quickly add up, depending on size of the client.

Quality of management

By most accounts (certainly ours), CEO and founder Steve Vestergaard is an accessible, no-nonsense kind of guy who has a vested interest in the success of the company (as a large shareholder) and has methodically and patiently build out the company to reach the inflection point it is today. It is difficult to put a price on that, but we think it should be substantial.

Most steps forward seem to be well thought out. We'll give a few examples. While many microcaps fall prey to their own ambitions and get all kinds of financing deals (often of dubious quality giving the financier incentives to short), Destiny has been built on a shoe-string. The company has incurred no debt, is cash flow positive, and most important of all, the cash flow generated by one product has been used to finance the R&D in another one, all of which has been expensed.

And this, all the while being engaged in litigation battles (which have been settled in their favor). The company was also wise to listen to the wishes of their main customers, and invest heavily into improving PlayMPE. As a result, revenues stagnated for a considerable amount of time, but the company is now in a much better situation as a result. Not only are the investments now more or less complete, more importantly, as a result the big three music companies want to go global with PlayMPE, as the product is now ready for that.

In terms of defensibility of the technology, not only is PlayMPE protected by three patents, it has cemented and solidified its monopoly position by working together with their main customers. This is smart work, and the fact that they have not taken shortcuts, but patiently build their capabilities and relationships, is impressive and will pay significant dividends. In the same careful, methodical, patient way their other product has been built, Clipstream G2.

Despite impatient investors, it hasn't been promoted when it wasn't ready and the company took the unprecedented step to hire two patent lawyer bureaus, one to investigate the opportunities to reverse engineer the product in order to protect it better. Seven patents have been filed in 2011 already (they're pending). Defensibility comes not only from these patents and the inherent complexity of working in Javascript, it comes also from the state of the market right now, where video on the web is fragmented into different standards.

Competition

Flash, the dominant system, isn't supported by Apple and as a result Adobe (the company behind Flash) had to lay off 700 people and Flash doesn't support mobile. This leaves video providers with the choice of either ignoring the mobile market (including tablets), or having to transcode their videos into different formats.

The dominant HTML5 compatible formats for mobile is H.264, but that's proprietary so web browsers have to pay license fees and it's not compatible with its successor, H.265. Companies like Netflix use Microsoft's Limelight, but the latter is being discontinued, and alternatives do not have much (if any) safety features (in terms of protecting video streams from being pirated).

Risks

There are many solutions out there, but none with the reach and the advantages of Clipstream G2. There are codecs (H.264, H.265, etc.) but these get replaced and don't reach all the audience. Clipstream has clear advantages in market reach, cost, durability, interactivity, and especially DRM.

There are partial alternatives to most of these but Clipstream is the only product that addresses all issues and works in a simple browser. However, Destiny is a small company and it's quite a tall order to become the de-facto standard in something as big as media streaming in a fractured market with big players.

On the other hand, they don't have to become the market standard. Destiny is still so small that even a few percentage points will materially improve the bottom line. We should also not forget that on-line video itself is a rapidly evolving market, growing at a fast rate.

Where can this go?

Consider the following stylized facts:

• PlayMPE is a de-facto monopoly and has a $60M market in front of it, of which $40M is addressable, according to the CEO


• Since most of the investments are done and expensed, and since the process is completely automatic, margins are near 100%


• Clipstream has a much bigger market ($3B), but the process is similarly automatic. There are fixed costs (sales, marketing, support) and variable cost (Amazon Cloud servers), but the worst case scenario margins is 60%


• The 60% margins can get higher if customers embed the videos in their own websites or newsletters, rather than on Amazon (Destiny won't incur Amazon server cost). Let alone if/when Destiny puts up its own servers (they already have five server locations around the world).


• You might also remember that since Clipstream files are streamed as normal web content, apart from not needing special streaming servers (in different formats), the content gets cached locally at ISPs around the world for local re-use. Not only does this save some 90% of bandwidth use (and the need for content distribution providers) it again side-steps Amazon cloud, reducing costs for Destiny. Vestergaard (Q4CC): "Every time the video recycles, our wholesale cost drops down near to zero"


• The online-video market itself is a rapidly expanding market

We think the advantages of Clipstream are so compelling that it's reasonable to assume it will catch at least some market share of the online video market. Even just a 1% share would give it $30+M in revenues and (pricing in $2M of profits from PlayMPE) $16-20M in profits.

Given that they have a clean balance sheet, no debt, cash flow positive, a multiple of 20 isn't at all unreasonable, which would make it a $400M company, 3 times the present size. We actually think that's only the beginning, the company could easily grab a bigger share (of a market that is itself growing at 50% annually..)

Early new year we'll have the first indication of how this is running, if you're not sure, you can wait until the first indications are in, but these are exciting times at Destiny Media.

Source: Our 2014 Double: Destiny Media

Disclosure: I am long OTCQX:OTCQX:DSNY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

This entry passed through the Full-Text RSS service — if this is your content and you're reading it on someone else's site, please read the FAQ at fivefilters.org/content-only/faq.php#publishers.