Destiny Media (OTCQX:DSNY) is a small media solution company which we have featured before so here just a quick re-introduction. The company offers two products, PlayMPE and Clipstream. The first offers music labels a way to securely send their pre-release media files (music, clips) to clients, roughly a $40M market.
PlayMPE is the de-facto standard, having all three big music studios and a thousand independent labels as long-term clients.
Their second product, Clipstream, offers a solution for streaming media, a much larger (and fast growing) market. The product has a number of inherent advantages (see below), but what was lacking so far were similar security (or DRM Digital Rights Management) features which have made PlayMPE the leading product.
This is just one reason why we have claimed that Clipstream hasn't really launched, but as we also argued, step by step, the remaining problems (like working around ISP throttling) and the needed customization of the product to the specific needs of up to two dozen verticals (customer groups) will get done, and then we'll have a real test whether there is demand for Clipstream. We think there will be, as the advantages are simply too compelling.
So it's encouraging to see that the company provided shareholders with an update announcing that the security features for Clipstream are finally ready. What are these security features? Well, below we discuss the security features of their other product, PlayMPE, and they are comparable, but Clipstream has a few additional features. From the update:
Clipstream provides content producers the extra assurance that their content is not easily scraped. Clipstream's new enhanced security provides resistance to copying and pasting, printing and blacklists programs that are able to access video or images while the video is playing. Optional dynamic watermarking also can identify viewers. This is combined with the Clipstream core engine's built-in resistance to re-hosting, making Clipstream the most robust secure streaming video solution.
It has immediate relevance because nearly all of Clipstream's revenues come from the market research vertical, a $39B market. So now a crucial barrier for increased Clipstream sales in this (but also other) big vertical has been removed, this is good news. Sales could ramp up pretty quickly, as Clipstream has two crucial advantages that no other product combines:
- Reach, it plays nearly everywhere, in every HTML5 equipped browser (it costs market research companies money if a respondent cannot see the video, so this is pretty important to them).
- Top security features.
You wouldn't realize any of this by reading yet another critical article by Keubiko. He already declared Clipstream a failure before it has properly launched, and he isn't changing track now that the company is addressing the technical problems and customization required for the different verticals, quite the contrary.
While Keubiko rubbishes the importance of this market vertical by pointing out the limited sales ($28K), this is a rather one-sided picture because:
- The market itself is large (something he doesn't dispute).
- Destiny already has many big market research companies as clients (see here).
- He fails to recognize that including these top security features is a must for this vertical and several others.
So yes, present sales are small, but the market is large and Destiny now has a good shot at that because the included DRM features are crucial and Destiny already has many market research companies as clients. Rather than see the opportunity, Keubiko focuses on some semantic trickery.
One of the advantages of Clipstream is that users don't need media players nor browser plug-ins. It simply plays in any HTML5 equipped browser. This advantage is rubbished by Keubiko because, well:
The Security Pack IS a plug-in! So one of the major benefits touted by DSNY, that Clipstream doesn't need a plug-in, actually needs a plug-in for the security features. Putting in a quote from a customer talking about not needing a plug-in strikes me as pretty odd.
There are two rather essential differences in play here which makes his criticism rather moot, almost a wordplay:
- The meaning of the word 'customer.' When Destiny touts the advantages of Clipstream not needing a plugin (or a media player), it is talking about people actually watching video streams online, not the customers of Destiny Media, the ones buying Clipstream, like market research companies.
- The DRM plug-in adds essential functionality which the customers themselves requested. It's rather stunning that Keubiko manages to turn even this positive into a negative, but whether the general reader should do the same, we don't think so.
It might be pretty odd for Keubiko, but there is a simple difference between adding a one-off new functionality for existing customers in a specific market vertical where that is a crucial feature, and a general reliance on plug-ins enabling the product to work at all for the masses (the customer's customers, so to speak) watching video streams online.
It's important to stress that viewers aren't affected at all by this plugin, they don't need to worry about any plugin whatsoever or install anything. Clipstream viewers still don't need a media player or an up-to-date browser plugin to view video streams in Clipstream format.
One might also take note of the fact that even without the security plug-in, Clipstream still works and is used in the market research segment. The plug-in simply adds new functionality which the clients themselves requested as security is crucial here (unlike, for instance the ad market, where advertisers actually hope ads will get copied and go 'viral').
Instead of derision and false equivalents, this is a very positive development, as it enables Clipstream to grow a lot in this substantial market vertical (and in others where top DRM features are a crucial selling point).
EMI, Warner and Sony actually worked with Destiny on designing and testing PlayMPE, in essence it's build to order and deeply integrated into their value chain.
One cannot have it both ways, apart from the fact that PlayMPE isn't such a run of the mill product besieged by competitors when it has the biggest companies as long-standing clients which helped design the product, how "vulnerable" is PlayMPE really?
Keubiko's argument rests on the fact that the contract with Universal is up for renewal and that there are competing products. This isn't terribly convincing:
- Universal renewed its contract (or contracts, as it happens) into a single world-wide contract only a year ago
- The companies have a long-standing relationship
- Universal actually made the contract conditional upon certain improvements in PlayMPE, working with Destiny
- Keubiko completely ignores why the big three studios actually chose PlayMPE
- There is something like switching cost and these have only become larger with the rationalization of a host of local contracts into one world-wide single contract.
Standards and network effects
Basically, PlayMPE has become the world-wide standard. Keubiko might have missed it, but here is the description right from the Seeking Alpha DSNY page:
Universal, EMI, Warner, Sony and one thousand other labels use Destiny's secure distribution service to deliver most of their pre-release music to radio, online retail, DJs, sports stadiums, journalists and VIP. Destiny's instant play streaming includes internet radio, internet TV, online surveys and new cloud and mobile offerings. Patents include watermarking, peer to peer locking and pending cross platform streaming video for mobile.
Not only the big three, but a thousand other labels and a network of 100,000 users. Switching to another standard brings costs. PlayMPE comes with real-time reporting features, which are essential early indications of success or failure of music and clips.
Switching to another standard would create a disruption in real-time reporting provided that a new standard can match these reporting (and lossless quality and security) features. Switching also involves changing systems and, for employees, learning a new system.
What's more, PlayMPE isn't just for internal use at Universal (or the other music studios), they use it to send their crown-jewels (pre-release music and clips) to clients like radio stations. There are some mild network effects at work here.
PlayMPE is integrated into Clear Channel, Shazam, BBC, Sirius XM, Mediabase, etc., and is compatible with all of the scheduling and reporting systems and there is a network of 100,000 users around the world.
As you might realize, the value of a network has a habit of increasing (steeply, according to Metcalf's law) with the number of users. By signing a world-wide contract with Destiny, Universal is banking on PlayMPE as the standard, enjoying network effects.
For instance, reporting becomes comparable, and stats on early music use can be combined. Destiny itself explained this in an earlier 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 world is simply less complex with everybody using the same standard, and PlayMPE is the de-facto standard.
Besides network effects and the advantage of a single standard, there are other key advantages upon which the studios chose PlayMPE and they have everything to do with why PlayMPE became the de-facto standard:
- It's a lossless codec, the quality of the music is way above MP3
- It has patented DRM features.
- It's essentially been built to order for the big studios
The latter is what probably made the studios choose PlayMPE in the first place. While sending pre-release music through the internet is much cheaper, it's also much riskier, especially for pre-release music of which the studios have invested, but not yet reaped any revenues. You don't want that to fall into the wrong hands.
You wouldn't realize from any of Keubiko's articles on Destiny, but PlayMPE has certain patented killer DRM (digital rights management) features:
- An undetectable watermark in the media file without losing quality, even when the file is 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.
- Locking the media file to a single device, preventing it to play on unauthorized machines and devices.
This isn't just garden variety technology:
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. [10-K filing]
Destiny's watermark technology is patented and integrated with the IFPI, the global anti piracy police. It's the only watermark that survives compression, analog duplication, conversion, filtering, etc., and still be inaudible. Pirates have been stopped in the middle of downloads with the police visiting them the next day, per the company.
The watermark identifies the violator by name with details of time, IP address, etc., so the person can be arrested. Every stream and every download is individually watermarked. Other systems have either no watermark or a useless generic one saying "Copyright UMG."
The support on offer is also top notch. Destiny has six server facilities in Europe, North America and Australia with global 24/7 telephone support. The servers operate on code that automatically mirrors and load balances content in real time globally, while creating automated streaming alerts and other marketing materials such as automated plaympe.com integration into real-time charts and social media feeds.
The system is a permission based encoding system where the labels can set up administrators and assign different staff to work on different aspects of a release (the music, the video, the recipient list, the promo material, etc.) and it doesn't go out without automated approval from various authorities (their CFO, for instance).
Content can be reused and relocalized so the same song can come out in different countries in different languages. Destiny has 27 language version of their various player software.
Compare that with other sites who give you a user name and a password and you can download MP3 format. There is simply nothing like Destiny's PlayMPE and this is not surprising as the studios had a big input in designing the system.
While Keubiko focuses on contract renewal and cheaper alternatives, the fact is that the big studios have chosen PlayMPE, and for reasons you would never find out reading any of his articles.
PlayMPE "pricing pressure"
We're not entirely sure on what Keubiko based that statement on (see quote above), to be honest, but we assume it's on the effects of last year's contract renewal with Universal. Apparently, the author is not aware that this was a rationalization of a host of local contracts into a single world-wide contract, the end result of close cooperation between Destiny and Universal.
The contract is beneficial for both parties, which have a long-standing relationship (something you wouldn't notice from Keubiko's articles). Universal benefits as the contract replaces a host of local contracts, cutting unnecessary complexity, and it made specific requirements for improvements in PlayMPE.
Destiny benefits by riding Universal's (and the other studios') coattails. They take it to new markets (so much for not having growth opportunities), and because of the fact that the studios use the product, independents and clients (radio stations, journalists, etc.) are likely to follow, creating network economies.
And the expansion basically cost Destiny little, PlayMPE is fully automatic. Above the threshold in the Universal contract (which they have reached), nearly all revenue is profit. So much for that pricing pressure...
Keubiko argues that cheaper alternatives exist and they do. The one that Keubiko touts is Haulix, which has been around since 2009.
But is Keubiko actually aware of the difference between music promotion software and music distribution?
We'll give a clue. The first are actually not competitors of PlayMPE, but are actually often using it.
None of the competitors give the advantages of PlayMPE:
- Network of users
- Deep customization and integration with the studios
One might notice that cheaper alternatives have always existed, this isn't something recent. But these advantages are good reasons why the studios have chosen PlayMPE.
From the description we've given above of these advantages, one might appreciate that PlayMPE operates on a different level, deeply integrated into the studio's value chains and networks (like radio stations, does any alternative have the same reach?) which makes PlayMPE rather difficult to compete against, let alone unseat.
Examples of peculiar arguments from Keubiko abound, due to the length of the article already we will just provide a couple more.
We already strongly disagreed with Keubiko's claim that Clipstream's "battery drain" is a serious problem. When confronted with some of these arguments, he either simply repeats these claims or tries to blind the reader with science. You might want to read his lengthy comment where he argues we're out of our depths and then quotes Steve Jobs on the battery drain of Flash.
He argues that Clipstream is similar, which indeed it is, to a certain degree. However, in one respect it isn't. Clipstream only taxes the CPU when one clicks on play whilst Flash runs continuously. So on the crucial issue of battery drain, it isn't similar at all.
He touts the advantage of hardware decoding. Indeed, there is an ever so minor difference, but this comes at the cost of two big disadvantages:
- The chips he's talking about are H.264, these are mostly in desktops, rarely in laptops, which would make battery drain no problem (that is no worse than viewing YouTube) just where it matters.
- Chips can't be upgraded, so when H.264 shifts into H.265, you're stuck with your H.264 chip and can't use it for H.265 video's (or any other format).
If you still don't believe us that battery drain is not a serious issue, we propose, like we have done, to run Clipstream streams from the DSNY website and compare the effects on battery life with running YouTube videos. Do you notice the difference? We didn't either, and we did it with a 35W laptop GPU and running streams continuously.
Clipstream is a poor solution to a problem that doesn't exist. Every major industry player is behind standard video formats. Every one. [Keubiko, comment]
The reader, as a viewer, might argue that he is still able to watch video streams. Yes, but behind the scenes, companies offering those video streams have to incur the costs of transcoding, run the different versions each on their own streaming server, and use content delivery networks.
These are all costs that Clipstream eliminates, as it plays in every HTML5 enabled browser (only the old IE8 isn't HTML5 enabled but this is a dwindling problem), it doesn't need a single, let alone multiple streaming servers (a single webserver will do) and because Clipstream is treated as normal web traffic it's cached at the local ISP ready for re-use, eliminating the need for content delivery networks.
Transcoding cost isn't an issue
This really is a rather bizarre argument:
Transcoding is a red herring thanks to Moore's Law. Ditto for CDNs (content delivery networks) [Keubiko comment]
Well, tell that to the companies who have to fork out these transcoding costs. Keubiko is entitled to his opinion, but you might want to see this video of an industry expert who calls transcoding the biggest problem, with hundreds of formats. Here from the summary of a market report on the transcoding market:
Although business models remain uncertain and appetite for new investment in major markets remains low, continued digitization of workflows and skyrocketing demand for over the top content (both on-demand and live), continuing to drive double-digit growth for the market.
Content delivery networks aren't necessary
You might have noticed in the previous issue (transcoding) that Keubiko also argues that content delivery networks will be usurped by Moore's law. Well, tell that to the dozens of companies that inhabit this space, this is a multi-billion dollar industry, and still growing.
We also wonder why, if transcoding and CDNs are a red herring due to Moore's Law, as Keubiko has it, he isn't making the same argument for CPU usage, which he sees as a big problem. Or, the existence of the non-HTML5 compliant IE8 browser (based on inflated figures).
Turns out he has it exactly backwards, the problems he sweeps away are serious, while the ones he highlights are near irrelevant.
Applying Keubiko's logic, companies should be based on past sales entirely, which is why his articles on Destiny are full of valuation exercises based on these and he constantly stresses that both PlayMPE and Clipstream have stagnant and no sales.
Armed with such a backward looking perspective, one could, or perhaps even should sell or short every development stage company, or even any situation in which the market capitalization isn't supported by present sales.
There are a host of biotech companies out there without any sales but with market caps well in excess of Destiny's. We just happen to come across POET Technologies, no sales whatsoever and a $250M market cap, over 6x Destiny's.
And, as this article and the previous one might have made it clear, valuating a company should also assess its opportunities and its core capabilities.
We can sort of understand that the market has lost faith at the moment. It has taken time for PlayMPE to reach the threshold and Clipstream's development has taken considerably longer, and particular one-sided articles blowing every threat out of proportion and ignoring all advantages of the technologies.
But here are some further facts to ponder. The CEO has bought shares well in excess of his yearly income and the company hasn't increased the number of outstanding shares in years. It's debt free and cash flow positive.
While the market price at present reflect negative investor sentiment, reality is that PlayMPE has crossed the threshold in the contract beyond which additional revenues are almost entirely profits and the technical and customization issues with Clipstream are being solved as we speak and the company is now just worth $35M.
Disclosure: The author is long DSNY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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