Destiny's Shares Can Still Double

| About: Destiny Media (DSNY)


When Destiny's streaming media product Clipstream was launched, it wasn't ready and the share price took a hit.

Problems with ISP throttling video streams for some users and extensive tailoring the product to different categories of users is what caused the holdup.

But as these issues are getting solved one by one, we still think there is a bright future for this company.

From the levels here, we think the shares can double and recoup their losses by year-end.

We haven't written about Destiny Media (OTCQX:DSNY) after we realized that their Clipstream video streaming product wasn't ready and it would take much longer to build the business, and the stock price took a big hit.

But we now think things are getting interesting enough for an update. We're not quite there yet, but we're getting a lot closer.

As a quick recap, Destiny has two products, PlayMPE and Clipstream. The first is a secure way to deliver digital content to end users and is presently used by music studios like Universal and Sony, it is the de-facto standard. Clipstream is a streaming video format which plays everywhere.

PlayMPE is used by music studios to send pre-release music to radio stations and clients, because of its killer security and reporting features (for a more extensive treatment of the advantages, see our previous articles).

PlayMPE is responsible for nearly all of the revenues at present, but the last quarters these have been stagnant. The reason for that was that the main customer, Universal, signed a new worldwide contract, replacing a host of local contracts.

This new contract, signed May 2013, had a threshold. The reason revenues were stagnant to date is that usage has only sporadically exceeded this threshold. But, two of the last three months' usage exceeded the threshold, and more importantly, underlying chargeable growth year on year was a whopping 83% (Q3CC).

This growth wasn't reflected at all in revenues or profits, as usage was below the contractual threshold. Since usage is now peeping above the threshold, future growth will be reflected in revenues, cash flow and profit figures. There are a few things one must realize:

  • PlayMPE is almost completely automated, that is, it's essentially a fixed cost business, margins are near 100%.
  • Underlying chargeable usage growth is very strong.
  • Usage will receive a further significant impetus with the imminent launch of the web encoder, which will solve usability issues which a critical article highlighted, although we would say that too much was made of this. Soon after the appearance of that article, Sony Australia signed on as a customer.
  • Universal is the 'anchor' client, wherever they move the usage, the other big studios like Warner and Sony usually follow and then the independent studios have little choice. This is what has happened in Australia, independent labels have little choice but to send their music in PlayMPE format to radio stations if they want it to be played.

Much of the world in terms of geographical areas and users is still to be won (the latter especially through the upcoming web-based encoder), and this is mostly up to the studios. But PlayMPE is the de-facto standard. The upshot here is that we've seen the lows for revenues and profits, and we can look forward to significant growth here.

Clipstream is a playerless video streaming format that plays everywhere (unlike other formats), doesn't need a browser plugin (it works in javascript), streaming servers (it is send as normal web content) and it saves up to 90% of bandwidth use as the streams are cashed as normal web content by local ISPs and the cashed files can be locally used by others.

So Clipstream saves big on transcoding and content distribution cost, reaches near 100% of the customer target, and, because browsers have to be backward compatible, files encoded in Clipstream will be playable for a long time to come.

In addition to that, similar security (undetectable watermark, locking) features as in PlayMPE are feasible and, especially interesting for the ad market, streaming videos can be enriched with interactivity (like clickable items), and it plays well in databases, ideal for sales catalogs, product how-to videos, online dating agencies, and the like.

A critical article made a lot about processor requirements. These are indeed somewhat higher as the video streams are rendered by javascript running on the CPU, not a dedicated decoder chip. In our view this isn't relevant. There will be a slight disadvantage in battery use, but this is (marginally) relevant for viewers of feature length movies, it's irrelevant for shorter streams like the ad market.

More importantly, viewers aren't the ones buying Clipstream, so this mild disadvantage isn't likely to influence buying decisions. Companies that are actually buying Clipstream will focus on the market reach, the longevity, the substantial savings in transcoding and streaming server cost, the interactivity possibilities and the fact that they won't need to hire content distribution networks like Akamai, as the streams are cached locally for re-use.

Clipstream offers big savings for companies using it, and there are still advantages for end users (viewers). They don't have to worry about the latest browser update or video player.

Despite the launch a couple of quarters ago, the product was simply not ready for prime-time, basically for two reasons:

  • Technical issues
  • Tailoring to different verticals

Clipstream's technical issues
Technical problems conspired to make the experience sub-optimal for some users, more especially where ISPs throttle bandwidth. This isn't actually a Clipstream problem, but a networking problem, and they have to work a way around it. The company has identified four core issues, two of which have already been implemented, and they're well on the way of solving the other two.

Solutions could also vary a bit depending on which 'vertical' (user group) is targeted. As an illustration, for movie streaming, the 2 second buffering rule they were using until now is probably not a problem, but for the ad market this is a problem. For movie streaming, video quality is paramount, for the ad market this is much less important.

The four verticals
While they have identified over two dozen verticals, they're initially focused on four of these:

  • Licensing the engine
  • The cloud product
  • The market research vertical
  • The ad market

The first is really for larger sized customers (businesses) that want to host their own videos. The cloud uploader has already launched, it's where smaller customers can drag and drop their videos which will automatically be converted to Clipstream and hosted at Amazon (Google is to follow). One has to realize that:

  • The margins on this are high (higher still where cached streams at local ISPs are re-used, as that bypasses the Amazon hosting).
  • Revenues are cumulative, pricing is per minute, customers chose plans. The more a video is viewed, the more Destiny earns.
  • Clients are sticky, once converted into Clipstream, clients have little need for going to another provider.

So the business model is very interesting, and the engine driving it is crucial for other verticals.

The third vertical, the market research companies is the one generating revenues already. It's interesting, as they do video questionnaires for commercial clients which also sort of markets Clipstream to these clients. From the Q3CC:

Our customers in turn resell to some of the largest companies in the world, doing test marketing of movie trailers, commercials, product launches, etc. So we're well set to become a standard in this vertical.

The prosumer approach
Destiny is working closely with customers in end markets from the various verticals in order to tailor the product to their needs. For instance, for the licensing vertical:

We've almost finished a new development module that lets us easily integrate into any third-party hosting system while keeping the auditing and logic on our servers. We expect to lay up Google hosting as a second supplier to Amazon in the next few weeks. [Q3CC]

For the cloud product, they've also been adding features, and they're getting to the end of the wish list, with things like:

One feature we've had demand for in this product is a corporate version that isn't credit card driven, but where a company can give individual accounts to individual employees. This will create a global build basically segmented into different billing units in the company. We think we'll be able to do some really large corporate offerings when this is completed. [Q3CC]

The market research companies have been clamoring for an inclusion of security features, a strength of PlayMPE. This is now in final testing, and the company expects uptake in this vertical to increase meaningfully when it becomes available. Work here also greatly benefits future verticals, as security issues are paramount for movies, for instance, so they've been working heavily on their movie security pack.

For what could become their biggest vertical, the ad market, they really don't have to start from scratch:

So with an old streaming product we had 10 years ago, we've signed up 150 ad agencies to sell into, speaking of selling to their customers. We have more than half the Fortune 100 companies using us. This is a really lucrative model, because their sales team sells to the end customer for us, but it involves integrating it into their existing workflow. [Q3CC]

For instance, ads enter real-time bidding networks, and integration with companies that do auditing and reporting is necessary. The engine driving this is close to being finished.

Careful expansion
When these technical and tailoring issues are solved, marketing efforts can step up, and we're close to this. Destiny is a company that is managed meticulously, in fact, some argue that it is all done too conservatively, that they should have done a big financing which would have given them the means to speed things up.

We're not sure of that, it would probably depend on the conditions of the available finance, and we think we're now at a point where this is mostly sunk cost, so we think, having come this far, investors should simply sit it out.

One might also appreciate that they already have lots of good contacts, the ad agencies from their legacy product, the customers with which they've been working with, the market research companies which, in turn, service some of the biggest companies in the world. Destiny has also purposely targeted to work with the web developer community, as these are the most technically adroit to give feedback, and they each leverage into hundreds of customers.

The bad news was that the company needed to solve technical issues and tailor Clipstream to the different needs of different verticals. This is what caused the big delays, not a lack of marketing effort, and the share price took a heavy hit. The good news is, this is largely in the rear-view mirror.

From here on, revenues are likely to increase for PlayMPE as they've crossed the threshold in the Universal contract. This is high margin business and it should take considerable risk out of the stock price. Meaningful revenue for Clipstream is still likely to be at least a quarter away, but once it starts, it's cumulative, sticky, recurrent, and high margin business.

What's more, compared to the puny market cap of Destiny (less than $50M at the point of writing), the online video market is huge, and growing fast. Destiny really only need to capture a sliver of it for it to show really meaningful improvements in the bottom line.

Considering the close cooperation they embarked upon with relevant customers to solve technical problems and tailor the product to customer needs and considering the inherent advantages of Clipstream, we think there is every chance of that to happen.

The company has been very prudent financially (it has no debt and paid for the research and development of Clipstream out of the cash flow from PlayMPE), the only real risk we see is no uptake whatsoever for Clipstream, but we think the chances of that are small. So does the CEO, already a big holder, he's been a heavy buyer of the shares of his own company.

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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