A Clockwork Orange may have taken a futuristic look at the world, but not without the help of some futuristic audio enhancements. Dolby Laboratories Inc. (NYSE: DLB) debuted its now-ubiquitous audio compression technology with the release of that movie in 1971. By encoding the soundtrack with its unique algorithm, the movie theater experience was changed forever and the company went on to become a $3.5 billion media industry giant.
Fast-forwarding to today, The Guitammer Company Inc. (OTCBB: GTMM) has developed an innovative technology of its own that it hopes will take the same track. By allowing the viewers to actually feel the impact of punches and explosions, the company's ButtKicker® hardware and recently patented broadcast technology could represent the next big improvement to both cinema and home viewing. Considering the industry-wide success of Dolby Digital's audio improvements and 3D technology's visual improvements, Guitammer's approach to adding and improving another sensory layer of experience makes it worth a look for investors.
Proving the Concept in Theaters
The Guitammer Company was originally founded to let musicians feel the low end of music without turning stage monitors up to levels that interfered with the playing ability of other musicians in a band. Since then, the company has refined its business model to focus on the entertainment industry, where its technology is already installed in over 10,000 theater seats across 11 different countries around the world.
In addition to the cinema market, the company sells a range of "all-in-one" products for the home entertainment and gaming markets. Its wireless ButtKicker® Kit, ButtKicker® LFE Kit and ButtKicker® Gamer2 retail between $129 and $699, enabling movie enthusiasts and avid gamers alike to experience their content in a compelling and immersive way. On Amazon.com, these systems have regularly achieved 4.5 to 5 star ratings across the board.
In FY2012, revenues from these products increased 64% to $2.1 million from organic growth due to word of mouth and customer referrals that increased demand. The company's claim to fame in these markets is its ability to retrofit theaters for a fraction of the cost of its competitors, while providing an at-home experience that's high quality and affordably priced. But in the end, these hardware products represent only a fraction of the company's potential.
Catalysts for Licensing Deals
There's little question that television providers, like DIRECTV (NASDAQ: DTV) and Dish Network (NASDAQ: DISH), are looking for ways to differentiate themselves from the competition in the fight for subscribers. The Guitammer Company's true potential lies in licensing its new tactile broadcast technology to these broadcasters in the same way that Dolby Digital did for audio. By encoding these effects - the actual feeling of being in a race car, of being smashed into hockey boards, football players hitting each other and more - into television transmissions, the company's ButtKicker Live!® aims to capitalize on an entirely new potential market.
In March of 2011, the company was issued a U.S. patent for the technology that covers the "capture and remote reproduction of haptic events in synchronous association with the video and audio capture and reproduction of these events." And in late-2011, it began marketing the technology to potential customers in the sports broadcast and distribution business, with live-arena testing done with large national sporting leagues.
Then in 2012, the company engaged Global Inventures Inc. to create a framework for its Technology Working Group that would bring together a team of technology, broadcast, sports, and entertainment industry experts to advance the development and rollout of this new technology. If successful, investors could see higher margin recurring revenues coming from licensing deals for encoding transmissions and less dependence on hardware sales for growth. In fact, the company's patent is not hardware dependent, meaning that any other entrant in the "shaking" or tactile electronics business will have to license this new data stream from Guitammer. Another possibility is that Guitammer could choose to license the ButtKicker® brand of hardware to a larger electronics manufacturer and exit the hardware business entirely.
Analyzing Market Potential
Dolby Laboratories generates revenues from both licensing and products, but its licensing revenues turned out to be the real value driver. Last year, these licensing revenues hit nearly $800 billion with increases still being seen in the broadcast arena. Just like Dolby, The Guitammer Company aims to transition from a hardware business to a licensing model with its breakthrough ButtKicker Live!® broadcast technology targeting broadcasters.
With over 65 million cable TV subscribers and 20 million satellite TV subscribers, the market for ButtKicker® technology is potentially enormous. There are also relatively low barriers to entry given that all digital television, over-the-air, cable, satellite, and IPTV broadcasts are in 5.1 surround sound, which provides an ideal environment for ButtKicker® encoding. And in the sporting segment alone, ESPN alone reaches nearly 100 million households.
Capturing just a fraction of this market could generate significant value for The Guitammer Company and its shareholders. With movie theater venues driving awareness, home purchasing on the rise, and increasing competition for subscribers among broadcasters, the company is well positioned to not only build market share, but could become a takeover target of its own as a way for these broadcast companies to differentiate themselves from others.
The Guitammer Company represents an attractive investment opportunity with its $10.5 million market capitalization. With its cinema hardware products gaining traction across 10,000 seats worldwide, consumers have been going home and purchasing their own hardware already. The company hopes to leverage this audience to build a platform of awareness for the ramp up of its licensing business, targeting broadcasters that could generate significant long-term value.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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