summary recommendations - wikileaks growth... · crackle has to invest in the quantity and quality...
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Crackle Growth StrategySummary Recommendations
IBSG, Global Media & Entertainment Practice
19 July 2011
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Executive Summary
Crackle has significant opportunity in ad-based online movie services— Limited competition in ad supported— Access to content— Significant consumer appetite
Crackle content library is dwarfed by competitions’
Crackle’s advertising performance is below benchmarks
Crackle has been under-investing in its operations— High growth of devices, users and
content— Engineering staff is challenged with
workload— Viewers complain about bugs
There are significant differences in competitive intensity and attractiveness of geographies
Focus on the US on ad-supported movies for M 18 – 44
Significantly invest in the quantity and quality of movies
Exploit limited TV library as an “annuity” and to bring traffic
Invest in marketing and in improving advertising performance
Invest in operations: focus on fixing bugs before rollout of new platforms
Experiment with no-ad-for-fee Monitor countries to further prioritize In selected countries pursue
affiliate-based model
US NPV $41.6M
2016 US Revenue $333M
2016 WW NPV* $71.9M
2016 WW Revenue* $616M
*WW Revenue and WW NPV calculated only for the countries with positive NPV:
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In 2016 Crackle is expected to capture $333M in advertising
2016 Online Video Revenue
Paid Video$8B
Ad Supported
Video$6.7B
Crackle US$ 333M
• In 2010 Hulu captured approximately US$ 265M in advertising – over 17% of ad supported online video market
• In 2011 Hulu is expected to generate over US$ 440M in advertising – over 20% of total ad supported online video market in the US
• Average monthly revenue per cable network per sub $8, avg Crackle expected in 2016 per unique viewer $1.6
Source: SNL Kagan 2011, IBSG Analysis
5%
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Cable networks with comparable ad revenue have averaged C3 1M viewers
A&E Syfy Spike TVABC
FamilyBravo truTV AMC Hallmark Oxygen
Lifetime Movie
WE tv IF
2010 479.3 427.4 425.8 388.9 362.9 270.3 261.1 259.4 172.1 132.7 132.1 23.2
2011 498.2 448.8 446.3 418.5 387.8 335.5 284.1 280 189.1 144.6 143.6 27.2
Jan-10 749 446 521 546 294 599 473 442 239 411 146 51
Jan-11 740 470 440 553 368 528 525 392 235 376 167 51
0
100
200
300
400
500
600
700
800
0
100
200
300
400
500
600
2010
2011
Jan-10
Jan-11
Basic Cable NetworksRevenue and C3 Ratings
Revenue
Ratings
Source: SNL Kagan 2011
Rev
enue
in $
M
Rat
ing
in M
HH
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Crackle has to invest in the quantity and quality of internal and external content
FY12 FY13 FY14 FY15 FY160
20406080
100120140
Total Costs - Movies and TV
Total costs - TV (SPE + External)
Total costs - Movies (SPE + External)$M
FY12 FY14 FY160
100
200
300
400
500
600
700
800
Total Acquisition VolumeMovies
External (Total Current, AAA, AA, A, B, C)
SPE (Total Current, AAA, AA, A, B, C)
FY12 FY13 FY14 FY15 FY160%
10%20%30%40%50%60%70%80%90%
100%
Content Acquisition - Movies (SPE + External)
C
B
A
AA
AAA
Current
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Crackle needs to improve its KPIs
Source: comScore, Crackle
Crackle has relatively long visits, but few viewing sessions resulting in low minutes per viewer
Hulu has visits of a similar length, but over double the viewing sessions and hence much higher minutes per viewer
The much smaller Crackle library size most likely results in the low number of viewing sessions compared to Hulu and other sites
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0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
US UK Germany Brazil China
Simplicity Control Quality Content
Most important attribute to computer-based video experienceRanked #1 by consumers, for all viewing devices
% o
f re
sp
on
de
nts
ra
nk
ing
fa
cto
r #
1
Source: Cisco IBSG Connected Life Market Watch, 2010 Base: U.S. Broadband Consumers
Content is the most important element of the online video experience
7
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Crackle has to significantly grow its lineup as most online video services dwarf it
1 1 1 1 2 2 20
10,000
20,000
30,000
40,000
50,000
60,000
70,000
Movies
TV
Ep
iso
de
s
Online Video Content
Source: SNL Kagan, April 2011, IBSG analysis
TV shows – sub-brand and exploit● Significant competition in current TV
shows● Crackle is at disadvantage in accessing
TV titles● Crackle can greatly benefit from
syndicating its TV library (direct revenue and brand awareness/traffic)
Movies – grow rapidly to lead the ad supported services
Limited competition in ad supported market Focus on overcoming content gap Focusing on segment allows faster market
lead
Recommendations
Ad Supported
CBS.com
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Crackle has multiple levers to improve its advertising performance
Component
Lever
CPM/CPx
• Reach• Content• Campaigns• Audience segment• Targeting• Functionality• Load/clutter
Unique visitors
• Content• Site function/feature• Marketing
Visits• Content• Site function/feature• Marketing
Time/visit• Content• Site function/feature
Hulu* Ad Network Premium 80%05
101520253035 33
25
10
23.5 22
CPM Benchmark ($)**
Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-110
4
8
12
16
0%
20%
40%
60%
80%
100%
Remnant
Source:*SNL Kagan ** Ad buyers and sellers
Source: Crackle
Crackle can accelerate its growth by investing in advertising capabilities to lift its average CPM from $12.93 to $22
Target Avg CPM
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Performance-based models dominate and will demand new capabilities
2004 2005 2006 2007 2008 2009 20100%
20%
40%
60%
80%U.S. Market Advertising Price Models
CPMPerformanceHybrid
59%62%
33%37%
5%4%
• Revenue share from CPM-based model is continuing its decline• Maximizing benefits from performance-based models requires
sophisticated targeting/analytics
Per
cen
tag
e o
f A
dve
rtis
ing
Rev
enu
e
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Crackle will have to be ready to support various targeting and pricing models
Source: comScore Media Placement Strategy, September 2010
Placement Strategy by Cost Structure
• Revenue share from the CPM-based model declined from 48% to 33% between 2006 and 2010 and is continuing its decline
• Maximizing benefits from performance-based models requires sophisticated targeting/analytics
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Crackle needs to address capability gaps
Video Platforms AdvertisingIT & Business
OperationsContent
Production
Ingest
Post Production
Encoding / Transcoding
Metadata Creation
DRM
Hosting
Bandwidth / CDNs
Digital Asset Management
Sony Content
3rd Party Content
Mobile Content
Current Mix (movies & TV)
Social Networking
Segment-Specific Content
Current Catalog Breadth
HD Offerings
Special Content
Hosting
Customer Profiling
Data Collection & Analysis
Ad Serving, Insertion & Targeting
Inventory Management
Ad Selling & Campaigns
Reporting
Supported Ad Models
CRM
Billing
ERP
Fulfillment
Assurance
Exclusive Content
Refresh Cycle
Brand Values & Perceptions
Online Specific Content
Content Syndication
Client Platforms
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Addressing functionality and quality challenges will require additional headcount
Ingest PostProduction
Encoding &Transcoding
RightsManagement
Hosting &Bandwidth
Website &Platforms
Fixed
Variable
OutsourcedFixed
Outsourced
Fixed
Existing Engineering Resources
• 6 Developers + 1 QC
• 2 Product Managers
• Total = 9 resources
Proposed Structure for Current Workload
PMO(1
FTE)Developer
(2 FTE)Prod. Mgr.
(1 FTE)QC
(1 FTE)
3 Rapid Development Teams
• Most activities will not vary with additional titles or user volume
• However, additional headcount is required to improve product quality, maintain existing platforms, and add new features/ functionality
• For comparison purposes, spend on engineering and technical staff is much lower than Netflix, which typically does not scale based on revenues
Rationale
Proposed Engineering Resources
• 3 RAD teams (4 FTE each)
• 2 PMO
• Total = 14 resources
Outsourced
Variable Fixed
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Financial Summary – U.S.
Grow to 66% of Hulu yearly visits by FY16 Grow to 705 titles by FY16 (235 SPE, 470 External); 10% price inflation
Ad load: 13 ads per hour. Viewing time per visit growing from 10 to 55 minutesCPM growing from $13 to $25 over 5 years
FY12 FY13 FY14 FY15 FY16Video ad revenues 8.0$ 27.0$ 64.4$ 139.8$ 303.4$
Other revenues 2.0$ 3.8$ 7.5$ 14.9$ 30.1$Total Revenue 10.0$ 30.8$ 71.9$ 154.7$ 333.5$
Content costs (6.1)$ (9.7)$ (20.6)$ (49.8)$ (123.4)$Other expenses (18.3)$ (29.3)$ (46.8)$ (77.5)$ (138.8)$
Total Costs (24.4)$ (39.0)$ (67.4)$ (127.3)$ (262.3)$
Free Cash Flow (14.4)$ (8.2)$ 4.5$ 27.4$ 71.2$
Project Breakeven (14.4)$ (22.6)$ (18.0)$ 9.4$ 80.6$Internal Cost of Capital 12%
NPV (5-Year) $42 ROI 60%
Breakeven 3 years
Scope (e.g.process) M Misc. Notesand Reference:Content costs M Hulu monthly visitson 2/11: 143MComplexity (e.g. technology) L Netflix viewing time per visit on 1/11: 94 minExternal Dependencies L
M
Dependencies None
Key Revenue Assumptions Key Cost Assumptions
Project IDProject Name Sony Crackle Acceleration Project - USA
Financial AnalysisYEAR
Risk rating(Difficultyof implementation)
Average
$(40.0)
$(20.0)
$-
$20.0
$40.0
$60.0
$80.0
$100.0
FY12 FY13 FY14 FY15 FY16
Free Cash Flow Project Breakeven
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US Sensitivity Analysis points to CPM and content costs risks
Low Expected High
Growth rate in minute per visit 20% 54% 60%CPM 14 22 25Content price inflation (SPE and external) 0% 10% 20%Sales and marketing growth rate 20% 41% 50%Year 1 Ratio of external to SPE content 0.05 0.1 0.15
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
-122 -99 -75 -52 -29 -6 17 40 64 87 110
Cumulative probability
NPV (Enhanced USA strategy)
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U.S. Revenues – Key Assumptions
Revenue Element
Assumptions
Visits (without sponsorship traffic)
• Grow from the current 291 M to 1,147M in 2016 (41% CAGR), or 96M monthly visits
• Compare to Hulu: 143M visits in 2/11. The model assumes that Crackle achieves 2/3 of that value by 2016
Time per Visit • Grow from the current 9.86 minutes to 55.4 minutes by 2016 due to the material increase in content quality and volume
• Compare to Netflix: average time per visit was 94 minutes in 1/11
Ad Load • Remains steady at 0.22 per minute, or 13 advertisements per hour• This could be achieved with one pre-roll plus either 3 ads every 15
minutes, or 2 ads every 10 minutes
CPM • Current CPM from all devices = $12.93• Grow to $22 by 2016 as content becomes more compelling and
additional advertising sales staff are employed • Assumes that 20% of the inventory is sold through ad networks at a
$10 CPM, and that 80% is sold directly at a market CPM of $25
Display Ad Revenue • $1M in 2012, then scaled by both the number of visits, and display ad CPM
• Display ad CPM grows from $3.4 in 2012 to $6.9 in 2016
Sponsorship Revenue
• $1M in 2012, growing at the same rate as the number of ad impressions
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U.S. Costs – Key Assumptions
Revenue Element
Assumptions
Content Costs (SPE and external content)
• Price ranges from $30,000 for a current movie title to $500 for a C title; and from $20,000 per hour for TV episodes to $800 per hour for TV episodes
• Assumes a 10% increase in overall content costs each year• Grows total volume of movies and TV to 705 titles and 2,203
episodes, respectively, by 2016• TV content cost is 3.4% of total content cost in 2016
Partner Revenue Share
• $432,000 in 2012, or 5% of video ad revenue, then dropping to 4% by 2016
• Partner’s revenue share shifts from 60/40 to 70/30 (30% to partners)
Hosting & Bandwidth • $1,727,000 in 2012, then scale directly with minutes on the site• Also experiences a 10% annual per gigabyte price decrease due to
technological innovation
Ad Serving Fees • $415,000 in 2012, then scales directly with the number of ad impressions
Website & Technology
• Consists of Video Operations, Product Development, Traffic & Music Fees, Sales and marketing
• The 2012 estimate was scaled by visits to account for new technology, enhanced reporting, and other enhancements. These grow by 41% each year, leading to a biennial doubling of costs
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U.S. G&A Costs – Key Assumptions
Cost Element AssumptionsDistribution • 5 FTE in 2012 growing to 8 in 2016. Stays relatively flat because
distribution deals would not grow with contentVideo Operations • 4 FTE in 2012 growing to 12 in 2016. Grows in approximate proportion to
content (e.g. ingest)Engineering • 9 FTE in 2012 growing to 14 in 2016. Immediate boost to headcount to
address quality issues. Add 1 FTE per year to broaden scope of applications
Executive • 2 FTE in 2012 growing to 3 in 2016 to handle increased management scope
Marketing • 6 FTE in 2012 growing to 15 in 2016. Immediate boost to headcount to handle increased Marketing workload, then grow incrementally each year
Product • 9 FTE in 2012 growing to 14 in 2016. Immediate boost to headcount for web development and product management, then grow incrementally each year
Programming • 6 FTE in 2012 growing to 12 in 2016. Grow in proportion to total contentAd Sales • 6 FTE in 2012 growing to 25 in 2016
Note: Headcount for video Operations, Engineering, Product, and Programming serve both the U.S. and international businesses.
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U.S. Cash Flow - Detail
UNIT FY12 FY13 FY14 FY15 FY16# Annual visits 290,810,772 409,886,701 577,719,684 814,273,878 1,147,688,000
(per minute) Ad load 0.22 0.22 0.22 0.22 0.22 minutes Minutes per visit 9.86 15 23 36 55
# Annual ad impressions 621,221,556 1,348,405,688 2,926,810,703 6,352,851,346 13,789,316,881 $/1000 CPM 13 20 22 22 22
$ Video ad revenue 8,032,395 26,968,114 64,389,835 139,762,730 303,364,971 $ Display ad revenue 1,000,000 1,676,142 2,809,452 4,709,041 7,893,023 $ Sponsorship revenue 1,000,000 2,170,571 4,711,380 10,226,386 22,197,100 $ Annual revenue 10,032,395$ 30,814,827$ 71,910,668$ 154,698,157$ 333,455,094$
$ SPE content cost 6,145,214 9,685,761 20,610,839 49,812,645 123,440,963$ Partner's revenue share 432,000 1,348,406 2,575,593 5,590,509 12,134,599$ Hosting bandwidth 1,727,000 3,373,719 6,590,608 12,874,846 25,151,194$ Ad serving fees 415,000 900,787 1,955,223 4,243,950 9,211,796$ Website/technology 2,169,404 3,068,000 4,338,807 6,136,000 8,677,614$ Sales and marketing 4,470,000 8,305,514 15,889,982 31,168,876 64,159,470$ General & admin 9,072,429 12,298,065 15,416,567 17,456,346 19,496,497
Total 24,431,046$ 38,980,252$ 67,377,618$ 127,283,173$ 262,272,134$
$ Net (14,398,652)$ (8,165,425)$ 4,533,049$ 27,414,984$ 71,182,960$ $ NPV 41,675,010$
Statistics% Price scalar for bandwidth costs 100% 90% 81% 73% 66%
Partner revenue share percentage 5% 5% 4% 4% 4%
Gross Margin -144% -26% 6% 18% 21%
Visits per unique visitor 2.47 2.91 3.42 4.02 4.73Display ad CPM 3.4 4.1 4.9 5.8 6.9Impressions per visit 2.14 3.29 5.07 7.80 12.01
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International strategy should be limited to relatively few countries
United States English-speaking Germany/Austria South Korea Russia India0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
Mobile
Display
$M
2016 Internet non-search advertising and mobile advertising
English-speaking countries include UK, Canada, Australia, New Zealand, Ireland, Sweden, Denmark, Norway, Netherlands
Spanish-speaking LatAm countries include Mexico, Argentina, Colombia, Chile, Venezuela
Twelve top countries/regions represent over 90% of the 2016 WW online non-search ad market and over 95% of consumer video entertainment spend
*Source: IDC, PWC, IBSG Analysis
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Crackle should focus on building US capabilities before further international rollout
Grow Existing MarketBuild Capabilities for InternationalRoll out Internationally
Monitor the markets for CPMs, content costs, and broadband growth
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Source: IBSG analysis
English
speakingJapan
South Korea
Germany /
Austria
France /
Belgium
China
India
Russia
Spanish-speaking
Brazil
LatAm
Italy
Deployment Ease
Attractiveness
High
High
LowLow
Financial modeling pointed to significant financial risks for most of the countries but also a high potential
Legend:
Increased Financial Risk
Decreased Financial Risk
Volatility of country environments requires close tracking of the changes in advertising, regulatory, and broadband market status
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Country deployment sequence will have to be re-evaluated on an ongoing basis
4 ?
COUNTRY DEPLOYMENT SEQUENCE
English Speaking
2011 2012 2014 2016
Phase 1
2013 2015
Spanish LatAm + Brazil
JapanPhase 2
South Korea
French Speaking (France + Belgium)Phase 3 Italy
Russia
India
ChinaTo be monitored for timing and sequencing
Rollout in these countries could generate over $283M revenue and $30M NPV in 2016. However, it requires careful monitoring of advertising, regulatory and b-band
status for sequencing
?
German Speaking (Germany + Austria)
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Net Present Value Results
(30)
(25)
(20)
(15)
(10)
(5)
0
5
10
15
All English, 12.9 UK, Aus, NZ, Can, Ire, 9.5 United Kingdom, 9.4 China, 6.1 Swe, Den, Nor, NL, 3.4 Denmark, 0.9
Netherlands, 0.8 Sweden, 0.8
Norway, 0.8 Austria, 0.6 New Zealand, 0.6 Australia, 0.6 Ireland, 0.5 Chile, 0.0 Venezuela, 0.0 Columbia, -0.2
Argentina, -0.4
Canada, -1.3
Mexico, -1.4
Chile, Venz, Mex, Arg, Col, -2.3
India, -5.4
Russia, -5.5
France, -8.6
Italy, -13
.3
Germany, -17.2
DE, Austria, -17.4
Brazil, -21.5
Japan, -23.3
South Korea, -26.9
NPV ($US m)
Country and Regional NPV (no rollout)
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• Only positive NPV countries
Aggregated positive NPV – World
UNIT World (+ve NPV + USA) FY12 FY13 FY14 FY15 FY16# Annual visits 366,916,169 552,910,243 1,192,981,362 1,852,137,683 2,851,078,680
per minute Ad load 2.4 2.4 2.6 2.6 2.6 minutes Minutes per visit 108.5 167.0 272.4 419.5 646.0
# Annual ad impressions 783,795,703 1,818,910,727 5,398,471,433 12,582,435,868 29,187,899,289 $/1000 CPM 233.7 226.7 230.6 222.2 220.8
$ Video ad revenue 12,129,765 37,949,885 110,762,486 248,850,226 561,306,373 $ Display ad revenue 1,261,701 2,261,006 5,284,039 9,554,742 17,184,955 $ Sponsorship revenue 1,299,803 2,974,103 7,614,969 16,859,133 37,584,368 $ Annual revenue 14,691,269 43,184,994 123,661,494 275,264,100 616,075,696
$ SPE content cost 8,008,764 14,943,082 43,898,710 107,081,468 264,751,264 $ Acquisition/editing - - - - - $ Partner's revenue share 636,869 1,897,494 4,430,499 9,954,009 22,452,255 $ Hosting bandwidth 2,480,262 4,845,227 13,060,815 25,514,486 49,842,911 $ Ad serving fees 596,010 1,293,682 3,672,053 7,970,454 17,300,438 $ Website/technology$ Video Operations 272,069 384,764 694,045 981,528 1,388,090 $ Product Development 802,956 1,135,551 1,645,439 2,327,002 3,290,878 $ Traffic & Music Fees 1,730,518 2,447,322 3,525,858 4,986,316 7,051,715 $ Sales and marketing 6,545,792 11,639,643 27,325,277 55,460,730 118,537,971 $ General & admin 9,713,293 13,135,808 17,615,829 20,242,013 22,805,249
Total cost 30,786,533 51,722,572 115,868,525 234,518,006 507,420,772
$ Net cash flow (16,095,264) (8,537,578) 7,792,969 40,746,094 108,654,924 % Discount factor 89% 80% 71% 64% 57%$ Present value (14,370,772) (6,806,105) 5,546,881 25,894,879 61,653,722 $ NPV 71,918,606 6% 2% 1% 1% 0%
years Cash +ve (year) 3Cumulative revenue 4 14,691,269 57,876,262 181,537,756 456,801,856 1,072,877,552 Cumul. Cash +ve (year) (16,095,264) (24,632,843) (16,839,874) 23,906,221 132,561,144
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Appendix
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• Positive NPV. No negative NPV countries• Dominated by UK value (United Kingdom, Australia, Canada, Ireland,
New Zealand, Sweden, Denmark, Norway, Netherlands)
English speaking
UNIT English speaking FY12 FY13 FY14 FY15 FY16# Annual visits 97,113,209 182,503,156 321,539,054 453,197,043 638,763,961
per minute Ad load 1.95 1.95 1.95 1.95 1.95 minutes Minutes per visit 88.73 136.65 210.44 324.08 499.08
# Annual ad impressions 207,450,426 600,381,259 1,628,962,921 3,535,780,184 7,674,663,033 $/1000 CPM 199.87 187.09 174.28 167.32 166.60
$ Video ad revenue 4,592,809 12,327,691 30,712,573 63,650,582 137,576,855 $ Display ad revenue 333,940 746,307 1,563,645 2,620,892 4,392,987 $ Sponsorship revenue 336,054 902,012 2,247,227 4,657,289 10,066,446 $ Annual revenue 5,262,802 13,976,011 34,523,445 70,928,763 152,036,288
$ SPE content cost 2,105,121 5,939,804 15,535,550 33,691,162 76,018,144 $ Acquisition/editing - - - - - $ Partner's revenue share 229,640 616,385 1,228,503 2,546,023 5,503,074 $ Hosting bandwidth 961,189 1,877,697 3,668,107 7,165,700 13,998,296 $ Ad serving fees 230,975 501,347 1,088,210 2,362,038 5,126,971 $ Website/technology - - - - - $ Video Operations 149,907 212,000 299,813 424,000 599,627 $ Product Development 9,646 13,641 19,292 27,282 38,583 $ Traffic & Music Fees 621,453 878,867 1,242,906 1,757,735 2,485,812 $ Sales and marketing 2,344,876 3,766,951 7,628,589 14,290,861 29,253,018 $ General & admin 879,721 1,149,977 1,330,846 1,617,213 1,988,188
Total cost 7,532,528 14,956,670 32,041,816 63,882,014 135,011,713
$ Net cash flow (2,269,726) (980,660) 2,481,629 7,046,749 17,024,575 % Discount factor 89% 80% 71% 64% 57%$ Present value (2,026,541) (781,776) 1,766,374 4,478,336 9,660,201 $ NPV 13,096,594
years Cash +ve 3Cumul. Cash 4 5,262,802 19,238,813 53,762,258 124,691,021 276,727,309
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• Negative NPV. Austria weakly positive• CF positive 2016• Sales and Marketing only divided between two countries cf 9 English.
German speaking
UNIT German Speaking FY12 FY13 FY14 FY15 FY16# Annual visits 53,727,558 100,969,261 177,890,406 250,729,748 353,394,025
per minute Ad load 0.4 0.4 0.4 0.4 0.4 minutes Minutes per visit 19.7 30.4 46.8 72.0 110.9
# Annual ad impressions 114,771,255 332,158,923 901,218,288 1,956,158,561 4,245,981,654 $/1000 CPM 35.8 32.7 30.0 28.4 28.4
$ Video ad revenue 1,755,366 4,506,692 10,894,434 21,954,142 47,653,031 $ Display ad revenue 184,751 412,892 865,082 1,450,000 2,430,405 $ Sponsorship revenue 128,439 329,753 797,142 1,606,376 3,486,754 $ Annual revenue 2,068,556 5,249,337 12,556,657 25,010,518 53,570,191
$ SPE content cost 827,423 2,230,968 5,650,496 11,879,996 26,785,095 $ Acquisition/editing - - - - - $ Partner's revenue share 87,768 225,335 435,777 878,166 1,906,121 $ Hosting bandwidth 531,775 1,038,829 2,029,368 3,964,399 7,744,510 $ Ad serving fees 127,786 277,369 602,049 1,306,789 2,836,480 $ Website/technology$ Video Operations 149,907 212,000 299,813 424,000 599,627 $ Product Development 39,527 55,900 79,055 111,800 158,109 $ Traffic & Music Fees 131,337 185,738 262,673 371,476 525,347 $ Sales and marketing 921,659 1,414,853 2,774,624 5,039,166 10,307,340 $ General & admin 3,310,040 4,326,905 5,007,442 6,084,928 7,480,758
Total cost 6,127,221 9,967,898 17,141,297 30,060,721 58,343,387
$ Net cash flow (4,058,665) (4,718,560) (4,584,640) (5,050,203) (4,773,196) % Discount factor 89% 80% 71% 64% 57%$ Present value (3,623,808) (3,761,607) (3,263,256) (3,209,495) (2,708,440) $ NPV (16,566,606) 13% 5% 2% 2% 1%
years Cash +ve (year) 6Cumul. Cash +ve (year) 6 2,068,556 7,317,894 19,874,551 44,885,069 98,455,260
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• Negative NPV• Low CPMs• Full Sales and Marketing
Japan
Japan 60% 80% 100% 100% 100%
UNIT FY12 FY13 FY14 FY15 FY16# Annual visits 72,678,453 136,583,346 240,636,277 339,167,662 478,043,895
per minute Ad load 0.22 0.22 0.22 0.22 0.22 minutes Minutes per visit 9.86 15.18 23.38 36.01 55.45
# Annual ad impressions 155,253,608 449,318,704 1,219,097,862 2,646,138,846 5,743,633,065 $/1000 CPM 17.5 16.5 15.4 14.8 14.8
$ Video ad revenue 2,722,675 7,396,485 18,782,691 39,277,278 85,254,132 $ Display ad revenue 249,917 558,528 1,170,215 1,961,446 3,287,663 $ Sponsorship revenue 199,217 541,198 1,374,322 2,873,903 6,238,012 $ Annual revenue 3,171,809 8,496,210 21,327,228 44,112,627 94,779,807
$ Content cost 1,268,723 3,610,889 9,597,253 20,953,498 47,389,904 $ Acquisition/editing - - - - - $ Partner's revenue share 136,134 369,824 751,308 1,571,091 3,410,165 $ Hosting bandwidth 719,343 1,405,248 2,745,171 5,362,731 10,476,170 $ Ad serving fees 172,859 375,203 814,404 1,767,723 3,836,969 $ Website/technology$ Video Operations 149,907 212,000 299,813 424,000 599,627 $ Product Development 39,527 55,900 79,055 111,800 158,109 $ Traffic & Music Fees 316,135 447,082 632,270 894,164 1,264,539 $ Sales and marketing 1,413,220 2,289,982 4,712,642 8,887,895 18,236,405 $ General & admin 5,735,424 7,497,383 8,676,573 10,543,570 12,962,175
Total 9,951,273 16,263,511 28,308,489 50,516,473 98,334,063
$ Net cash flow -6,779,464 -7,767,301 -6,981,261 -6,403,846 -3,554,255% Discount factor 89% 80% 71% 64% 57%$ Present value -6,053,093 -6,192,045 -4,969,124 -4,069,760 -2,016,780$ NPV (23,300,801)
years Cash positive (year) 6Cumul. Cash +ve (year) 6
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• Negative NPV • Low CPMs lead to increased losses with subscriber growth
India
India 60% 80% 100% 100% 100%
UNIT FY12 FY13 FY14 FY15 FY16# Annual visits 14,567,835 27,377,077 48,233,684 67,983,539 95,820,208
per minute Ad load 0.22 0.22 0.22 0.22 0.22 minutes Minutes per visit 9.86 9.86 15.18 23.38 36.01
# Annual ad impressions 31,119,387 58,482,120 158,674,516 344,414,351 747,575,911 $/1000 CPM 17.6 16.8 16.0 15.2 14.5
$ Video ad revenue 547,701 980,272 2,533,035 5,236,318 10,824,573 $ Display ad revenue 50,094 111,953 234,561 393,157 658,987 $ Sponsorship revenue 40,075 110,458 285,426 590,035 1,219,726 $ Annual revenue 637,870 1,202,683 3,053,021 6,219,509 12,703,286
$ Content cost 255,148 511,140 1,373,860 2,954,267 6,351,643 $ Acquisition/editing - - - - - $ Partner's revenue share 27,385 49,014 101,321 209,453 432,983 $ Hosting bandwidth 144,187 281,671 550,248 1,074,918 2,099,867 $ Ad serving fees 34,648 75,207 163,241 354,326 769,091 $ Website/technology$ Video Operations 149,907 212,000 299,813 424,000 599,627 $ Product Development 39,527 55,900 79,055 111,800 158,109 $ Traffic & Music Fees 139,469 197,239 278,938 394,479 557,877 $ Sales and marketing 284,207 324,159 674,621 1,253,118 2,444,215 $ General & admin 641,614 838,721 970,636 1,179,494 1,450,060
Total 1,716,092 2,545,051 4,491,733 7,955,855 14,863,471
$ Net cash flow -1,078,222 -1,342,368 -1,438,712 -1,736,346 -2,160,186% Discount factor 89% 80% 71% 64% 57%$ Present value -962,698 -1,070,128 -1,024,047 -1,103,479 -1,225,747$ NPV (5,386,099)
years Cash positive (year) 6Cumul. Cash +ve (year) 6
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• More aggressive visits and minutes: 42M impression/ month cf 123M leads to revenue of $11M cf $28M
• Negative NPV: Content cost: $3.3M (60% of $5,577) cf $14.1M
Brazil
Brazil 60% 80% 100% 100% 100%
UNIT FY12 FY13 FY14 FY15 FY16# Annual visits 28,787,208 54,099,297 95,313,621 134,340,917 189,348,403
per minute Ad load 0.22 0.22 0.22 0.22 0.22 minutes Minutes per visit 9.86 9.86 15.18 23.38 36.01
# Annual ad impressions 61,494,401 115,565,352 313,553,547 680,590,335 1,477,269,856 $/1000 CPM 20.0 19.0 18.1 17.3 16.5
$ Video ad revenue 1,229,888 2,201,245 5,688,046 11,758,390 24,307,071 $ Display ad revenue 98,989 221,227 463,510 776,909 1,302,210 $ Sponsorship revenue 89,990 248,039 640,936 1,324,950 2,738,950 $ Annual revenue 1,418,868 2,670,511 6,792,493 13,860,249 28,348,232
$ Content cost 567,547 1,134,967 3,056,622 6,583,618 14,174,116 $ Acquisition/editing - - - - - $ Partner's revenue share 61,494 110,062 227,522 470,336 972,283 $ Hosting bandwidth 284,925 556,604 1,087,335 2,124,124 4,149,506 $ Ad serving fees 68,468 148,614 322,577 700,177 1,519,785 $ Website/technology$ Video Operations 149,907 212,000 299,813 424,000 599,627 $ Product Development 39,527 55,900 79,055 111,800 158,109 $ Traffic & Music Fees 34,250 48,437 68,500 96,874 137,001 $ Sales and marketing 632,186 719,782 1,500,926 2,792,589 5,454,430 $ General & admin 4,036,818 5,276,955 6,106,916 7,420,982 9,123,292
Total 5,875,123 8,263,322 12,749,266 20,724,501 36,288,148
$ Net cash flow -4,456,255 -5,592,811 -5,956,773 -6,864,252 -7,939,916% Discount factor 89% 80% 71% 64% 57%$ Present value -3,978,799 -4,458,555 -4,239,913 -4,362,356 -4,505,322$ NPV (21,544,945)
years Cash positive (year) 6Cumul. Cash +ve (year) 6
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• Materially different outcomes cf LatAm, $7.6M cf $59M revenue• Content costs of $2.2M ($5,577 * 40%) cf $29M• Negative NPV
Spanish LatAm
UNIT Chile, Venz, Mex, Arg, Col FY12 FY13 FY14 FY15 FY16# Annual visits 51,545,955 96,869,413 170,667,182 240,548,889 339,044,492
per minute Ad load 1.1 1.1 1.1 1.1 1.1 minutes Minutes per visit 49.3 49.3 75.9 116.9 180.0
# Annual ad impressions 110,110,978 206,929,636 561,444,416 1,218,655,142 2,645,177,889 $/1000 CPM 107.3 102.2 97.3 92.7 88.3
$ Video ad revenue 2,578,480 4,614,945 11,925,080 24,651,654 50,960,165 $ Display ad revenue 177,249 396,126 829,955 1,391,122 2,331,719 $ Sponsorship revenue 188,666 520,018 1,343,733 2,777,778 5,742,253 $ Annual revenue 2,944,395 5,531,089 14,098,768 28,820,555 59,034,137
$ SPE content cost 1,177,758 2,350,713 6,344,445 13,689,764 29,517,069 $ Acquisition/editing - - - - - $ Partner's revenue share 128,924 230,747 477,003 986,066 2,038,407 $ Hosting bandwidth 510,182 996,648 1,946,966 3,803,425 7,430,045 $ Ad serving fees 122,597 266,106 577,603 1,253,727 2,721,305 $ Website/technology$ Video Operations 149,907 212,000 299,813 424,000 599,627 $ Product Development 39,527 55,900 79,055 111,800 158,109 $ Traffic & Music Fees 61,184 86,527 122,367 173,053 244,734 $ Sales and marketing 1,311,895 1,490,793 3,115,381 5,806,820 11,358,648 $ General & admin 1,205,540 1,575,890 1,823,746 2,216,174 2,724,546
Total cost 4,707,514 7,265,324 14,786,380 28,464,830 56,792,488
$ Net cash flow (1,763,119) (1,734,235) (687,612) 355,725 2,241,649 % Discount factor 89% 80% 71% 64% 57%$ Present value (1,574,213) (1,382,522) (489,429) 226,070 1,271,972 $ NPV (1,948,122) 3% 2% 1% 1% 0%
years Cash +ve (year) 4Cumul. Cash +ve (year) 6 2,944,395 8,475,484 22,574,252 51,394,807 110,428,944
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• Only positive NPV countries
Aggregated positive NPV – World
UNIT World (+ve NPV + USA) FY12 FY13 FY14 FY15 FY16# Annual visits 366,916,169 552,910,243 1,192,981,362 1,852,137,683 2,851,078,680
per minute Ad load 2.4 2.4 2.6 2.6 2.6 minutes Minutes per visit 108.5 167.0 272.4 419.5 646.0
# Annual ad impressions 783,795,703 1,818,910,727 5,398,471,433 12,582,435,868 29,187,899,289 $/1000 CPM 233.7 226.7 230.6 222.2 220.8
$ Video ad revenue 12,129,765 37,949,885 110,762,486 248,850,226 561,306,373 $ Display ad revenue 1,261,701 2,261,006 5,284,039 9,554,742 17,184,955 $ Sponsorship revenue 1,299,803 2,974,103 7,614,969 16,859,133 37,584,368 $ Annual revenue 14,691,269 43,184,994 123,661,494 275,264,100 616,075,696
$ SPE content cost 8,008,764 14,943,082 43,898,710 107,081,468 264,751,264 $ Acquisition/editing - - - - - $ Partner's revenue share 636,869 1,897,494 4,430,499 9,954,009 22,452,255 $ Hosting bandwidth 2,480,262 4,845,227 13,060,815 25,514,486 49,842,911 $ Ad serving fees 596,010 1,293,682 3,672,053 7,970,454 17,300,438 $ Website/technology$ Video Operations 272,069 384,764 694,045 981,528 1,388,090 $ Product Development 802,956 1,135,551 1,645,439 2,327,002 3,290,878 $ Traffic & Music Fees 1,730,518 2,447,322 3,525,858 4,986,316 7,051,715 $ Sales and marketing 6,545,792 11,639,643 27,325,277 55,460,730 118,537,971 $ General & admin 9,713,293 13,135,808 17,615,829 20,242,013 22,805,249
Total cost 30,786,533 51,722,572 115,868,525 234,518,006 507,420,772
$ Net cash flow (16,095,264) (8,537,578) 7,792,969 40,746,094 108,654,924 % Discount factor 89% 80% 71% 64% 57%$ Present value (14,370,772) (6,806,105) 5,546,881 25,894,879 61,653,722 $ NPV 71,918,606 6% 2% 1% 1% 0%
years Cash +ve (year) 3Cumulative revenue 4 14,691,269 57,876,262 181,537,756 456,801,856 1,072,877,552 Cumul. Cash +ve (year) (16,095,264) (24,632,843) (16,839,874) 23,906,221 132,561,144
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Online video is expected to become a direct competitor to TV
Change2009 - 2010
Video Viewers +104%
Videos per Viewer +75%
Viewers that view videos every day +100%
US Growth in videos viewed on long-form TV sites
2006 2008 2010 20120
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
U.S. Online Filmed Entertainment Spend
Digital downloads
Online rental movie subscriptions
Mobile TV subscription market
Rich media / video Internet Advertising
$ M
illio
n
20092010201120122013201420150
10
20
30
40
50
60
70
80
-15%
-10%
-5%
0%
5%
10%
15%
Ad spent
Growth
US TV Advertising in $B
15%
CAGR
4%CAGR
20%
CAGR
Source: Kagan 2011, comScore 2011, PWC 2010, IBSG Analysis
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Traditional players and new entrants entered the market with different models
2006 2007 2008 2009 20100
5,000
10,000
15,000
20,000
25,000
30,000
HBO
Cinemax
Showtime
Starz
Epix
Netflix
Total Subs (000’s)
Def
ensi
veO
ffen
sive
2008 2010
Revenue Content Costs
Revenue Content Costs
AMC $438.9M $204.1M $457.8 $219.3M
Bravo $460.2M $214.0M $520.7 $249.4
HBO $3,784M $1,427M N/A N/A
Starz $1,111M $810M N/A N/A
Netflix $1,365M $211M $2,163M $530.1
Hulu N/A N/A $265M ~$160M
Source: Kagan 2011, Hulu, IBSG Analysis AMC, Bravo, HBO, Starz revenue are total revenues