RealNetworks April 15th, 2000 RealNetworks April 15th, 2000 Chantal Yearwood Luiz Gustavo Saito Makoto Yokoo Paulo Passoni Our message is RealNetworks should combine its technological expertise and content aggregation power with strategic alliances to enhance the ecosystem model and consolidate its presence in the growing streaming media worldwide 3 Agenda 1 What business are we in? 2 Who are the competitors? 3 What foreign markets to enter? How? 4 What Human and Financial Resources will be needed? 5 Whats in the future of this business? 6 Q&A 5 Agenda
1 What business are we in? 2 Who are the competitors? 3 What foreign markets to enter? How? 4 What Human and Financial Resources will be needed? 5 Whats in the future of this business? 6 Q&A 6 The Streaming Chain Broadband 14K Media Companies Servers 56k Different music formats 28-36K Source: Nielsen/NetRatings Streaming server software
Internet infrastructure Platform war Streams & Advertising CAGR:31% Microsoft Platform War Linux, Sun Client software and/or Organizer Rich-Media trend Internet will mimic real life 5.4 3.9 1999 Source: IDC 2000 End Consumer 8.8 7 US$ bn Content producing will result in conflict with media
companies 2001 2002 7 Ecosystem: highly leveraged by alliances Real Broadcast Network deal with DoubleClick. Examples: Buick, Gap, Intel, and 800.com Non-proprietary Non-proprietary Juke Jukebox box vs. vs.proprietary proprietary RealPlayer RealPlayer technology technology Advertising Consumer Software Content aggregation Music: Universal Music Group, BMG and Sony Aggregators: Yahoo Content providers: CNN, ESPN, ABC, FoxNews and AOL E-commerce: amazon.com, Cdnow.com, NetRadio.com and Spinner.com Narrow and broadband software infrastructure
Infrastructure AT&T, [email protected], Cable and Wireless, Enron, Deutsche Telekom, GTE and Sprint Application Tools: 150 soft vendors such as Intel, SGI, Sun, Lotus and Macromedia 8 Core Business: Streaming media Catalyst The Ecosystem concept is key to the Business Model Business assets: 350k hours of streaming media creation per week (100k 2 yrs ago) 85% of available streaming media files are in RN`s format 100 million unique users Technology Leader: several Awards as the best product Dynamic management that understands this market Streaming media is critical to the WWW Software/Streaming technology development to the end consumer Content aggregation, NOT creation Advertising revenues as a result of increasing traffic 9 RealNetworks Dilemma: Which business model? Leverage on Real`s strategic alliances, becoming the major hub for streaming tech and content. Real.com is more vibrant
than Broadcast.com Website traffic revenues through content aggregation and tech innovations to end consumers (JukeBox) Microsoft`s cash and networking power may result in a lost battle for technology standard Yahoo core business is content aggregation Software Fees 10 Agenda 1 What business are we in? 2 Who are the competitors? 3 What foreign markets to enter? How? 4 What Human and Financial Resources will be needed? 5 Whats in the future of this business? 6 Q&A 11 Competition Overview Players Software:
RealPlayer & RealJukeBox Content Aggregation: Real Guide RealNetworks Microsoft Apple RealNetworks (13th) Yahoo Broadcast MediaPlayer.com (42nd) RealNetworks Content Producer: Take5 Large bricks-andmortar media companies Threats How to overcome Microsoft is a very strong competitor with monopoly position in PC OSs RealNetworks can capitalize in its Ecosystem and key partnerships Yahoo internet reach can Leverage its streaming aggregation business Continue to deliver a more vibrant product worldwide
Media Companies eminent conflict Turn Take5 into a content hub fed by third parties 12 Agenda 1 What business are we in? 2 Who are the competitors? 3 What foreign markets to enter? How? 4 What Human and Financial Resources will be needed? 5 Whats in the future of this business? 6 Q&A 13 Choosing Target Markets Decision criteria: Demographic and Economic information GDP per capita Total population Telephone Penetration Internet current user base (1999) Internet projected user base for 2003 Political Environment
14 Demographic & Economic Data GDP (US$ Bi) GDP per capta Population Telephone Penetration Telephone Penetration (5yrs) Annual Growth Total Growth Index in 5yrs Japan Germany France UK Italy Sweden Netherlands Switzerland Australia Spain Korea China Norway Finland Brazil Russia Mexico Argentina Singapore NewZealand Chile India Thailand 4,079,880
7 2 USA 8,009,820 29,340 273.0 67% 70% 1.039 1.21 6,466 Source: CIA (1999) 15 Thailand India Chile New Zealand Singapore Argentina Mexico Russia Brazil Finland Norw ay
China Korea Spain Australia Sw itzerland Netherlands Sw eden Italy UK France Germany Japan Demographic & Economic Data Index 2,500 2,000 1,500 1,000 500 - Index=(GDP*GDP growth 5yr*Telephone Penetration)/1,000 16 Internet Users (in millions) World Western Europe Asia-Pacific Latin America
1,999 300 107 22 9 2,000 450 134 34 13 2,001 560 161 54 18 2,002 670 188 75 24 2,003 780 215 95 30 2004 890 USA Japan Canada UK Germany France Italy Australia Korea Russia Sweden China Brazil
Between Between Computer Industry Almanac Computer Industry Almanac Monitoring.ru Computer Industry Almanac 126 China Internet Netw. Info. Center, Strategis IDC Computer Industry Almanac IDC [email protected] Angus Reid Group IDC IDC IDC USA will grow at 20% annual rate until 2003 (Goldman Sachs estimate) Canada will grow at the same rate as the USA All Western European countries will grow at the same rate All Latin America countries will grow at the same rate = information not available 17 7 5 6 5 5 4 4 3.0 0.9 2 3 1 0.9 0.3 0.2 India 3 2
Chile 4 Argentina 7 Singapore 8 Norway 9 Mexico 12 Spain 9 14 Brazil 45 China 10 Sweden 13 15 Russia 13 14 Korea 19
Australia 20 Italy 15 26 France 27 Germany 25 UK 20 Canada 40 Japan Millions of Users Internet Users (in millions) 44 41 1,999 2,003 35 30 24 18
12 6 8 18 Primary Target Markets China = Fastest growth in the world, 2nd largest market by 2003 Japan = Huge market with high disposable income UK, France, Germany & Italy = Fast growth, relatively simple implementation and high disposable income 19 China Demographics (source: Strategis Group) High level of education among target audience 35% college degree, 45% university degree Higher than average income Dominance of single males 71% of internet users are males 69% of males are singles Short-term content aggregation strategy: Focus on this audience, providing i.e.: sports, news, career orientation Political Environment Xenophobic, but willing to receive foreign investments (paradox) Entry strategy: Increase ties with China.com and other local content providers Look for local partners for sales, content aggregation and customer support both for political, cultural and economic reasons 20 Agenda 1 What business are we in? 2 Who are the competitors?
3 What foreign markets to enter? How? 4 What Human and Financial Resources will be needed? 5 Whats in the future of this business? 6 Q&A 21 Whats Involved in Localizing Content? Software Drive to improve the breadth and quality of the products and services it offers in order to provide a durable platform for growth in international markets RealNetworks employs 650 in Seattle Dynamic Management US: Localization Strategy Staff: 12 led by Webster Europe Manager Strategic Alliance Asia Manager Content China Japan Strategic Alliances
Improve Partnerships UK German France Italy Editor Editor Editor Editor Editor Operator Operator Operator Operator Operator Corp. Sales Corp. Sales Corp. Sales Corp. Sales Corp. Sales 22 Increasing International Revenues result in positive cash flows. Revenues vs. Costs 157,154
42% 136,656 In US$ 000 CAGR 93,707 55,778 35,310 2,000 47,711 2001 Intl COSTS 58,610 2002 65,336 23% 2003 Intl REVENUES the idea is that this business model is scalable. 23 Agenda 1 What business are we in? 2 Who are the competitors? 3 What foreign markets to enter? How?
4 What Human and Financial Resources will be needed? 5 Whats in the future of this business? 6 Q&A 24 RealNetworks Business Portfolio Star ? Advertising through content aggregation E-Commerce Wireless & Handhelds Services Potential Growth Software fees (Client/Server) Cash Cow Dog Market share to largest competitor 25 Key Drivers in the Streaming Industry Consumer Expectation
Internet will Mimic real life (1) Provide the consumer a rich media experience Increasing Broadband Penetration Technology Increasing Digital Music market Wireless and Handheld enable Music Industry different patterns Revenue Sources New tech incorporation Advertising Revenues M&A activity (Stock is Currency!!!) (1) Mary Meeker, Research Analyst 26 Opportunities for the Future Wireless Wireless A revolution is approaching: revolution is approaching: A Internet enabled cell phones will soon be ubiquitous Internet enabled cell phones will soon be ubiquitous Unprecedent for exploring streaming technologies: Unprecedentopportunity opportunity for exploring streaming technologies: Voice over IP in cell phones Voice over IP in cell phones Handhelds Handhelds Handhelds will eventually become multimedia devices Handhelds will eventually become multimedia devices Microsoft is tied to the Windows CE plataform
Microsoft is tied to the Windows CE plataform The market leader, Palm, will need a partner The market leader, Palm, will need a partner RealNetworks is uniquelly positioned to provide multimedia Realnetworks is uniquelly positioned to provide multimedia techology techology for this market for this market 27 Agenda 1 What business are we in? 2 Who are the competitors? 3 What foreign markets to enter? How? 4 What Human and Financial Resources will be needed? 5 Whats in the future of this business? 6 Q&A 28 APPENDICES 29 Who are our competitors today? Competitive scenario in the Client & Server streaming software marketx Competitive atribute: RealNetworks Microsoft
Apple Current client base Capacity to create new technologies Cash to back aggressive campaigns Ability to build alliances Access to different server platforms Brand recognition International presence Bundle capability Overall Position Very strong Very weak 30 Delivery channels: Media Value Chain: News & Raw info Movies gathering creation Info processing and selection Internet Print Audio Video Rich-Media? Rich-Media? Advertising Customers RealNetworks Value Chain: News, movies, music & business
Media Company Internet delivering End customer Delivery Value Chain: Media company servers AOL/TW Disney ABC NBC News Corp Dow Jones Bloomberg ESPN Streaming Internet Structure software Microsoft Apple RealNet
Cisco Lucent Nortel Nokia Erickson AT&T MCI Streams & Advertising Decoder and/or organizer RealNetworks RealNetworks Microsoft Microsoft Apple Apple DoubleClick End Customer AOL TCI MSN PSINET Earthlink AT&T 31 About the Other Countries Japan, France, UK, Germany & Italy Build on existing local structures Look for partners for sales, content aggregation and customer support Switzerland, Scandinavian Countries, Netherlands, Singapore High incomes and high Internet penetration, but small populations (remember that content aggregation costs are not necessarily lower because of smaller population) Latin America, Spain, Korea, Russia High Internet growth and sufficient income per capta, however
they are not as promising as the chosen target markets India, Thailand, Philippines Despite fast Internet growth, infrastructure and income are still restrictions in order to achieve critical mass chart 32 Rationale behind Partnerships Benefits Partners understand the local markets They help to avoid or minimize political issues RealNetworks may share its costs with them 33 Measuring the return of Guide and Take5: Ways of measuring return on an investment: CFROI Conceptually better, but unfeasible ROIC ROI A Advertising revenues Measured by a software that tracks consumer surfing in RN`s website Software License fees generated by RealGuide and Take5 Cost of Advertising Revenues A
Total Revenues * SG&A Advertising Costs 34 Why RealNetworks wont become a Netscape? Proprietary integrated platform Relationships with content providers that block Windows MediaPlayer Strong presence in client platforms & key partnerships 85% market share and RealPlayer is bundled in most new PCs and several apps Strong presence in server platforms & key partnerships RealServer comes bundled in major server oper. systems (Sun, Linux RedHat, etc) More knowledge in software and portal business Real.com Guide 13th vs WindowsMedia 42nd Positive cash flow Network of companies that rely on RealNetworks technology Content creators, software developers, ISPs and streaming professionals Superior technological system Best Product Awards from several opinion makers 35 RealNetworks Strenghts Huge User Base (>100mm) Superior Technology (Awards) Flexible product to new stream standards Highly leveraged Ecosystem First Mover Edge Brand Recognition Successful International entering (Japanese) High Mkt Cap can be used for further acquisition 36 RealNetworks Threats Content creation causes conflicts with its current partners Microsoft:
War for industry standard MSFT can leverage its products through networking and bundling Is better positioned for International expansion The Company already has handheld software that can be used to adapt Media Player Different Audio standards (I.e. MP3) Search engines as alternative guides 37 RealNetworks Opportunities International Market is relatively unexplored Broadband and new complex streaming tech demand (rich-media) Provide and aggregate streaming content Develop handheld market Important new corporate market (cost reduction opportunity, conference call) 38 RealNetworks Weaknesses No clear definition on core business Therefore, lack of focus Lack of qualified personnel, specially outside of US Lack of knowledge in foreign countries, besides Japan No handheld devices software Relatively low cash power compared to main competitor 39 Forecasted Income Statement Increasing Asian Revenues Increasing Advertisement Revenues Revenue Breakdown by Region
Revenue Breakdown by Segment 500 500 74 300 22 200 17 101 62 219 254 72 33 13 100 44 50 167 In US$ mm In US$ mm 400 85 400 292 300 75 200
100 14 26 91 82 94 172 195 202 2001 2002 2003 66 44 45 134 0 0 1999 153 113 2000 North America 2001 Europe 2002 1999 2003
2000 Software License Asia and Other A cash generating company Service Revenues Advertising Increasing net income Bottom Line Operating Cash Flow 70 80 18% $1.00 $0.90 60 $0.80 16% 14% 12% 40 10% 8% 20 6% 0 1999 2000 2001
2002 (20) 2003 EBIT EBITDA Margin $0.70 $0.60 40 $0.50 30 $0.40 $0.30 20 4% 10 2% 0 0% EBITDA 50 In US$ mm In US$ mm 60 $0.20 $0.10 $0.00 1999
2000 Net Income 2001 2002 2003 Income per share 40 Market Data Asia will become the largest market Digital Music is a big business World Number of Online People Evolution (in Millions) Digital Music Industry in US$mm 1200 6,000 1000 CAGR: 68% 800 30 % 3,500 600 2,000 400 47 % 200
15 % 21 % 1,050 750 0 World Asia/Pacific Europe 2000 North America 1999 2000 2001 2002 2003 2005E Source: Forrester Research The Company`s Market Cap reflect this awesome potential Advertising dollars are real Internet Advertising in US$ Billions 10.8 CAGR: 29% Real Netw ork's Market Capitalization since IPO (In US$ Millions) 8.8
14,000 7 12,000 10,000 5.4 8,000 6,000 3.9 4,000 2,000 1.95 0.2 1996 Source: IDC - 0.85 1997 1998 1999 2000 2001 2002 2003 41 Alternative Business Models: As today Give up software (core so far) Give up content
Become a content producer Partner with MSFT rivals (Sun) Outsource aggregating INITIALS 42 How to deal with talent shortage in US and abroad? US Seattle Concentrate all software localization in Seattle Bring language/cultural experts (in which international expansion is essential) to headquarters Hire from software houses that have experience with software localization Promote foreign students recruiting in schools all over America Content Aggregation: Abroad Must cater to local needs in both cataloging and developing proactive aggregation LOCAL EXPERIENCE 43 Presentation Directory How to enter Core Business International Expansion Investments The Streaming Chain Ecosystem RealNetworks`core business Rationale behind partnerships
Expansion Organization Industry Get Noticed in Foreign Markets RealNetworks`dilemma International Pricing Strategy Business alternatives Foreign Markets Industry Drivers New Ventures Value Chain Key Success Factors Competition BCG Portfolio Analysis Competition Overview Competition in the Server & Client Becoming Netscape? Financials and other Forecasted Income Statement Market Data Analysis Calculating return in Guide and Take5 Talent Problem Our Message Summary Choosing Criteria Demographic&Economic Data Demographic&Economic Graph Internet Users Data Internet Users Graph Primary Target Markets China Other Countries International Pricing SWOT Analysis RealNetworks` Strengths RealNetworks` Weaknesses RealNetworks` Threats RealNetworks` Opportunities
44 Creative Ways to Get Noticed in Foreign Markets Make Deals with major Radio and TV Stations Alternative advertisements (Malls, Billboards) Major Events Coverage: Music Concerts Interviews with celebrities Sports Broadcast Religious Events 45 International Pricing Strategy Tradeables Client Software Non-Tradeables Services Advertising Can be downloaded from any country website Not downloadable, must be treated locally Pricing must be the same worldwide Pricing may follow regional strategies Server Software: Its possible to be sold directly to clients at lower prices than from the website. 46 Key Success Factors First FirstMover MoverAdvantage Advantage
Helps Helpscreate createaade defacto factostandard standard Huge HugeClient ClientBase Base Leverage Leveragedominance dominanceininthe theserver servermarkets markets Technology TechnologyLeadership Leadership Promotes Promotesclient clientand andserver serverdominance dominance through continuous product improvements through continuous product improvements Alliances Alliances With Withcontent contentproviders: providers:increases increases adoption by end and
business adoption by end and businessusers users With Withstreaming streamingprofessionals: professionals:helps helps creating an industry support for creating an industry support forthe the product product With Withother othertechnology technologyproviders: providers: helps creating a standard helps creating a standardand andincrease increase influence in platform. influence in platform. 47 Internet access: Dial-up or Cable? China: TV penetration 25:1 PC penetration India: Huge access to cable WebTV may be very successful there RealNetworks should make a provision for streaming technology over Web enabled appliances that access the Internet through cable 48
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