Significant revenues might loom on Net Insight’s horizon
Net Insight’s (NETI-B.ST) first live OTT agreement has in our view the potential of generating significant revenues in upcoming years. Based on a numerous assumptions we have made estimations on how much revenues Net Insight might generate from the Formula 1 branch. Other than that there still remain several untapped opportunities.
Substantial revenues might await if a Software as a Service revenue model is used
Approximately one week ago Net Insight announced their framework agreement with Tata Communications regarding the company’s new live OTT service. Tata Communications is the official connectivity provider of Formula 1 content and has already tested the technology on the Singapore track with no time lag across the platforms. The agreement has already generated significant attention within trade press, for example this article.
In a succeeding article on Alpha Researcher we briefly described our view on the agreement and also on the future prospects of Net Insight’s new service. Since it took them around two years to develop the technology there is little or no doubt that Net Insight could win large business on the market before competitors start to emerge. We also still regard the Formula 1 agreement with Tata Communications as one of the best to sign at this early stage. Industry participants involved in sports and leagues such as NFL (football), NBA (basketball), NHL (ice hockey), MLB (baseball) and Premier League (soccer) might in our view be next in line. The willingness to watch via OTT is considerable in for example the United States. In a survey only 27 percent said that they would cancel their subscriptions if live sports only were to be broadcasted via OTT. 73 percent would however continue to subscribe and to watch all the sports events via OTT.
Since an increased interactivity is one of many sales arguments for this technology we also believe that media participants within the e-sport industry could be interested of it in the future. Except for this we have also identified several other industries that should be interested in a service that enables truly live OTT content, and the most eminent one is undoubtedly the online betting and gambling industry. With truly live OTT content the opportunity for betting companies to innovate new betting variants and services emerge.
From a shareholder’s perspective it would be interesting to know approximately how much revenue this new service could generate to Net Insight in the upcoming years. But it is yet not known what kind of revenue model that will be used. The company has however mentioned the SaaS (Software as a Service) model. After some research we have identified a variant of this revenue model that could be used in the Net Insight and Tata agreement. And we have also made some revenue estimations.
From start we thought that it would be most reasonable to assume that Net Insight will be compensated based on the amount of monthly unique users that access live OTT content through their service. After a few discussions we however rejected this option. We now argue that it is more likely that Net Insight will be compensated based on the resources that are being used. Based on a few assumptions we have thus estimated what the Tata agreement could generate in terms of revenues.
The reason why we no longer expect Net Insight’s compensation to be based on the amount of monthly unique users is the fact that it is unreasonable to assume that a user who only watch 5 minutes of a race will entail the same amount of revenues as one that watch 100 minutes. Alpha Researcher instead expects that Net Insight will charge their customers based on the amount of resources that the end-users have utilized. With other words we believe that the customers will be charged depending on how much data that has been transmitted through Net Insight’s software.
Currently content that is streamed with 720p or 1080p requires internet speeds of 3.0-8.0 Mbps (Megabits per second), which implies a transmission of 0.375-1.0 MBps (Megabytes per second). A user viewing 100 minutes of a Formula 1 race on OTT would hence utilize 2.3-6.0 GB (Gigabytes) of data, that has been transmitted through Net Insight’s software. To make it simple we assume that the average data usage (resource usage) for one OTT user is 4 GB per race.
Online streaming services suggest that one GB of data usage costs USD 0.05-0.09 for enterprise customers. The pricing for these streaming services are the only publicly available ones that we have found and that somehow can be compared to Net Insight’s software. Since Net Insight’s technique currently is unique we expect a pricing within the top of the range, at least in the upcoming years. The average Formula 1 fan would thus generate USD 0.36 for viewing a 100 minute race. It translates into SEK 3.1 per user and per race.
On average each race has around 30 million live viewers globally. If assuming that Net Insight’s new technology will be available to 50 percent of those within two years (perhaps not only via Tata) their total scope would be 15 million viewers per race. If assuming that 15 percent of them watch via OTT in 2017 (currently the overall OTT penetration is 10 percent) it would imply that 2.3 million will utilize the company’s technology per race. In numbers it would translate into revenues of SEK 7 million per race to Net Insight, if assuming the SaaS model and our pricing assumptions. Annual revenues would thus reach SEK 135 million given 19 races and all of our assumptions. Even at half of the assumed price per GB or at half of the market penetration Formula 1 standalone could bring in significant revenues to the company.
The above made assumptions are however just rough estimates made by us, and nothing definite. It is just a scenario which might be reasonable to assume. It is yet not known that the revenue model will be based on resource usage. If revenues will be based on the resource model it is however also worth taking into consideration that worldwide broadband capacity continuously is increasing. 4GB of data usage per race today could be 5GB in 2017. Also pay attention to the fact that Ultra HD most likely will make its real entry into the market within a few years. Streams with UHD quality would require internet speeds of 15-25 Mbps, implying data usage of 11-19GB per Formula 1 race (100 minutes).
And more importantly, our estimations and assumptions are only based on Formula 1. As previously mentioned there are several other sports that could benefit from offering a truly live OTT experience, along with other business areas such as online betting. The combination of those two are somewhat tickling. Imagine FIFA World Cup in 2018, when 1 billion viewers and potential gamblers tune in their devices to watch the final. Assuming that Net Insight reach 10 percent of the global audience (i.e 100 million viewers) and that 15 percent of them views via OTT devices 15 million users would use Net Insight’s technology during the World Cup final. Given the same price- and data usage assumptions (approximately 100 minutes per game) as mentioned above it would imply revenues of SEK *46.5 million just for this one game. If using half the price in the calculation (i.e 4.5 cents per GB) it would imply revenues of SEK *23 million. In our view it is however likely that a revenue cap per event will be implemented. These figures are hence most likely too optimistic.
(*we discovered an incorrect calculation and have now corrected it – however, it does not change the context and our conclusion since we also expect a revenue cap per event)
It is now up to Net Insight to monetize on this golden opportunity. They are in pole position. We argue that they are in the delicate position to use such a SaaS revenue model as we have described above. But it is still unclear where the pricing will land. Our pricing assumptions are as previously mentioned just based on similar services that are available today. And as mentioned above it is also likely that there will be a revenue cap per event (for example maximum revenues of SEK 5-, 10,- or 15 million per game or race et cetera), but as everything else this is so far solely a speculation as well. To summarize we argue that there are significant growth opportunities for Net Insight going forward no matter what.
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Alpha Researcher does not take any responsibility for investments made in Net Insight. The analysis or article written above and all the conclusions that are made within it are solely Alpha Researcher’s opinions and expectations. It should absolutely not be seen as any investment advice. We highly encourage investors to make their own analysis and/or contacting investment professionals before buying any shares in Net Insight.
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