Monday, March 24, 2014

Streaming Internet Radio Becoming A Minefield of Competition

Quick Thesis

  • Streaming internet radio/music is filling up with competitors which will make this a very difficult market segment to predict a clear winner.


Before we analyze the competition inside the streaming internet radio space - lets go over a brief overview of the business model.

Product: Streaming music via app or computer - tailored to the users preferences.

Revenue Streams: Advertising that play every few songs. Subscription packages. Selling songs or albums.

Content Providers: Much like TV, the providers of the content - in this case the musicians, producers, publishers ... ect are generally the winners, since it allows wide distribution (airplay) of songs to a target audience. Not to mention royalty payments.

Streaming Radio Co's: Have substantial IT, R&D, technology budget since the streaming radio & mobile application is still relatively new, and requires a strong development team. The companies are similar to Netflix or Hulu, in that they need to acquire the right to the content, and pay royalties. This content allows them to acquire users - who ultimately are served ads - or pay a monthly fee.

Source: Time


Potential Winners

AAPL - iTunes Radio - Is the gorilla who can just play around in the streaming radio playground. They can monetize users with the option to buy a song in the iTunes store, which gives them some advantages over competitors who get a smaller % of a similar sale. While their relationship with the music industry as been somewhat tenuous over the years, artists recognize the importance of iTunes, and iTunes is a massive revenue stream for the music business. That has allowed Apple to develop relationships with record labels, publishers and artists over the years - which certainly can help them acquire content for the iTunes radio.

Pricing Model
Free with ads or $24.99/year

P - Pandora - This was one of the first companies to prove the business model somewhat. They too have a somewhat tenuous relationship with content publishers, and rising costs will be the name of the game each time these licenses are renewed. On the positive side, an early mover advantage, and a large user base helps Pandora against competing services. In essence, the users who signup for a competing service more than likely have tried Pandora - so they set a bar for software and user experience.

Pricing Model
Free with ads or $4.99/mo Pandora One - ad-free streaming.

As a side note, just because Pandora could emerge as a winner in this category - doesn't mean the stock isn't overvalued. Additionally, Pandora has virtually the smallest music catalog, and streams at a lower quality than most of the competition.

Beats Music - These guys are still really new, but have an advantage because Beats headphones have become popular. It's possible they can use that brand to develop a following in the streaming music business as well. One example would be offering trial subscriptions with any Beats headphone purchases. Additionally, the platform boasts the high quality streaming sound available. Additionally they have the backing of Dr. Dre and music industry veterans.

The company actually describes the sometimes difficult task of acquiring the rights to stream new music - which is a challenge all these companies face now & into the future.

Adding new labels can take quite a bit of time. We have to sign an agreement, get the music sent to us, and then build  the content into our front-end, making sure all metadata is mapped correctly, including similar artist information that populates our recommendation and discovery features. Beats Music FAQ

Pricing Model:
$9.99/mo or $119.88/year - 1 account 3 different devices.
AT&T Partnership: Family Plan = 5 accounts $14.99/mo

XBOX - Amazon
These two companies can offer the streaming music as an add-on benefit to XBOX Live or Amazon Prime subscriptions. This could increase retention rates of current users, and could cut into stand-alone streaming music providers like Sony, Rdio, Spotify and Rhapsody who don't currently offer a free/ad-supported service level.

Trying to pick the winner from this much competition would be like picking a girl on the bachelor .... you could easily make a choice .... but you sure are giving up on a lot of other nice women too. Personally I will stay on the sidelines and watch these companies & investors duke it out.

Sunday, March 23, 2014

MGT To Provide VegasInsider.com Fantasy Sports Skin

Last week MGT, the majority owner  (65%) of FanThrowdown.com - a daily fantasy sports contest website - partnered with vegasinsider.com to provide a 'white label' fantasy sports 'skin'.

Press Release

Basically, VegasInsider will be able to offer a daily fantasy sports website (similar to Fanthrowdown.com), under the VegasInsider brand. MGT will provide the software, support and shared player pool (we assume). Essentially MGT is establishing themselves as a possible network hub for other sites that want to do the same thing.

Daily fantasy sports contests benefit with larger player pools, and allows the sites to run more generous promotions to attract & retain current players. Similar to social games on facebook and online games like poker or World of Warcraft - the more players that play - the more profitable it can be to the company who offers the games.

Of all the recent announcement by this company, including 'inking' two 'top' daily fantasy sports players, an angry letter from an investor, and the owner of FanThrowdown allegidly being a sex offender - this is one of the more interesting moves this company has made with this brand. If there isn't a tremendous amount of additional CapEx partnering with VegasInsider - MGT's FanThrowdown.com benefits with additional players, while compensating VegasInsider the same way they reward users who refer new players to the site.

Overall, seems like a win-win for everyone involved. While there are still many questions surrounding MGT and FanThrowdown, the company is making attempts to grow the brand that can be perceived as positive for FanThrowdown. The management's willingness to dilute shareholders has me on the sidelines, but this speculative stock is showing some signs of trying to grow this area of the business.

Thursday, March 20, 2014

Healthways, Inc. (HWAY) Quick Business Model Overview

A few days ago I was reading a rather lengthy & technical article about Healthways (HWAY). The author felt the stock had a 93.3% chance of making 20%+ return on a short investment. I agree with one of the comments in the article - there are some amazing colors, bubbles, graphs and lines .... but to the average person, wrapping your head around that kind of analysis is not exactly easy or even necessary.

However, often times when I see an author go to great lengths to present a point, I want to dig further into what Healthways has to offer investors. Today's blog is simply an overview of Healthways, Inc. I'm still trying to examine if the best decision is to place a bearish bet on this company or avoid this investment play all together.

What does Healthways do?


Here's is summary of what Healthways business model straight from the most recent 10-K filed 3/14/2014
  • All of our interventions were developed with over 30 years of experience based in science and ongoing innovation. 
  • Our technology-driven infrastructure is compatible with, and integrated into, our customer and other vendor systems. 
  • We operate domestic and international well-being improvement call centers staffed with a wide range of licensed health professionals.  
  • Our fitness center network encompasses approximately 15,000 U.S. locations.  
  • We maintain an extensive network of over 88,000 complementary, alternative and physical medicine practitioners.
Comments: They use some fancy jargon for a glorified call-center & some websites to sway large employers or insurance companies to offer Heathways services ... which aren't really much different than what you can find free on the internet or through other providers.

Some of the products/services Healthways, Inc mention in the 10-K
  • Well-Being Connect® portal
  • Dave Ramsey Core™ Financial Wellness program
  • Dr. Dean Ornish Program for Reversing Heart Disease
  • wellbeingGO®
  • Embrace®
  • Well-Being Tracker™ (MeYou Health subsidiary)
  • Daily Challenge® (MeYou Health subsidiary)
  • Walkadoo™ (MeYou Health subsidiary)
  • increasing physical activity for seniors through the Healthways SilverSneakers® 
  • overcoming nicotine addiction through the QuitNet® 
  • generating sustainable weight-loss through our Innergy® 
  • Gallup-Healthways Well-Being 5™ diagnostic tool
  • Gallup-Healthways Well-Being Index® ("WBI")
Additionally, Healthways, Inc operates under many different subsidiaries, a full list of them is here.

Comments: There's a lot going on here. To analyze each of these business models would take time, and the company is vague inside the annual report how they actually execute these products/services. Many are online portals or applications that allow a customer to track certain aspects of their health. In some cases, the services are used in conjunction with wearable tracking devices like Fitbit. Other products, like Dave Ramsey's Core Financial Wellness Program, is simply a license agreement that allows Healthways offer this program to existing or future clients. The company has the feel of one that throws a bunch of healthy sh*t onto clients, and hopes some of it sticks so they renew and/or land new contracts.

Customers

North America
  • health plans
  • large self-insured employer
  • integrated healthcare systems
  • hospitals
  • physician groups
Brazil, Australia, and France
  • commercial healthcare businesses 
  • government entities
Contract Terms:
  • contracts with health plans and integrated healthcare systems generally range from three to five years with several comprehensive strategic agreements extending up to ten years in length. 
  • Contracts with self-insured employers typically have two to four-year terms
  • Some of our contracts allow the customer to terminate early.
Comments: Can't blame Healthways for going where the money is. Instead of trying to build a client base on their own - one by one, they target larger groups under health plans or employers. I'm sure Healthways has an elaborate presentation they use to lure company executives into thinking what Healthways offers is so unique, and once they lock in the members ... most of the services are online, self pace, and don't require much effort from Healthways to administer them. If you don't short Healthways .... you might want to short some of the companies who are fooled into thinking Healthways actually offers something unique worth paying for!

Risk Factors

Obamacare
We cannot predict whether individuals will switch to health plans offered through the Exchanges that do not include our services.  If we are unable to provide services to health plans participating in Exchanges, our results of operations could be negatively impacted. 
Comments: That excerpt comes from the 10-K I link to earlier. The risk factors takes into account that Obamacare is meant to cover the essential health care needs of the un-insured - and those who decide to buy a plan on the exchanges. Healthways would lead you to believe their services are essential, but clearly by looking at the health services they offer, they are not. The company is always at risk that health insurance providers & employers view Healthways as an extra expense that can be replaced with cheaper alternatives.

Humana

10.5% of revenues came from Humana in 2013.

Activists 

North Tide Capital, LLC indicates its intention to nominate four directors for election to our Board at our 2014 Annual Meeting of Stockholders. The investment group has been trying to oust the CEO Ben Leedle for a while now. I wouldn't call this a risk factor - the CEO seems replaceable ... although the company provides a lame excuse why he is valuable. The risk factor lies that Healthways is more worried about maintaining the status-quo, rather than looking after shareholders best interest,

Debt

See the balance sheet below. Long term debt is nearly 100x the cash balance as of December 2013 ... and nearly double the total current assets. If that's not two waving red flags about a company - I'm not sure what is.

Balance Sheet




December 31, 2013


December 31, 2012

Current assets:






Cash and cash equivalents

$
2,584


$
1,759

Accounts receivable, net


89,484



108,337

Prepaid expenses


9,228



9,727

Other current assets


6,857



7,227

Income taxes receivable


1,402



5,920

Deferred tax asset


9,667



8,839

Total current assets


119,222



141,809










Property and equipment:








Leasehold improvements


37,463



40,679

Computer equipment and related software


290,392



267,902

Furniture and office equipment


22,881



23,552

Capital projects in process


25,228



11,799




375,964



343,932

Less accumulated depreciation


(217,766
)


(187,438
)



158,198



156,494










Other assets


53,629



21,042

Intangible assets, net


79,162



90,228

Goodwill, net


338,800



338,695










Total assets

$
749,011


$
748,268




December 31, 2013


December 31, 2012

Current liabilities:






Accounts payable

$
33,125


$
26,343

Accrued salaries and benefits


20,157



24,909

Accrued liabilities


32,065



39,234

Deferred revenue


4,496



5,643

Contract billings in excess of earned revenue


17,411



14,793

Current portion of long-term debt


14,340



11,801

Current portion of long-term liabilities


2,822



5,535

Total current liabilities


124,416



128,258










Long-term debt


237,582



278,534

Long-term deferred tax liability


33,320



36,053

Other long-term liabilities


51,003



26,602










Stockholders' equity:

















Preferred stock $.001 par value, 5,000,000 shares authorized, none outstanding






Common stock $.001 par value, 120,000,000 shares authorized, 35,107,303 and 33,924,464 shares outstanding


35



34

Additional paid-in capital


283,244



251,357

Retained earnings


48,000



56,541

Treasury stock, at cost, 2,254,953 shares in treasury


(28,182
)


(28,182
)
Accumulated other comprehensive loss


(407
)


(929
)
Total stockholders' equity


302,690



278,821










Total liabilities and stockholders' equity

$
749,011


$
748,268





Pacific Coast Investment will continue the due diligence process on Heathways, Inc business model - and will provide an update on any positions we take regarding this company shortly.