Just what is Qualcomm’s MediaFLO likely to be worth and is it already well catered for in the high flying $71 billion valuation of the world’s dominant CDMA chip maker?
The best place to look for a valuation for MediaFLO is based on some kind of multiple of the likely revenues that will emerge at MediaFLO, in line with the valuations that are used for the two major satellite radio businesses, which have managed to charge up to $13 for each of 14 million customers, merely to receive radio across a US wide footprint.
So let’s start there. Here are the revenue and subscriber numbers for the combined satellite radio companies in the US.
This represents 13.7 million customers paying an average of $9.50 per month for what amounts to 100 radio channels, usually on a single car or portable radio.
The companies are valued at over $8 billion, a multiple of 5.4 times combined revenues and have exhibited growth rates of around 47% of the installed base during the past year, on two services which are both just about cash break even. The total growth from 2003 to four years later is an impressive 780%.
There are many large differences between what MediaFLO is trying to do and what the satellite radio companies are doing. The satellite radio companies are directly contracting for their content as if they are broadcasting businesses, whereas MediaFLO is buying from broadcasters content that is for use a second time. That should mean that MediaFLO pays less initially, but perhaps more later, based on the numbers of customers that it attracts.
Also MediaFLO has the marketing backing of both Verizon and AT&T, and doesn’t have to directly market to end users, something that eats a constant amount of resource from the satellite radio companies, despite their partnerships with major vehicle manufacturers. The bigger the radio companies get, the greater the cost of customer acquisition because they are getting to the point of saturation of in-car devices, which are also being eaten into by iPods and the like. On the other hand, once they have the customer, they own the customer and can market new services to them directly. That won’t be true for MediaFLO.
In order to get to a bigger population, the satellite radio companies have to try to make their services personal and offer a device to each person, instead of one to each car. That means investing in breakthrough technologies that will make satellite receivers lighter and easier on batteries, but to be honest, this is mostly already done.
But still, with the satellite radio signal there is poor in-building penetration of audio signals, and virtually no opportunity to get video into the home.
So it’s fairly easy to conclude that the services that MediaFLO can offer are per person, rather than per home, and they are equally usable in the home, in car, and at work. But MediaFLO doesn’t have a national footprint, instead it has multiple 40 kilometer diameter cells, initially in around 30 markets, reaching around 110 million of the 300 million people that live in the US.
And finally one service is pure video and one pure audio. Actually no. MediaFLO can offer 20 video channels, although each of its partners is likely to offer 8 or so TV channels, plus around 80 channels of clip casts between operators (video that you pre-book to download overnight) and 10 channels of enhanced AAC audio. Actually this is all a moveable feast, depending upon what operator partners prefer to have.
It could be a downloadable music service, with the right music rights, music videos dropped onto the phone, TV favourites, and any combination. With phone storage a DVR and a stored music player, can be part and parcel of the service. Sound familiar?
Sirius is already experimenting with video to car seat backs, but the video is limited and can only be watched with an outdoor aerial.
Finally satellite radio is already competing with commercial radio, so one of its main ‘features’ is the lack of advertising. MediaFLO, over a period of probably three or four years, will replace some element of subscription revenue with content addressable advertising.
Interestingly the Verizon version of MediaFLO also costs around the same as the satellite radio, priced at present at $15 with a special introductory discount of $13.
Also the price of devices starts at around $200 for the new MediaFLO handsets, but of course Verizon and AT&T can choose to subsidize these in return for prolonged contracts. Although the original costs of satellite radio devices was higher than that, by the clever tactic of bundling them into car purchases, this was largely disguised. If there is any advantage here it will be minor. For a mobile TV system like DVB-H, which is going to be sold all over the world, and therefore develop higher volumes than MediaFLO, there will be Chinese built handsets coming out at far lower prices. But for both MediaFLO and DVB-H it is possible to receive the video broadcasts with devices which are NOT mobile handsets, and so can be brought to market under $100.
In a report that Rethink has published this week in conjunction with Multimedia Research Group of the US, we have projected US sales of handsets of around 13 million, in the US, which will mostly include MediaFLO service (rather than one of the competing DVB-H services) by the end of 2009 (email [email protected] to ask for more information about this major report). This figure is based on a penetration rate of around 7.5% per annum in the areas where MediaFLO or any other mobile TV service will be available.
Receivers which are not handsets are likely to reach another 60 million devices globally by the same time frame with roughly 15% of these shipping in the US, so perhaps another 9 million customers for mobile TV services in the US. However that’s a tactical decision.MediaFLO has not yet announced that it has components for, or will support such devices, whereas DVB-H already has them in abundance. Perhaps AT&T and Verizon will not want rivals in the portable telephone business.
But given that most other networks won’t be ready in the US prior to this, MediaFLO is likely to be dominant in supplying over 20 million US customers.
If the average subscription income slides from $15 down to $9.50, the same as the satellite radio services, it will develop revenues of some $2.4 billion in about half the time that the combined satellite radio companies achieved just $1.56 billion, and without MediaFLO spending a single cent on marketing and customer acquisition it will almost certainly be profitable, dragging only its network build out costs around in its balance sheet, always cited by Qualcomm as $800 million, far less than the satellite rental plus the CPE subsidies that the satellite radio companies paid per head.
Whatever way the graph is drawn, the growth multiple that attaches to that $2.4 billion revenue will have to be higher, especially as post 2009 MediaFLO will double its market reach by building out into a virtually US national footprint, potentially increasing its size threefold.
Any valuation on MediaFLO alone, if all of this comes about, has to be at least 6 to 7 times the revenues, or as high as $17 billion. Right now this asset sits as merely a set of Capex and R&D write offs within Qualcomm’s balance sheet. Change it into an asset of that magnitude by giving it a public quotation, and regardless of what’s happening to Qualcomm’s chip and intellectual property valuation, the core business, there is likely to be an additional $17 billion of value.
There are weaknesses in this argument. Will the market opt for a different technology? Well only if Qualcomm has failed to write a contract that properly ties in AT&T and Verizon, because with those companies committed, there is precious little mobile customer base in the US to go around other services.
Will broadcasters be seduced into offering their own 8VSB mobile TV services bundled into whatever spectrum is allocated for digital TV during 2009 (as suggested by Harris and LG last week)? That might create a new local level of mobile TV, but where will the US broadcasters get the cellular eco-system to pay for the devices and offer a national footprint?
Could Modeo and HiWire get their DVB-H acts together in the US and take a piece of this marketplace? Well that’s possible, especially in light of the FCC concession that Modeo has been granted to increase its spectrum power limits so that it can create a far greater 12 kilometer radius to its transmissions in 1.6 GHz than was previously understood to be possible (compared with the 20 kilometer radius of MediaFLO’s UHF spectrum reach).
But then the market would have pricing pressure in abundance and it would accelerate the uptake of mobile TV, and spread that valuation across two or more suppliers.
Whatever you think of Qualcomm’s excessive $71 billion valuation (Nokia only has a valuation of $94 billion despite Qualcomm’s revenues being just $7.5 billion, and Nokia’s being $41 billion), the addition of MediaFLO will add anything from $10 billion to $17 billion to that valuation over the next two years, depending on just how dominant the Qualcomm technology can remain in the US.