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You might have noticed that a guy called Keubiko has written several articles on Seeking Alpha, arguing that Destiny's PlayMPE and Clipstream are no good and the company is worth virtually nothing. We have refuted many of his claims, but since quite a number of these articles are not accessible without subscription to SA Pro and the discussion is scattered in comment sections of numerous articles, we'll deconstruct his claims here one by one, in an orderly and numbered fashion.

1) PlayMPE is a bloated dinosaur

Keubiko's claim: PlayMPE is a bloated dinosaur full of problems, for which much cheaper alternatives exist and switching cost are negligible.

I view PlayMPE as the bloated expensive dinosaur in the space.

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Reality: The studios keep on using it, extending it over the world, renewing its contracts, and cooperating with Destiny to improve functionality..

• PlayMPE is used by all three big studios, Universal, Warner, Sony
• Universal renewed its contract last May and has renewed its contract since the beginning, every single time
• The Universal contract signed last May replaced a host of local contracts rationalizing them. They cooperated intimately with Destiny to get all the features they wanted in PlayMPE
• Sony Australia signed a contract this year
• Where the studios go, independent labels usually follow, PlayMPE is used by a thousand of them

You might notice that Keubiko actually agrees with the fact that where studios go, others follow:

The studios have been effectively stuffing PlayMPE down the throat of the industry.

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2) Play MPE is not a growth business

Keubiko's claim: PlayMPE is not a growth business

DSNY's core (>97% of revenue) PlayMPE business is not a growth business, is vulnerable to upstart competitors, faces pricing pressure, and has huge single-customer concentration risk with a contract renewal set for March/April 2015. I generously value this business in the $0.15 per share range (assuming DSNY does indeed renew its large customer)

Recent Update Further Cements The Bear Case For Destiny Media - Destiny Media Technologies, Inc. | Seeking Alpha

Reality: As is common, his claims are one-sided, this one is no exception. Revenue from PlayMPE has indeed been stagnant, but that's because of a threshold in the new worldwide contract with Universal. Usage has to go beyond that threshold in order to generate additional revenue and up until recently, that has not generally be the case.

But in the last quarter (their fiscal Q3), two out of three months, usage was above that, and we know that chargeable usage at Univeral has grown 80%+ compared to the quarter. Here is CFO Vandenberg from the CC:

Should this continue, you might also keep in mind that additional revenue will show up as almost pure profit, as the process is highly automated.

One might also realize that Destiny has no debt and the number of outstanding shares haven't changed in years, and, according to Vandenberg on the Q3 CC:

We’ve continued to generate positive cash flow, even after subsidizing the R&D efforts on Clipstream.

3) PlayMPE margins

Keubiko's claim:

I generously value this business in the $0.15 per share range (assuming DSNY does indeed renew its large customer) representing a 2.2x revenue multiple or 15x an assumed net profit margin of 15%.

Recent Update Further Cements The Bear Case For Destiny Media - Destiny Media Technologies, Inc. | Seeking Alpha

Reality: Margins on PlayMPE are 22% on existing business and 90% on new business if it exceeds the usage threshold in the Universal contract (which happened in two of the three months of the April-June quarter or fiscal Q3).

4) Transcoding

Keubiko claims: transcoding cost aren't relevant and will be supersedec by Moore's law anyway.

Transcoding is a red herring thanks to Moore's Law.

Has Destiny Media's Clipstream Product Failed? - Destiny Media Technologies, Inc. | Seeking Alpha

On transcoding my point is that a) it is cheap, especially for a small ad clip, and b) most transcoding is done because there is VALUE in transcoding - video can be optimized for quality, screen size, link speed, latency, etc for the best user experience.

Panic Selling In Destiny Media Is Unwarranted - Destiny Media Technologies, Inc. | Seeking Alpha

Reality:

1) Transcoding cost are highly relevant

you might want to see this video of an industry expert who calls transcoding the biggest problem, with hundreds of formats. Here from the summary of a market report on the transcoding market:

Although business models remain uncertain and appetite for new investment in major markets remains low, continued digitization of workflows and skyrocketing demand for over the top content (both on-demand and live), continuing to drive double-digit growth for the market.

The cost of transcoding can run up pretty quickly and it's a billion+ dollar industry

2) It's not only transcoding cost

Clipstream is treated as normal web traffic. That means that:

• One doesn't need streaming servers, just a normal web server will do
• One doesn't need multiple streaming servers, one for each format
• One doesn't need content delivery networks either. Clipstream is treated as normal web traffic and therefore stored locally at your ISP for re-use

So, not only does Clipstream save the transcoding cost themselves, also the cost of multiple streaming servers and content delivery networks are not incurred.

3) Onesided argument

It's curious to see someone invoking Moore's law to rubbish transcoding cost (and content delivery networks) and yet stress things like:

• Clipstream taxes CPU more
• Clipstream does not have universal reach because Internet Explorer 8 isn't HTML5 enabled
• H265 can stream 720p at 600kbps

While we'll discuss these issues separately, it's very curious that Moore's law (or technological progress) only seems to operate in such a way as to diminish or rubbish Clipstream advantages and not its disadvantages. Very onesided.

5) Play MPE user problems

Keubiko's claim: PlayMPE delivers a very lousy user experience, and he has shown a few tweets to back this up, in his first article and in the comment section of one of ours.

Reality:

While there are indeed some usability issues outside the studios, the fact is that PlayMPE remains the industry standard with a growing usage. The company is also aware of these usability issues. From the CC:

But with that sophistication comes complexity. Some of the feedback we are receiving is the promotion staff would use the system a lot more if a simpler web-based encoder was available. This encoder has been under development for a couple of quarters now. We expect another big uptick in growth when it launches later this year.

6) Cheaper alternatives to PlayMPE exist

Keubiko's claim: PlayMPE is a bloated dinasaur for which cheaper alternatives exist. He especially touts an outfit called Haulix

I believe vastly more cost-effective newcomers such as Haulix (which has a quickly improving feature set) have a good shot at winning business from the high cost dinosaurs in the space like Destiny and iPool. For example Haulix's pricing schedule is $999 per month ($12K per year) for unlimited usage.

Recent Update Further Cements The Bear Case For Destiny Media - Destiny Media Technologies, Inc. (OTCMKTSSNY) | Seeking Alpha

Reality:

1. Cheaper alternatives have always existed, but this hasn't stopped PlayMPE to become the de-facto standard used by the big three music studios and a thousand of independent studios
2. Does one really think that if the likes of Universal (with a 40% market share after the EMI takeover) would use Haulix they would just have to pay $999 a month? Well perhaps, but as anyone who ever responded to a web hosting service promising "unlimited usage" can testify, these pricing schemes are usally not what they seem.
3. Keubiko touts Haulix feature set, but one should realize that the studios worked intimately with Destiny to tailor make (or, rather, re-make) PlayMPE to the specifications of the studios. The worldwide contract with Universal signed last year was conditional on these and it required Destiny to years of investment in PlayMPE.

Cheaper isn't always better. Are Haulix feature set really comparable to those of PlayMPE? Do they provide lossless quality and the sophisticated watermarking and security features that is so crucial for PlayMPE? From our own article:

PlayMPE has certain patented killer DRM (digital rights management) features:

• An undetectable watermark in the media file without losing quality, even when the file is compressed or conversed into another format.
• Tracking the MPE file so that any infringes can be tracked back to the violating (and receiving) party. It provides even information about the date and time of the transaction, operating system, IP address and even the date and time of the illegal transaction are available to the original owner of the content using this technology.
• Locking the media file to a single device, preventing it to play on unauthorized machines and devices.

This isn't just garden variety technology:

One of the more important claims in this patent is the ability to uniquely recognize a particular computer. Uniquely identifying a person's computer is a common issue which is usually approached by saving cookies or beacons to the user's computer or by tracking IP addresses. These are not reliable solutions as cookies are easily deleted and IP addresses easily changed. Destiny's propriety hash code process creates a serial number that can be used to recognize the user on subsequent visits without ever saving anything to that user's computer. [10-K filing]

Destiny's watermark technology is patented and integrated with the IFPI, the global anti piracy police. It's the only watermark that survives compression, analog duplication, conversion, filtering, etc., and still be inaudible. Pirates have been stopped in the middle of downloads with the police visiting them the next day, per the company.

The watermark identifies the violator by name with details of time, IP address, etc., so the person can be arrested. Every stream and every download is individually watermarked. Other systems have either no watermark or a useless generic one saying "Copyright UMG."

Can Haulix do all this? We don't think so.

7) PlayMPE has no network effects

Keubiko claim: there aren't any network effects to speak off

Switching costs are de minimis based on my research. These are cloud based offerings and extremely easy to use. This is not like ripping out an accounting system at all.

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While Keubiko speaks of switching cost, these include network effects and we'll take on his switching cost in the next post.

Reality: Network effects are likely to be significant

1. A network becomes more useful with the number of users (known as Metcalf Law)
2. This is working to a considerable degree with PlayMPE, as the big three studios adopted it, independents follow and then basically the receiving customer base (radio stations, journalists, etc.) has to follow, as it becomes the de-facto standard.

The curious thing is, Keubiko does realize this at certain stages:

The studios have been effectively stuffing PlayMPE down the throat of the industry. Most of the angst seems to be coming from their targets.

Panic Selling In Destiny Media Is Unwarranted - Destiny Media Technologies, Inc. | Seeking Alpha

8) Switching costs are negligeable

Keubiko claim:

Switching costs are de minimis based on my research. These are cloud based offerings and extremely easy to use. This is not like ripping out an accounting system at all.

Panic Selling In Destiny Media Is Unwarranted - Destiny Media Technologies, Inc. | Seeking Alpha

I view PlayMPE as the bloated expensive dinosaur in the space.

Panic Selling In Destiny Media Is Unwarranted - Destiny Media Technologies, Inc. | Seeking Alpha

Reality: If PlayMPE is indeed a bloated expensive dinosaur for which cheap alternatives (Keubiko touts Haulix) exist what prevents their customers from switching? Switching cost!

So we know that these statements can't be both true, as usual, Keubiko want to have his cake and eat it too.

We have already argued that PlayMPE isn't the bloated expensive dinosaur, here we will argue that switching cost are fairly high.

1. The studios like Universal worked intimately with Destiny to improve PlayMPE, which is almost build to specification. Iimprovements were conditional for the renewal of the Universal world-wide contract last year (replacing a host of local contracts). The improvements were a multi-year process. Why would the studios go over this again with a new partner?
2. There are mild network effects described above which make switching to another player expensive. Not only is PlayMPE used by the big three studios and a thousand independents, it is integrated into Clear Channel, Shazam, BBC, Sirius XM, Mediabase, etc., and is compatible with all of the scheduling and reporting systems and there is a network of 100,000 users around the world.
3. The network effects provide other benefits which further cement PlayMPE's position: "We are in a position to generate the most accurate real time charts in the industry. We're building the most accurate data base meditated data from music all over the world..."] (CEO Vestergaard Q2 2013CC)

We actually asked the company for a comment on the last point, here is what they had to say:

We have six server facilities in Europe, North America and Australia with global 24 7 telephone support with code that automatically mirrors and load balances content in real time globally, while creating automated streaming alerts and other marketing materials such as our automated http://daily.plaympe.com integration into real time charts and social media feeds - this compares with other sites with a user name and password you can download an MP3 from.  Our patented watermarking is the best in the world and we're integrated with the IFPI - the global anti piracy police.  It's the only watermark to survive compression, analog duplication, conversion, filtering, etc. and still be inaudible.



Our watermark will say "The name of the Pirate is Steve Vestergaard and he downloaded on July 31st at 7 AM from IP address...blah blah blah" so they can sue or have the person arrested.  Every stream and every download is individually watermarked.



Other systems either have no watermark or a useless generic one "Copyright UMG".



Our system is a permission based encoding system where the labels can set up administrators and assign different staff to work on different aspects of a release (the music, the video, the recipient list, the promo material, etc.) and it doesn't go out without automated approval from various authorities (their CFO for example).  Content can be reused and relocalized so the same song can come out in different countries in different languages.  We have 27 language versions of our various player software, for example.



There is nothing similar to our system anywhere in the world.  That's why say that out of the 60 million dollar market, 1/3 will go to the competitors at the low end and we have  a 40 million near monopoly market opportunity on the remaining high end business.