In timew when even big technology firms can get into serious trouble almost overnight, one should not forget perhaps that small tech companies are quite vulnerable, so one should not put one's life savings into any single one.
However, there are also lots of opportunities and we think that Destiny Media provides an excellent risk/reward picture, with a few qualities that might seem to skip notice. While the market cap versus the addressable market is an important metric for seizing op the opportunity in front of the company, we think there are two other critical factors that we think investors should not lose sight off:
- The quality of management
- The defensibility of the technology
By most accounts (certainly ours), CEO and founder Steve Vestergaard is an accessible, no-nonsense kind of guy who has a vested interest in the success of the company (as a large shareholder) and has methodically and patiently build out the company to reach the inflection point it is today. It is difficult to put a price on that, but we think it should be substantial. Most steps forward seem to be well thought out. We'll give a few examples.
While many microcaps fall pray to their own ambitions and get all kinds of financing deals (often of dubious quality giving the financier incentives to short), Destiny has been built on a shoe-string. The company has incurred no debt, is cash flow positive, and most important of all, the cash flow generated by one product has been used to finance the R&D in another one, all of which has been expensed. And this, all the while being engaged in litigation battles (which have been settled in their favor).
The company was also wise to listen to the wishes of their main customers, and invest heavily into improving PlayMPE. As a result, revenues stagnated for a considerable amount of time, but the company is now in a much better situation as a result. Not only are the investments now more or less complete, more importantly, as a result the big three music companies want to go global with PlayMPE, as the product is now ready for that.
There are big advantages for these music companies, as the cost of using PlayMPE (50 cents) are a fraction of sending out CD's by courrier ($25), but more importantly, the latter is inherently more risky. PlayMPE is secure, it can be locked to a single computer or IP address and watermarking enables copies to be traced to the violator within half an hour. Also, PlayMPE is instant, and gives immediate feedback and data as to the usage.
So not only will we see geographical expansion (on the coattails of the record labels), it will also access new user categories like DJ's and journalists. And, in terms of defensibility of the technology, not only is PlayMPE protected by three patents, it has cemented and solidified it's monopoly position by working together with their main customers. This is smart work, and the fact that they have not taken shortcuts, but patiently build their capabilities and relationships, is impressive and will pay significant dividends.
In the same careful, methodical, patient way their other product has been built, Clipstream G2. Despite impatient investors, it hasn't been promoted when it wasn't ready and the company took the unprecedented step to hire two patent lawyer bureaus, one to investigate the opportunities to reverse engineer the product in order to protect it better. Seven patents have been filed in 2011 already (they're pending).
Defensibility comes not only from these patents and the inherent complexity of working in Javascript, it comes also from the state of the market right now, where video on the web is fragmented into different standards. Flash, the dominant system, isn't supported by Apple and as a result Adobe (the company behind Flash) had to lay off 700 people and Flash doesn't support mobile.
This leaves video providers with the choice of either ignoring the mobile market (including tablets), or having to transcode their videos into different formats. The dominant HTML5 compatible formats for mobile is H.264, but that's proprietary so web browsers have to pay license fees and it's not compatible with its successor, H.265. Companies like Netflix use Microsofts limelight, but the latter is being discontinued, and alternatives do not have much (if any) safety features (in terms of protecting video streams from being pirated).
We think that Destiny's Clipstream G2, offers a solution on the cost, addressible market, and DRM (safety). Any partial solution on any of these dimensions would already be quite interesting, but all of these at once is a compelling offering.
We remain very bullish on the company, if you want some more meat on this we can advise you to listen to the Tree Part advisers presentation last month. The second half is especially interesting as it contains something of a roadmap of product launches.
