DRAFT FOR DISCUSSION Investment in Crackle Australia• With a rapidly growing mobile advertising...

Investment in Crackle Australia

Overview August 2013

DRAFT – FOR DISCUSSION


Executive Summary

SPT Networks is seeking approval to make an additional investment in Crackle Australia

• Foxtel has recently decided not to renew TV1 and Sci-Fi’s (“SF”) affiliate agreement. The elimination of Foxtel’s subscriber fees has forced the TV1/SF joint-venture between SPT, CBS Studios and Comcast/NBC Universal to begin the process of winding down the business

• In light of these developments, SPT can capitalize on this window of opportunity to realign SPT’s strategy in Australia by positioning Crackle to be the premium AVOD service in Australia – filling a market gap left by the impending shutdown of the TV1/SF JV

• Crackle Australia launched in 2010 and has been able to build an audience with minimal investment in programming and marketing with a free ad-supported video on demand (“AVOD”) anywhere, anytime

• With a rapidly growing mobile advertising market, national rollout of a new high speed broadband network over the next decade, and lack of entrenched competition, Australia is well positioned for an expanded Crackle presence

• Investment will be used to significantly increase the content offering, expand marketing budget to $1.4MM and add 8 in headcount in Year 1

• From a SPT view, expected DWM of ($6.9M) and payback period of 6 years

• From a SPE view, expected DWM of ($3.3M) and payback period of 4 years

1


Australian Advertising Market Overview

2 Source: PwC.

• The Australian digital video advertising market is expected to grow at a 45% CAGR from $91MM in 2012 to $582MM in 2017

• The Australian TV advertising market is expected to grow at a 5% CAGR from $4.1BN in 2012 to $5.2BN in 2017

($USD in millions) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Digital Video Advertising Market $5 $15 $39 $69 $91 $139 $213 $310 $432 $582

% Growth NA 200% 160% 75% 33% 52% 54% 46% 39% 35%

% US Digital Video Advertising Market 1% 2% 3% 4% 4% 4% 5% 6% 7% 8%

TV Advertising Market $3,862 $3,566 $4,153 $4,080 $4,076 $4,282 $4,492 $4,701 $4,945 $5,195

% Growth NA (8%) 16% (2%) (0%) 5% 5% 5% 5% 5%

% US Digital Video Advertising Market 7% 7% 7% 7% 6% 6% 6% 6% 6% 6%


Australian Market Overview

• Broadband households in Australia expected to grow at a 3% CAGR from 2012 to 2017 with significant uptick expected once the National Broadband Network project finishes rollout in 2022

• Smartphone users expected to reach 70% of the population by 2017 due to the lag in broadband connectivity

3

Smartphone Users (MM) and % Penetration of Population Fixed Broadband Households (MM)

Source: eMarketer as of April to May 2013 and PwC.

5.6

5.8

6.0

6.2 6.3

6.5 6.6

5.0

5.5

6.0

6.5

7.0

2011 2012 2013 2014 2015 2016 2017

6.6

9.3

12.0

14.4 15.1 15.6

16.2

31%

42%

54%

64% 67% 68% 70%

--%

10%

20%

30%

40%

50%

60%

70%

80%

6.0

10.0

14.0

18.0

22.0

2011 2012 2013 2014 2015 2016 2017

Smartphone Users % of Population


Australian National Broadband Network Project

• The National Broadband Network (“NBN”) is a national mandate to develop a high speed broadband network to reach 100% of Australian premises with a combination of fiber, fixed wireless and satellite technologies

• Broadband speeds up to 100 Mbps

• Operated by government-owned enterprise, NBN Co.

• Goal is to rollout over 10 years with commencement in 2011

• Services available in New South Wales, Queensland, Victoria, Tasmania and South Australia

• Expected costs to reach ~A$36B with funds to come from a government investment of A$27B and NBN Co’s own revenues and private debt markets

• NBN accelerates opportunity for digital growth in Australia

• Tablet/smartphone penetration at 65% of population at end of 2012 with current high-speed infrastructure an obstacle

• Broader high-speed access enhances demand for digital services such as AVOD, SVOD and other mobile applications

4

NBN Fiber Australian Coverage 2012 - 2022

1% 4%

14% 21%

31% 40%

52%

64%

78%

88% 100%

--%

20%

40%

60%

80%

100%

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Source: NBN website.


Films

TV

Clips Full Length

Competitive Landscape

• Opportunity to capitalize on limited premium AVOD content in online market as consumer appetite is rapidly building for on-demand entertainment

• Existing AVOD services are primarily catch-up services focusing on TV

• Increase in penetration of smart TV, tablets, and mobiles and faster internet supporting growth in streaming

• Amazon Instant, Hulu and Netflix are not offered in Australia

• Viewster, Crackle’s direct competition in Australia, is increasing it’s international presence, particularly in APAC region

5

Ad Supported Video Services

Viewster Recent Developments VOD Providers

• Australia and New Zealand’s only subscription online DVD rental and streaming service

• Subscription and PPV streaming of 3,000+ movies

• HBO invested $10MM for a ~16% stake in Feb 2012

• Leading cinema exhibitor with top DVD rental kiosk network

• Plans to launch online streaming service in late 2013

• Subscription services that offer access to Australia’s FTA television channels in addition to subscription channels, radio, games and PPV content

• Well distributed TVOD service offering mainstream movies and TV

• Currently only offering TVOD movies but potential to expand offering

• Public estimates of ~11MM monthly uniques on YouTube

• May 2013: Announced licensing deal for 240 hours of programming from Starz Digital Media, Shine Group, ALL3MEDIA, and KBS Media catering to its young audience

• April 2013: Viewster announced plans to open an office in Australia in addition to the US, UK and Singapore

• March 2013: Reported 29MM global uniques, of which 8.3MM in the U.S. and 3.7MM in the UK


Strategic Benefits to SPT, SPE, and Sony

• Elevate the Crackle brand to be the premiere destination for premium long form content free to the consumer

• Solidify position in the Australian market while digital ad spend grows sharply in the coming years coupled with the rollout of a new high-speed broadband infrastructure backed by the government

• Further grow Crackle’s international presence while creating synergies from leveraging Crackle’s technology backend

• Exploit SPT’s movie and television products to generate incremental licensing revenue in Australia

• Utilize ad inventory to market SPE television and film products, as well as consumer electronics such as next generation PS4

6


Critical Success Factors

7

• Hire local team with strong digital expertise

• Secure distribution deal with PlayStation Australia

• 95% fill rate and floor net network CPM of $17 and net direct sales CPM of $30 guaranteed by an ad sales house

• Ability to selectively acquire exclusive AVOD rights of Sony and third party content (e.g., CBS) at reasonable pricing

• Current pricing for Sony and third party content are preliminary estimates and not yet negotiated

• Foxtel has indicated a willingness to offer a significant premium above current pricing estimates to acquire the entire library from Sony and CBS

• Cheaper, higher quality broadband made more widely available to Australians via NBN


Operating Assumptions

8

DISTRIBUTION

• Expand (re-launch) in Australia in April 2014 on Web, Mobile and CTV

• 800k uniques / month in FY15 growing to 1.9MM uniques / month in FY19

• 4.0 streams / unique in FY15 growing to 5.2 streams / unique in FY19 (average)

• $3.7MM of net revenue in FY15 growing to $17.8MM of net revenue in FY19

• Crackle Australia: 184k uniques in July 2013 (54%/22%/24% for Web/Mobile/CTV)

AD SALES

• Network CPMs: FY15 – FY19 Net CPM of $17-$19 for Web/Mobile/CTV

• Direct Sales CPMs: FY15 – FY19 Direct Sales CPM of $30 for Web/Mobile/CTV

– Direct Sales Ad opportunities at 40% in FY16 growing to 85% in FY19

• 95% streams monetized in FY15 for Web/Mobile/CTV and staying flat to FY19

• 4.4 ads / stream in FY15 growing to 5.6 ads / stream in FY19 (across all platforms)

CONTENT / PROGRAMMING

• Content mix: Movies and TV

• 98 monthly movie titles in FY15-FY19

– Movie content license from third parties: 20% in FY19 growing to 40% in FY19

• 27 monthly TV shows at launch in FY15 growing to 31 in FY19

– TV content license from third parties: 20% in FY15 growing to 40% in FY19

OPERATIONS

• Utilize Crackle’s Digital Platform Group for core platform and app development support: $339k in FY15 growing to $517k in FY19

• Australia hires 8 new employees starting in January 2014 and leverages existing management. Hire an additional 4 employees starting in April 2016

• Assumes hiring of one finance employee as part of Home Office

MARKETING • Annual marketing support of $1.4MM in FY15 growing to $2.0MM in FY19 (includes $150k launch marketing)

Note: US dollars.


Uniques by Platform

9

• Uniques are based upon Crackle’s current distribution on the following platforms in Australia:

• CTV: Bravia, LG, Samsung, Xbox

• Mobile: Android, Blackberry, iOS, Windows 7 Phone

• Web: Google Chromeapp, Windows 8

• Crackle plans to add apps for PlayStation 4, FetchTV/Optus IPTV set-top boxes (“STB”) and Wowtel IPTV STBs

FY 2015 FY 2016 FY 2017 FY 2018 FY 2019

Web:

Total Internet Users 17,100,000 17,300,000 17,600,000 17,800,000 17,978,000

Crackle Uniques per Month 410,874 648,750 704,000 738,700 746,087

Monthly Uniques as % of Internet Users 2% 4% 4% 4% 4%

CTV:

Total CTV Devices 6,074,161 7,483,140 8,977,806 9,951,670 10,863,947


Monthly Uniques as % of Devices 3% 4% 4% 4% 4%

Mobile:

Total Mobile Devices 20,460,526 22,372,632 23,963,526 25,399,879 26,345,873


Monthly Uniques as % of Devices 1% 2% 2% 2% 2%

Total Uniques:

Web 410,874 648,750 704,000 738,700 746,087

CTV 187,107 299,326 381,557 437,873 478,014

Mobile 202,019 447,453 539,179 609,597 632,301

Total 800,000 1,395,528 1,624,736 1,786,171 1,856,402

% Growth NA 74% 16% 10% 4%

% of Population 4% 6% 7% 8% 8%

Total Uniques Mix:

Web 51% 46% 43% 41% 40%

CTV 23% 21% 23% 25% 26%

Mobile 25% 32% 33% 34% 34%


Ad Projections (US$ in thousands)

10

(1) Assumes $150K in sponsorship revenue per Original TV show. (2) Source: PwC. Data shown during periods available.

Crackle Australia

FY 2015 FY 2016 FY 2017 FY 2018 FY 2019

Monthly Uniques 800,000 1,395,528 1,624,736 1,786,171 1,856,402

Implied Devices to Uniques Conversion Rate 2% 3% 3% 3% 3%

% of Total Population 4% 6% 7% 8% 8%

Streams per Unique 4.0x 4.4x 4.7x 4.9x 5.2x

Monthly Streams 3,176,233 6,092,640 7,571,053 8,814,701 9,664,557

Ads per Stream 4.4x 4.7x 4.9x 5.4x 5.6x

Monthly Ad Opportunities 14,102,208 28,892,488 37,176,128 47,827,953 53,688,772

Monetized Ad Opportunities - % 95% 95% 95% 95% 95%

Monetized Ad Opportunities 13,397,098 27,447,864 35,317,322 45,436,555 51,004,334

Monetized Ads per Stream 4.2x 4.5x 4.7x 5.2x 5.3x

Direct Sale Ad Streams Opportunities - % --% 40% 60% 80% 85%

Monetized Direct Sale Ad Opportunities -- 10,979,145 21,190,393 36,349,244 43,353,684

Network Filled Ad Streams Opportunities - % 100% 60% 40% 20% 15%

Network Filled Ad Opportunities 13,397,098 16,468,718 14,126,929 9,087,311 7,650,650

Net Direct Sale CPM NA $30 $30 $30 $30

Annual Direct Sale Net Revenue $-- $3,952 $7,629 $13,086 $15,607

Net Network Filled CPM $19 $17 $17 $17 $17

Annual Network Filled Net Revenue $3,055 $3,360 $2,882 $1,854 $1,561

Sponsorship Revenue (1) $600 $600 $600 $600 $600

Net Revenue $3,655 $7,912 $11,110 $15,540 $17,768

% Australian Video Advertising Market (2) 2% 3% 3% 3% NA


Financial Projections (US$ in thousands)

11

(1) Source: PwC. Data shown during periods available. (2) Does not include Finance headcount. (3) Cash flow assumes 2 month lag on inflow of cash and 1 month lag on outflow of cash. Includes Finance headcount. (4) Cash flow after Licensing Revenue to SPT. Includes Finance headcount.

Crackle Australia

Pre-Launch FY 2015 FY 2016 FY 2017 FY 2018 FY 2019

Net Revenue $3,655 $7,912 $11,110 $15,540 $17,768

% Growth 117% 40% 40% 14%

% Australian Video Advertising Market (1) 2% 3% 3% 3% NA

Movie Programming Costs $677 $744 $819 $901 $991

TV Programming Costs 2,711 3,796 4,345 4,780 5,258

Total Programming Costs $3,388 $4,541 $5,164 $5,681 $6,249

Hosting / Bandwidth 189 364 484 591 676

Partner's Revenue Share 346 630 714 999 1,167

Ad Serving Fees 99 216 330 416 463

Traffic and Music Fees 91 198 278 388 444

Other Cost of Sales $725 $1,407 $1,805 $2,394 $2,751

Gross Profit ($458) $1,965 $4,141 $7,465 $8,769

% of Revenue NM 24.8% 37.3% 48.0% 49.4%

Marketing $150 $1,429 $1,882 $1,974 $2,015 $2,048

Headcount 239 956 985 1,407 1,450 1,493

Other G&A 121 283 291 300 309 319

Digital Platform Group Allocation -- 339 408 456 488 517

Total SG&A $510 $3,007 $3,566 $4,138 $4,262 $4,377

EBIT (2) ($510) ($3,465) ($1,601) $3 $3,202 $4,392

% of Revenue NM NM NM 0.0% 20.6% 24.7%

SPT EBIT (add back SPE Content Costs) ($510) ($924) $1,350 $2,843 $5,759 $6,579

SPT Cash Flow (3) ($467) ($3,647) ($2,251) ($541) $2,419 $3,955

SPT Cumulative Cash Flow (467) (4,115) (6,366) (6,906) (4,488) (532)

SPE Cash Flow (3)(4) ($467) ($2,262) ($532) $1,132 $3,928 $5,247

SPE Cumulative Cash Flow (467) (2,729) (3,261) (2,129) 1,800 7,046

Appendix


KPI Across Plans

13

Web Mobile CTV Total

Monthly Uniques (thousands)

Australia - FY15 411 202 187 800

United States - MRP FY15 13,100 3,000 5,500 21,600

Women's Network - FY15 3,310 224 184 3,718

LatAm - FY15 6,320 904 1,747 8,970

Streams per Unique

Australia - FY15 3.3x 4.3x 5.3x 4.0x

United States - MRP FY15 1.9 4.9 5.5 3.2

Women's Network - FY15 2.3 1.7 2.8 2.3

LatAm - FY15 2.5 1.8 3.0 2.5

Ads per Stream

Australia - FY15 3.1x 4.2x 6.4x 4.4x

United States - MRP FY15 4.9 4.7 5.9 5.3

Women's Network - FY15 3.0 3.2 3.2 3.0

LatAm - FY15 3.2 3.3 3.3 3.2

Ad Opportunities (thousands)

Australia - FY15 4,153 3,623 6,326 14,102

United States - MRP FY15 119,600 68,600 179,800 368,000

Women's Network - FY15 23,061 1,166 1,598 25,825

LatAm - FY15 50,822 5,426 17,477 73,725

Note: Streams per unique and ads per stream for Australia assumption incorporates expected uplift from exclusive programming and significant increase in marketing spend (vs. no current marketing spend in Australia).


Programming (US$ in thousands except per title/episode costs)

14

• Assumes 10% rate card increase every year for movies and TV

• Rate card for Sony and 3rd party content is the same

• Assumes 100% of linear rate card for TV shows based upon TV1/SyFy pricing

• Total annual programming cost of $3.4M in FY15 growing to $6.2M in FY19

(1) Assumes 10% rate card increase every year. (2) Includes Anime, Bewitched, I Dream of Jeanie and Jackie Chan Adventures.

Title Cost Movies Episode Cost TV

Per Month FY 2015 FY 2016 FY 2017 Per Month FY 2015 FY 2016 FY 2017

Number of Titles: Number of Episodes:

AAA $5,400 2 2 2 A $1,667 20 40 40

AA 3,500 6 6 6 B 1,250 60 60 60

A 1,200 10 10 10 C 833 80 100 100

B 460 10 10 10 D 583 80 100 120

C 160 30 30 30 Originals 13 16 16 16

D 80 40 40 40 Other(2) 6 625 625 625

Total Movies Per Month 98 98 98 Total TV Episodes Per Month 881 941 961

Monthly Streams Per Title: Monthly Streams Per Episode:

AAA 86,975 126,114 156,381 A 20,000 29,000 35,960

AA 33,075 47,959 59,469 B 15,000 21,750 26,970

A 19,600 28,420 35,241 C 7,000 10,150 12,586

B 9,800 14,210 17,620 D 2,000 2,900 3,596

C 3,675 5,329 6,608 Originals 7,000 10,150 12,586

D 4,900 7,105 8,810 Other(2) 225 326 404

Total Programming Spend - Movies $677 $744 $819 Total Programming Spend - TV $2,711 $3,796 $4,345

% Sony 75% 65% 55% % Sony 75% 65% 55%

% Third Party 25% 35% 45% % Third Party 25% 35% 45%

(1) (1)


Marketing (Figures in thousands and US$)

15 (1) Assumes CTV promotions through partner marketing.

FY 2015 FY 2016 FY 2017 FY 2018 FY 2019

Uniques by Platform

Web Uniques (Monthly) 411 649 704 739 746

Mobile Uniques (Monthly) 202 447 539 610 632

CTV Uniques (Monthly) 187 299 382 438 478

Total Uniques (Monthly) 800 1,396 1,625 1,786 1,856

% Total Uniques Across All Platforms

Web Uniques (Monthly) 51% 46% 43% 41% 40%

Mobile Uniques (Monthly) 25% 32% 33% 34% 34%

CTV Uniques (Monthly) 23% 21% 23% 25% 26%

% Total Uniques Across All Platforms by Marketing Budget

Paid 59% 50% 47% 45% 41%

Retained 6% 8% 12% 18% 25%

CTV 23% 21% 23% 25% 26%

Organic 12% 20% 17% 13% 8%

Marketing Budget

Web SEO $180 $198 $218 $240 $264

Web SEM 240 264 290 319 351

Paid Web Uniques $420 $462 $508 $559 $615

Mobile 200 443 534 604 626

CTV (1) -- -- -- -- --

Subtotal $620 $905 $1,042 $1,163 $1,241

Newsletter $50 $53 $55 $58 $61

Launch Marketing -- -- -- -- --

Public Relations 150 158 158 165 174

Social Media 50 53 53 55 58

Media 150 158 158 165 174

Research 50 53 53 55 58

Organic Shortfall 359 504 457 354 283

Total Marketing Budget $1,429 $1,882 $1,974 $2,015 $2,048


Headcount (US$ in thousands)

16 (1) Assumes 15% bonus. (2) Assumes fringe benefits of 20% on salaries and 4% on bonuses.

• Assumes hiring of an Australia operations team of 8 new employees starting January 2014 in advance of proposed launch in April 2014

• Hiring of remaining Australia operations team consisting of 4 new employees to occur in April 2016

FY 2015

Title Responsibilites Start Date Location Salary Bonus (1) Total Comp.

1 GM - Business Owner P&L Responsibility, Local Distribution, Monetization Jan 2014 Australia $150 $23 $173

2 Programming Manager Managing Acquisitions, Scheduling, Metadata Jan 2014 Australia 90 14 104

3 Marketing Head Head of Partner/Promotions, SEO/SEM, Social/PR Jan 2014 Australia 100 15 115

4 Ad Ops Traffic campaigns, Manage inventory yield, Ad tech integration Jan 2014 Australia 75 11 86

5 Art/Creative Slideshow, Creative Assets, Channel Art Jan 2014 Australia 65 10 75

6 QA Identify, raise and address technical issues Jan 2014 Australia 65 10 75

7 Vid Ops Ingest content assets, Encoding, Rights Management Jan 2014 Australia 80 12 92

8 Producer Production set up in CMS, Playlists, Channel Launches Jan 2014 Australia 80 12 92

9 Programming Acquisitions, Scheduling, Metadata Apr 2016 Australia -- -- --

10 Marketing Partner/Promotions, SEO/SEM, Social/PR Apr 2016 Australia -- -- --

11 Vid Ops Ingest content assets, Encoding, Rights Management Apr 2016 Australia -- -- --

12 Producer Production set up in CMS, Playlists, Channel Launches Apr 2016 Australia -- -- --

Total Before Fringe Benefits $705 $106 $811

Fringe Benefits (2) 141 4 145

Total After Fringe Benefits 846 110 956


Illustrative Programming Ratings & Costs

17

Rating A B C D E

Cost per Episode per Year ($20K-$35K) ($15K-$20K) ($10K-$15K) ($5K-$10K) (~$5K or less)

– The Client List (current) – NA – Re-runs of current shows – The Nanny – The Young and

– Helix (current) – Community – Just Shoot Me the Restless

– The Lost Girl (current) – Drop Dead Diva – Mad About You – The Dr. Oz Show

– Necessary Roughness – Seinfeld – Ripley's Believe it

(current) – Unforgettable or Not

– The Big C

– Pan Am

– CSI – NCIS – Everybody Loves – Becker – Charmed

Raymond – Numb3rs – Wolf Lake

– Frasier – Rules of

– Hawaii Five-0 Engagement

– Star Trek

– Defiance – Law & Order: UK (new) – Eureka – 30 Rock – NA

– Law & Order: SVU (new) – House – Battlestar Galactica

– Warehouse 13 – Law & Order: CI – Covert Affairs

– Royal Pains

– Fairly Legal

CBS

NBC

Sony

• The table below represents TV shows categorized into ratings based upon current linear channel market pricing for TV1/SyFy

• Shows are not categorized based on qualitative ratings

• Factors to consider are competition for these rights (e.g., Foxtel), AVOD pricing vs. linear TV pricing and ability to select shows from a library offering

DRAFT FOR DISCUSSION Investment in Crackle Australia• With a rapidly growing mobile advertising...

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Transcript of DRAFT FOR DISCUSSION Investment in Crackle Australia• With a rapidly growing mobile advertising...