The biggest issues surrounding UF are the very ones the Kool-Aid drinkers either don't want to examine or have no ability to understand. NTEK has essentially become a singular effort - UF - there really isn't anything else among their various "divisions" of note. Believe me, even if there was a very small "something" there outside the UF project, they or IR would be shouting from the rooftops.
So as we know they've put all of their eggs in the UF basket, this simplifies the process of due diligence significantly.
UF is a 4K transactional video on demand application, depending on a specific user base:
First, the consumer must own a 4K television. This one is simple. 116MM or so TV households in the US. 4K penetration estimated at 10% of households by 2018 (or 11.6MM), with current estimates at around 1% of the total or 1.6MM give or take. When doing DD on this part of the equation, you can't look at "shipments" or other data - shipments are a complete misnomer and don't always equate to sales.
That's why models are moved around from top-end stores to big box and then circulated out of inventory if they don't sell. Happens all the time as millions of models go unsold. So we're at 1.6MM sets across all TV manufacturers at the present time in terms of 4K sets in consumer’s homes. I'd just straight-line the estimate to see annual growth the next three years.
Second, of that 1.6MM current 4K TV consumers, said consumer must be enticed to actually use the UHD functionality of the set, not just pass-through their cable or sat signals and use the built-in upscaler. This is a critical point, as more and more larger set sizes are, by default, 4K sets. People typically make TV purchasing decisions based on screen size. If the TV size they want happens to be 4K, so be it.
And as 4K functionality continues to cost less and less to implement vis-à-vis HD, the larger set sizes will become almost exclusively 4K. But unless the consumer is actively “using” the full 4K functionality of the set, they aren’t a potential UF consumer. So that current 1.6MM actually represents a smaller number of potential UF consumers than the total. Let’s be generous and call it 1.2MM who actually want to actively use the 4K feature set. I doubt the percentage is that high, but let’s go with it.
Third, of that now 1.2MM current 4K TV consumers that want to actively engage in the set’s UHD functionality, they have to be “connected.” Of internet connected homes, approximately 45% will use a connected TV regularly in 2015, although that number is growing. So the potential consumer base for UF falls to 540K.
Forth, of that 540K consumers that own a 4K set, want to engage its functionality, and have their TVs connected to the internet, you have to further cull that number by the competition – namely cable/sat 4K offerings from Comcast, Direct and Dish, and OTT offerings from Amazon, MGO, Netflix, etc. Not to mention upcoming UHD Blu Ray. But let’s be crazy generous and say UF can attract half the people within that 540K subset to UF – so 270K.
Fifth, of that 270K consumers that own a 4K set, want to engage its functionality, and have their TVs connected to the internet, and also want to try UF instead of the stiff competition, you have to drill down to only those with a 2015 Samsung or Vizio, as these are the only TVs that UF is currently available on. And if 10 TV companies make up 100% of the market, then for simplicity 2 companies make up 20%. So 20% of 270K comes out to roughly 54K consumers.
Sixth, to make any money in the transactional space from those remaining 54K consumers, you have to continually engage them to return to your app month in and month out and make active purchases each month by offering A-list, blockbuster content they want so badly they’re willing to pay for it in a home environment (outside of seeing the film in the theater and before it becomes “free” on subscription services, broadcast or cable channels).
So it’s easy to see the huge hurdles UF faces here. Their potential pie is razor thin to start with, as 4K still represents a mere fraction of the US market; the pie is made thinner still by the realities of connected TV penetration, usage patterns and stiff competition. And that potential pie is still thinner because they don’t have 80% of the potential market. And lastly, they don’t have enough quality, A-list content to drive continual transactional purchases from that very small sub-set they reach.
UF has failed on both the push and pull sides of the market – the two fundamental ways you build an OTT business – they’ve failed to push (or get) the app featured on 100% of the potential 4K base, e.g. every TV company, and they’ve failed to pull (or attract) consumers with aggressive marketing, free trials and promotions, and most importantly, a steady stream of A-list content to attract and retain consumers.
So if I were an active investor, I’d want to know what their specific, step-by-step plan is to effectively “re-launch” the UF service. Start over and get the push and pull sides of the equation in lock step. And not only in the US, but in growing markets overseas. This will require time, money and expertise. I’m not sure that have any of the three.
So as we know they've put all of their eggs in the UF basket, this simplifies the process of due diligence significantly.
UF is a 4K transactional video on demand application, depending on a specific user base:
First, the consumer must own a 4K television. This one is simple. 116MM or so TV households in the US. 4K penetration estimated at 10% of households by 2018 (or 11.6MM), with current estimates at around 1% of the total or 1.6MM give or take. When doing DD on this part of the equation, you can't look at "shipments" or other data - shipments are a complete misnomer and don't always equate to sales.
That's why models are moved around from top-end stores to big box and then circulated out of inventory if they don't sell. Happens all the time as millions of models go unsold. So we're at 1.6MM sets across all TV manufacturers at the present time in terms of 4K sets in consumer’s homes. I'd just straight-line the estimate to see annual growth the next three years.
Second, of that 1.6MM current 4K TV consumers, said consumer must be enticed to actually use the UHD functionality of the set, not just pass-through their cable or sat signals and use the built-in upscaler. This is a critical point, as more and more larger set sizes are, by default, 4K sets. People typically make TV purchasing decisions based on screen size. If the TV size they want happens to be 4K, so be it.
And as 4K functionality continues to cost less and less to implement vis-à-vis HD, the larger set sizes will become almost exclusively 4K. But unless the consumer is actively “using” the full 4K functionality of the set, they aren’t a potential UF consumer. So that current 1.6MM actually represents a smaller number of potential UF consumers than the total. Let’s be generous and call it 1.2MM who actually want to actively use the 4K feature set. I doubt the percentage is that high, but let’s go with it.
Third, of that now 1.2MM current 4K TV consumers that want to actively engage in the set’s UHD functionality, they have to be “connected.” Of internet connected homes, approximately 45% will use a connected TV regularly in 2015, although that number is growing. So the potential consumer base for UF falls to 540K.
Forth, of that 540K consumers that own a 4K set, want to engage its functionality, and have their TVs connected to the internet, you have to further cull that number by the competition – namely cable/sat 4K offerings from Comcast, Direct and Dish, and OTT offerings from Amazon, MGO, Netflix, etc. Not to mention upcoming UHD Blu Ray. But let’s be crazy generous and say UF can attract half the people within that 540K subset to UF – so 270K.
Fifth, of that 270K consumers that own a 4K set, want to engage its functionality, and have their TVs connected to the internet, and also want to try UF instead of the stiff competition, you have to drill down to only those with a 2015 Samsung or Vizio, as these are the only TVs that UF is currently available on. And if 10 TV companies make up 100% of the market, then for simplicity 2 companies make up 20%. So 20% of 270K comes out to roughly 54K consumers.
Sixth, to make any money in the transactional space from those remaining 54K consumers, you have to continually engage them to return to your app month in and month out and make active purchases each month by offering A-list, blockbuster content they want so badly they’re willing to pay for it in a home environment (outside of seeing the film in the theater and before it becomes “free” on subscription services, broadcast or cable channels).
So it’s easy to see the huge hurdles UF faces here. Their potential pie is razor thin to start with, as 4K still represents a mere fraction of the US market; the pie is made thinner still by the realities of connected TV penetration, usage patterns and stiff competition. And that potential pie is still thinner because they don’t have 80% of the potential market. And lastly, they don’t have enough quality, A-list content to drive continual transactional purchases from that very small sub-set they reach.
UF has failed on both the push and pull sides of the market – the two fundamental ways you build an OTT business – they’ve failed to push (or get) the app featured on 100% of the potential 4K base, e.g. every TV company, and they’ve failed to pull (or attract) consumers with aggressive marketing, free trials and promotions, and most importantly, a steady stream of A-list content to attract and retain consumers.
So if I were an active investor, I’d want to know what their specific, step-by-step plan is to effectively “re-launch” the UF service. Start over and get the push and pull sides of the equation in lock step. And not only in the US, but in growing markets overseas. This will require time, money and expertise. I’m not sure that have any of the three.
