Saturday, April 2, 2011

Development of triple play and UT valuation going forward

To continue last week's post on triple play, here is another article providing China's development goals for the next 5-yr plan. It is a comprehensive look at how China is planning to develop different parts of their industry. I'll provide the excerpts on the triple play part. "Triple play, things, wireless cities are included in the information technology construction of major projects. Triple play pilot project: Completion of two-way access to meet the requirements of triple play integrated business management platform and IPTV, mobile TV broadcast control platform. The implementation of triple play digital home pilot demonstration project. Promote the application of triple play model in the Universiade." "Hangzhou will twenty billion investment in the development of "triple play" "Triple play" one of ten projects include infrastructure, plans to invest 22.0 billion construction of telecommunications, mobile, Unicom transmission network ( base station ) project, the implementation of FTTH projects and build cloud computing, Internet of things base. Promote the "triple play" development. Explore the "triple play" of management models and mechanisms, and actively promote radio and television, two-way access to telecommunications services, to enhance the "triple play" infrastructure to build the most advanced network infrastructure. Promote the intelligent network , soft switch , a new generation of mobile communication, next generation Internet technologies such as research and development and applications. Full high-definition TV services for broadcast, interactive. Comprehensively promote the "triple play" industry, focus on supporting the new formats, new applications industry." ------------------------------------------------------ There are a lot of moving parts to triple play/network convergence and it is at the very early stage right now. In the short term, UT is still in the process of right sizing their expense structure and still relying primarily on "older" revenue streams predicated on selling direct equipment in support of iptv and broadband. That model has struggled to even break even as the huge expense base coupled with declining PAS sales could not be offset with sales of iptv primarily (as a non-Chinese company to boot). While that has showed significant improvement from an expense standpoint and their move to China will help in iptv/broadband sales in China, the long term major opportunity will come from using their existing technology to build new platforms inline with the triple play network convergence opportunity. As shareholders, we have been focused on the company getting to a profitable model. The company has not had that since 2004 so it is understandable that is a major priority. However, how much value will the market place on just breaking even with low margins and a fluctuating sales base. The business will have some value then (and the company will finaly trade above cash) but it is not the growing business that will attract shareholder interest. I also don't think that is the intent of the new investors buying in at $2. No, the real opportunity is building new platforms that will yield much higher gross margins, growth rates, and sustainable customers. Some ,and I emphasize some, value will be unlocked via getting to a profitable business model but as we've seen with others, the value lies in how scalable and differentiable a model they build (through unique products that the customers will be dependent on for years on out). UT targetting the cable industry, radio industry, triple play/network convergence is how the company will go from an "old" struggling to get to breakeven company to a "new" company the investment community will value. I think any new shareholders getting in or existing shareholders have to have that mindset or else there are many other companies which are already profitable but their business model is capped. We'll see how the company progress on the breakeven side but the value creation from that is limited. The progress by UT and the industry on the new platforms will be the key to major gains. Unlike some new companies which get the benefit of the doubt or are pure plays on a major theme, UT is (rightly so) perceived as a struggling to breakeven has been company but it could get real interesting to see where the shares will be priced as they make progress on the new platforms. Have a good weekend.