A Near-Lock on Content Security
SUNNYVALE, Calif.--The technology of Macrovision Corp., which prevents people from copying DVD movies onto videotape, is woven into every DVD player sold in America.
The company has a virtual monopoly in the fast-growing content-security industry, and its many patents on the technology look to be a strong engine for growth with the explosion of digital entertainment.
But Macrovision has seen its market value plunge by half over the last year, including a 16% dive in just the last two weeks. The company’s most recent dip--its third this year--came this month after executives announced that revenue and profit in 2002 would be flat.
Investors are worried that Macrovision’s stock--trading at 85 times profit--has outstripped its earnings power, said Steve Lidberg, senior research analyst with Pacific Crest Securities.
“Companies trading at high multiples like this give investors high expectations,” said Lidberg, who recommends the stock up to $45. It closed up 41 cents at $32.68 Friday on Nasdaq.
“Much of the fluctuation has been caused by speculation. But I think the company is in an excellent position. They have a great model and have continued to do all the right things,” he said.
Despite its deep reach into the lives of consumers, Macrovision remains largely invisible. In fact, the running gag inside the company is that investors looking to buy Macrovision stock often buy Macromedia Inc.--a San Francisco company that makes software to build Web pages--by mistake.
“We’re not a household name,” said Bill Krepick, Macrovision’s president and chief executive. “And that’s because we sell a technology that is definitely not viewed as a feature by consumers.”
Whether consumers like it or not, the ability to keep movies safe from theft is becoming increasingly important to corporate America as more content becomes digitized and as more products are available over cable TV wires and the Internet.
Consumers are unaware that Macrovision exists, because its technologies work invisibly. The company’s tools make pirating intellectual property difficult, but they go unnoticed if the consumer uses the product as directed.
For instance, a videotaped movie embedded with Macrovision’s anti-copy system looks fine on a television screen. But trying to use another VCR to copy that signal results in a duplicate tape that’s unwatchable.
The system, which has been in use since 1985, works on about 95% of all VCRs and has been encoded onto 2 billion cassettes.
Part of the reason for the company’s steady profit increase is the consumer shift to DVD movies. About 70% of DVD movies are encoded with Macrovision’s technology, compared with only about 35% of prerecorded videotapes. The studios use the technology only on their most valuable videotaped properties, in part because copies of videotapes are inferior to the original.
Because DVD movies are digital, copies of them made onto videotape are of much higher quality, which makes piracy more of a problem. In addition, while most homes don’t have the two VCRs needed to copy a videotape, most homes with DVD players also have a VCR, making copying a DVD onto videotape a relatively easy task.
The company sells similar technology to prevent piracy of computer programs, video games and cable television broadcasts. It dominates nearly every market it’s in.
About 60% of Macrovision’s revenue comes from the film industry, which means the company’s sales are heavily dependent on Hollywood releasing movies that people want to own.
That was good news in the current quarter, because the industry released a number of DVDs for the holiday season that are setting sales records, such as “Shrek” and “Star Wars: The Phantom Menace.”
But that wasn’t enough to keep investors from dumping the stock Dec. 12, when Macrovision announced that 2002 revenue will be flat at $103 million to $108 million, with pro-forma profit off a penny from analysts’ expectations of 89 cents a share.
“While taking a naturally cautious view of 2002 at this point, we remain extremely optimistic about Macrovision’s prospects in its existing businesses,” Krepick said.
Analysts say that caution may be unwarranted.
“The guys running the show are very conservative, and they offered a very conservative analysis of next year,” said Sterling Auty, a vice president with JP Morgan, who rates the stock a “buy” and expects it to outperform the market over the next 12 months.
“Some people reacted to the fact that some movie studio contracts are up for renewal next year,” Auty said. “But the studios will undoubtedly renew those contracts, because there’s nothing else like Macrovision on the market.”
Contributing to investors’ jitters is a lack of success in Macrovision’s second-biggest line of business. Globetrotter, a system designed to let software developers control customer compliance with software licenses, has languished.
In addition, use of Macrovision technology to prevent copying of cable TV pay-per-view programs has been largely nonexistent, though the system already has been installed in nearly every cable box sold in America.
Although Macrovision’s technology dominates the film industry today, its wares are aimed at preventing analog copying using a VCR. The real terror for the movie industry is digital copying and distribution using computers and the Internet.
The studios are working on better ways to thwart that sort of piracy, and Macrovision is part of a coalition of companies whose technologies will go into use soon.
Analysts say those markets will take off eventually, and Macrovision is in an excellent position to dominate them.
The next battlefield is music piracy. Macrovision and several other companies have produced technology that will keep consumers from making copies of CDs and distributing them on the Internet.
“There’s lots of interest in that technology, due to the popularity of Napster and other tools that are costing the record labels millions,” Lidberg said.
The company will broaden its interests far beyond its traditional markets fairly soon, according to Lidberg. “As media increasingly goes digital, the Internet allows for quick and cheap transportation, but that’s not going to happen without security,” he said.
“Macrovision’s capabilities are going to become even more important in the future. They are better positioned to do that than anyone else, and that’s the emerging opportunity for them.”
