Grouper Acquisition Opportunity
Corporate Planning Review
Response to Questions from August 11, 2006
CONFIDENTIAL
Corporate Planning’s August 11 Questions
1.
$12.5mm tied to performance metrics:
1a. Structure of contingent consideration:
Could you prepare a slide which explains the conditions in more detail such as $2.5mm based on mgmt retention (5yrs for
top 2 execs, 3-5 yrs for other 3 execs), $2.5mm based on (1st year?) revenue and $7.5mm based on revenue and traffic
1b. Risk of management departure
This is a hypothetical question: if all of the current mgmt decided to leave the company say immediately after the
acquisition, what will happen to Grouper? What is the likelihood for us to be able to retain them for sufficent period of
time? Why?
2. Ad Sales
2a. Ad sales as a portion of SPT sales
My understanding is that SPT has approx $300mm annual revenue from ad sales (ie barter),which represents around 30%
of SPT's total revenue. Is my understanding still correct?
2b. CPMS
Slide on page 48 says CPM for major network is $23.50. The attached slide is exerpted from ITN acquisition proposal deck
in '04. The slide says CPM for Cable is only $8.38 and, if this data is still valid, I would suspect CPM for internet service
could be much cheaper. My concern now is whether or not our assumption of $13-$15 CPM is reasonable (or a bit
optimistic). Please could you explain on this point.
3. Page Views
In telecon today, you have kindly explained the logic reaching 15.9 PV/unique per year. I would like to see actual statistics
of other US popular sites say Yahoo, Google and MSN to compare with this figure. If you have some data, that would be
very much appreciated.
page 1
Corporate Planning’s August 11 Questions
4. Basic questions:
4a. $4MM investment option
What does "$4 mil binding option in favor for grouper" mean on page 37? If the contract is not signed by 8/18, will any
cost incur?
4b. 80% click-through
What does "80% click-through" mean on page 24?
4c. Grouper history
When Grouper was established and when did they start the service? (I think it is established sometime in '04.)
4d. Cash status and balance sheet
Out of $5.1mm funded in the past, how much is already used up and how much do they still have on hand? If you have
the most recent PL and BS data available, please could you send it to us.
5. Return calculation:
5a. IRR
IRR: On cell G80 of "DCF fiscal" tab, it looks like IRR is calculated using 2 figures only : ($53mm) in '06 and $247mm in
'09. Is this correct?
5b. DCF
DCF calculation using pre-tax profit and discount rate of 16.5%: I know SPE is traditionally using this method as an
alternative to after-tax, 10% discount rate base calculation but, as you may be fully aware, these 2 calculations are
arithmetically not identical and normally SPE method brings higher NPV and IRR result (thus I don't recommend keep
using this method in the future). For the purpose of investment committee on Monday, I will use SPE data, however, I
hope we could discuss on this methodology issue sometime in the near future.
page 2
1a. Structure of Contingent Consideration
•
$12.5 million of contingent consideration is structured as follows
– $2.5 MM tied to first year revenues
• If Grouper achieves revenues of $4.2 million or more (30% or more of management’s projected
revenues) for the 12 months ending December 31, 2007, the entire $2.5MM is earned
–
$3.75 tied to first and second year revenues
• Up to $1.875 million for Calendar Year 2007
– If Grouper achieves $9.8 million (70% of management’s projected revenues) for the 12
months ending December 31, 2007, $1.875 is earned
– If Grouper achieves between 50% and 70% of management’s projected revenues for the
year, a pro-rated portion of the $1.875 million is earned
– If Grouper achieves less than 50% of management’s projected revenues, nothing is
earned
• Up to $1.875 million for Calendar Year 2008
– If Grouper achieves $35 million (70% of management’s projected revenues) for the 12
months ending December 31, 2007, $1.875 is earned
– If Grouper achieves between 50% and 70% of management’s projected revenues for the
year, a pro-rated portion of the $1.875 million is earned
– If Grouper achieves less than 50% of management’s projected revenues, nothing is
earned
page 3
1a. Structure of Contingent Consideration (continued)
–
–
$3.75 tied to first and second year video streams
• Up to $1.875 million for the 12 months ending September 1, 2007
– If Grouper achieves 285 million video streams (70% of management’s projected video
streams) for the 12 months ending September 1, 2007, $1.875 is earned
– If Grouper achieves between 50% and 70% of management’s projected video streams for
the year, a pro-rated portion of the $1.875 million is earned
– If Grouper achieves less than 50% of management’s projected video streams, nothing is
earned
• Up to $1.875 million for the 12 months ending September 1, 2008
– If Grouper achieves 612 million video streams (70% of management’s projected video
streams) for the 12 months ending September 1, 2007, $1.875 is earned
– If Grouper achieves between 50% and 70% of management’s projected video streams for
the year, a pro-rated portion of the $1.875 million is earned
– If Grouper achieves less than 50% of management’s projected video streams, nothing is
earned
$2.5 million retention pool payable on September 1, 2009
• Pool is allocated across current employees
• If any employee leaves prior to September 1, 2009 an employee leaves, they are not eligible to
receive payment from the retention pool
• If either Josh Felser (CEO) or Dave Samuel (President) leaves the company prior to
September 1, 2009, the pool is reduced by 50%
• If both Josh Felser and Dave Samuel leave prior to September 1, 2009, the pool is eliminated
page 4
1a. Structure of Contingent Consideration (continued)
–
$2.5 million retention pool payable on September 1, 2009
• Pool is allocated across current employees
• If any employee leaves prior to September 1, 2009 an employee leaves, they are not eligible to
receive payment from the retention pool
• If either Josh Felser (CEO) or Dave Samuel (President) leaves the company prior to
September 1, 2009, the pool is reduced by 50%
• If both Josh Felser and Dave Samuel leave prior to September 1, 2009, the pool is eliminated
page 5
1b. Risk of management departure
•
Grouper’s senior management has expressed a strong interest in working for Sony Pictures
and we expect to retain these employees
•
To further mitigate risk of Grouper management departures, we have structured two
mechanisms for retaining employees -- a retention pool and employment contract
•
The retention pool (as defined on the previous page) provides a strong incentive to remain
with SPE
– If any employee leaves, the lose their portion of the retention pool
– If either of the founders leaves, they decrease the pool for all other employees
•
The acquisition is contingent on the top five managers signing employment contracts.
Contracts are still in negotiation but are expected to be in-line with the following
– Josh Felser, CEO: 3 year contract plus a 2 year non-compete
– Dave Samuel, President: 5 year contract plus a 2 year non-compete
– Aviv Eyal, CEO: 3 year contract
– Mike Sitrin, VP Revenue: 3 year contract
– Jonathan Shambroom, VP Product: 3 year contract
page 6
2a and 2b. Ad sales and CPMs
•
Ad sales represent roughly 25% percent of SPT revenues ($265MM of Ad Sales /
Promo-based revenues for the fiscal year ending March 31, 2007)
•
While Cable TV CPMs are below Network TV CPMs, Online Video Ads are currently
receiving CPMs in-line with Network CPMs
•
As Jeff Lanctot, VP of media buying at Avenue A Razorfish, points out, these higher
CPMs are merited by advertisers’ ability to interact directly with consumers
•
Third party estimates and Sony deal experience continue to point to online video
based ads continue to support CPMs in the $20-$30 range
•
The SPE Base Case Grouper model conservatively place streaming CPMs between
$12 and $16.50
•
The recently closed $900MM Google / MySpace partnership implies there may be
room for upside to the Grouper model
page 7
2b. Online Video CPMs Are Currently $20-$30, In-line with Traditional
TV CPMs and Positioned to Benefit From Growth of Online Ad Spend
Industry Commentary
•
Josh Bernoff, Forrester analyst
“…the driving force of the online video market is advertising…advertisers are paying $25 per
thousand users who see their online commercials, more than they pay for network
television”
•
Allie Savarino, SVP World of Worldwide Marketing at Unicast
“…while rich media ads on average cost around $10-20 on a cost per thousand basis the
video commercials cost around $25-30 for the same rate… a comparable cost with
advertising on a US television network to the same number of television viewers for a 15- to
30-second spot.”
•
Jeff Lanctot, VP of media buying at Avenue A Razorfish
“Advertisers are now paying about $20 to $30 a CPM for a 15-second spot that pre-rolls a
broadband video… one reason advertisers are warming up to Web broadband content is
because they can interact with consumers.”
•
Trends in Sony Ad Sales
Online video ad components of deals are being priced at CPMs of roughly $30.00. Sony’s
advertising partners are demonstrating strong demand for cross-platform packaged deals.
page 8
2b. Television CPMs Have Grown to Reach $23.50, Initial Online Video
CPMs Are At a Similar Level
CPM Pricing Trends
5 yr CAGR: 5.4%
$30.00
$25.00
$20.00
$16.60
$18.10
$19.00
$19.20
$20.30
$22.30
$23.50
$14.60
$15.00
$10.00
$5.00
$0.00
1998
1999
2000
CBS
2001
ABC
NBC
2002
FOX
2003
WB
2004
2005
Average CPM
Source: Nielson Media Research.
page 9
2b. CPMs -- Cost to Advertise on TV
(Per September 2004 Presentation Regarding ITN)
Network CPMs presented as part of ITN presentation are in-line with our analysis for Grouper
Average Primetime CPM
Average Cost of a 30 Second Spot
($)
($ in 000s)
$25
$140
$123
$21.64
$120
$20
$100
$15
$80
$11.51
$60
$10
$8.38
$40
$25
$5
$20
$4
$0
$0
Network
Cable
Syndication
Network
Cable
Syndication
Sources: 2004 PwC Global Outlook and the 2003 Kagan World Media Report
page 10
2b. Google Strikes $900M Advertising Search Deal With MySpace
and Fox Interactive Media Sites
Deal Specifics
Views

Google Inc. will provide search and advertising for
News Corp.'s MySpace and other Fox Interactive
Media sites

Analysts estimated the deal could bring Google
net revenue anywhere from $50 million to $200
million

Google will pay at least $900 million in advertising
revenue to News Corp. over the next four years,
provided traffic on the sites reaches an
undisclosed threshold


Google will install its search boxes and keyworddriven ads
"Google needed to win this deal to lock up the last
remaining large and fast growing piece of traffic
on the Web today. One thing is certain: Yahoo
and MSN would have loved to sign News Corp.,
but could not make sense of a $900 million
guarantee.“
– Jordan Rohan, RBC, August 8, 2006

All-cash deal


Google also receives the right to sell directly any
display ads not sold by Fox
"While we have highlighted the potential
opportunity for Google on the display side for
some time, we feel that Google has made limited
progress on this front. We applaud this deal as an
example of how Google can leverage its
relationships and technology to grow an additional
revenue stream and monetization models.“
– Benjamin Schachter, UBS, August 8, 2006
page 11
2b. The Google Deal Implies Strong Revenue Potential for Grouper
Deal Metrics
Total Deal Revenue
Implied Grouper Revenue Opportunity
$900 MM
Average Annual Revenue
$225 MM
MySpace Uniques
50 MM
Revenue Per Unique
$4.50
Projected Revenue
Unique
Users (Avg)
Implied
Banner/Adwords
Banner/Adwords
In-Stream
Sponsored
Search
TOTAL
FY2006
8.8
$39.6
$1.2
$1.4
$0.5
$3.1
FY2007
29.0
$130.5
$5.7
$10.1
$2.9
$18.6
FY2009
45.6
$205.2
$12.8
$28.3
$10.5
$51.5
FY2009
65.1
$293.0
$21.0
$43.0
$19.5
$83.5
( $ millions)
page 12
3. Pageviews
page 13
4a. $4MM investment option
•
$4MM investment option
– On July 25, 2006 SPE and Grouper entered into an exclusive negotiation period ending
through August 18, 2006
– As part of that agreement the companies structured a “Failure to Sign Clause,”
structured as follows
“In the event that, by August 18, 2006, the parties have failed to enter into definitive
documents regardint the Transaction and such failure is caused by an reason other than
SPE’s good faith decision not to pursue the Transaction based on material concerns arising
out of its due diligence or bad faith on the part of Grouper and/or any of the Key Personnel,
then Grouper shal have the option (the “Grouper Option”) to cause SPE to invest
$4,000,000 in Grouper at a pre-funding valuation of Grouper of $62,500,000. The Grouper
Option is exercisable, if at all, by Grouper’s giving written notice of exercise prior to
September 30, 2006.”
page 14
4b & 4c. Grouper History, Click-through
•
Grouper History
– Grouper was incorporated in March of 2004
– Early development efforts focused on a solution for sharing video with other users in a
closed grouper over a P2P network
– In 2005, the company developed a web site focused on sharing videos online
– Grouper launched its online video sharing service in December of 2005
•
80% click-through
– On average, 80% of visitors to the Grouper web site click on a video in the initial display
(“Video Wall”)
page 15
4d. Cash status and balance sheet
•
Grouper has utilized the $5.1MM of angel and venture funds for operations
•
On July 10, Grouper established a $1MM bridge loan with T-Online Ventures, Josh
Felser, and Dave Samuels to fund operations through a sale to SPE or a future
funding event
•
Grouper initially drew down $300K of the bridge loan as reflected on the July 31, 2006
balance sheet
•
As of August 11, 2006, Grouper has drawn down a total of $560,000 of the bridge loan
•
Assuming an August 18, 2006 close, Grouper will have funds on hand to operate to
close
•
SPE would assume responsibilities for Grouper operational costs after close
page 16
4d. Cash status and balance sheet (Assets)
page 17
4d. Cash status and balance sheet (Liabilities and Equity)
page 18
5a. IRR
page 19
Grouper Acquisition Opportunity
Corporate Planning Review
Response to Questions from August 10, 2006
CONFIDENTIAL
Corporate Planning’s August 10 Questions
1. Risk of Litigation
We found some articles reporting that copyrights holder has accused YouTube of piracy. Our concern is that Grouper also owns
potential risks of litigation for piracy? However you did not mention about litigation risk in the presentation. Is there any
reason i.e. technology differentiation from YouTube?
Current Efforts for Digital Distribution Strategy
2. SPE Digital Distribution Efforts
Please could you update us with current business situation on Nanofilms, Chat Cinema, Broadband Channels, and MovieLink
(shown on page 13).
3. Assumption for financial analysis
We appreciate for sending financial analysis in detailed. With regards to assumptions for the analysis, we have some questions.
3a. Definition of "Total Unique Users"
In SPE Base case, FY06 Total Unique Users would be about 21 million. Is this the number of "Global" unique users who visit
Grouper in Dec. 2006? Also, you mention, on the page 38 (your presentation dated Aug. 3rd), that "Unique Users" contain
Grouper.com and embedded. What is the definition of "embedded unique user"?
3b. Page Views
Please let us know how to calculate the number of page views on the page 56 (SPE Base Case). With regard to FY06, total
page view would be about 900 million. How can we obtain 900 million page views from 20 million total unique users and 15.9
grouper.com pager view per unique user?
page 21
Corporate Planning’s August 10 Questions (continued)
3c. % Inventory Sold
According to SPE base case scenario, % of inventory sold would be significantly increased from FY06 to FY09 as follows:
FY06
FY09
Streaming
12.1%
25.2%
Search
18.1%
40.0%
3 c. Headcount
Please let us know about background for increase of % inventory sold (in addition to the footnote on the page 32, if any)?
Employee (headcount)
page 22
1. Process for Mitigating User-generated Content Risks
•
There are risks associated with publishing user-generated content –
for example, it can violate another’s copyright or be inappropriate
•
These risks can be mitigated under the Digital Millennium Copyright
Act of 1998 (“DMCA”) if certain “takedown” policies are implemented
•
Grouper has implemented procedures for receiving written
notification of claimed copyright infringement, for processing any
related claims, and taking down associated content in accordance
with the DMCA
•
Grouper bans users and/or terminates the accounts of users who
publish inappropriate content / copyrighted material
•
The Communications Decency Act provides additional safe harbor
(risks of damages can be reduced by quickly taking down applicable
inappropriate content after learning of the infringement)
page 23
2. Current Efforts for Digital Distribution
SPE is evaluating several models that could utilize Grouper’s technology
• Nanofilms
– Nanofilms would provide users access to Hollywood content, talent, distribution,
and "pay-outs" increasing engagement and benefits derived from
user-generated video
•
Broadband channels
– Broadband channels would give users online access to SPE’s content through
pre-programmed on-demand channels
•
Chat Cinema
– Chat Cinema would establish a community-based video destination that
combines streaming video content and real-time online chat to provide a unique
interactive, shared experience
SPE also retains a 20% interest in MovieLink
– MovieLink will continue to be independently managed from SPE’s operations
– MovieLink will not have direct interaction with Grouper
page 24
3a. Definition of Total Unique Users
Unique Users include all global users and are calculated on a monthly basis
Grouper’s Unique Users are broken into two categories
• Direct Unique Users
– Visitors to the Grouper.com web site
•
Embedded Unique Users
– Embedded users are those that view Grouper video streams on third party sites
– Grouper.com embeds its video player in third party web sites, enabling users to
see Grouper videos on sites like MySpace and Friendster
– Grouper controls the player, advertising, and stream of the videos embedded in
these third party sites
FY2006
FY2007
FY2008
FY2009
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
Jan-07
Feb-07
Mar-07
Mar-07
Mar-08
Mar-09
Mar-10
3,210
3,772
4,338
4,880
5,368
5,771
6,233
6,716
7,219
7,219
14,385
23,875
38,224
3,745
4,869
6,086
7,304
8,582
9,869
11,103
11,935
12,786
13,649
13,649
22,826
30,030
38,086
6,421
8,079
9,859
11,642
13,462
15,237
16,874
18,168
19,501
20,868
20,868
37,211
53,905
76,309
Apr-06
May-06
Jun-06
Grouper.com Monthly Uniques 2,647
3,907
2,675
Embedded Total Uniques
1,853
3,125
4,500
7,032
Jul-06
Unique Users (000)
Total Unique Users
page 25
3b. Page Views
•
The assumption pages provided for page views are provided on a monthly
basis
•
Total page views are calculated based on monthly unique users and summed to
arrive at the annual page view figures
Apr-06
May-06
Jun-06
2,647
3,907
2,675
Grouper.com PVs/Unique per Month
7.0
7.4
Grouper.com PVs/Unique Per Year (Implied)
7.0
7.2
18,448
29,058
Jul-06
FY2006
FY2007
FY2008
FY2009
Mar-07
Mar-08
Mar-09
Mar-10
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
Jan-07
Feb-07
Mar-07
3,210
3,772
4,338
4,880
5,368
5,771
6,233
6,716
7,219
9.1
10.6
12.2
13.7
15.3
16.9
18.4
20.0
20.6
21.3
7.8
8.5
9.4
10.3
11.3
12.2
13.2
14.2
15.1
15.9
15.9
25.7
32.9
33.5
24,234
34,098
45,962
59,637
74,720
90,583
106,398
124,652
138,510
153,410
899,709
3,385,164
7,621,476
12,506,356
Unique Users (000)
Grouper.com Monthly Uniques
7,219
14,385
23,875
38,224
Page Views (000)
Total Page Views
-
-
-
-
• 15.9 represents the average page view/unique user
over the course of the entire fiscal year
• Sum of FY2006 Total Page Views / Sum of FY2006
Total Grouper.com Uniques
page 26
3c. Percent of Inventory Sold
•
Percent of ad inventory sold is calculated for each revenue type and each region
•
Growth in percent of inventory sold is based on increased sales international
territories and increased sales capabilities over time
Sell-Through / Inventory
Grouper.com % Video Inventory Soldd -- (In Stream Ads)
North America
Asia Video
Western Europe
ROW Video
Aug '06
Jan-07
Jan-08
Jan-09
9.0%
3.0%
4.0%
3.0%
20.0%
5.0%
10.0%
5.0%
25.0%
8.0%
20.0%
8.0%
30.0%
10.0%
25.0%
10.0%
Grouper.com % Graphical Inventory Sold -- (Banner Ads)
North America
Asia Graphical
Western Europe
ROW Graphical
50.0%
25.0%
50.0%
10.0%
75.0%
50.0%
75.0%
30.0%
90.0%
75.0%
90.0%
60.0%
90.0%
75.0%
90.0%
65.0%
Grouper.com % Contextual Inventory Sold -- (Ad -words)
North America
Asia Link
Western Europe
ROW Link
75.0%
75.0%
75.0%
75.0%
90.0%
90.0%
90.0%
90.0%
90.0%
90.0%
90.0%
90.0%
90.0%
90.0%
90.0%
90.0%
Grouper.com % Page Veiws Search Inventory Sold -- (Sponsored Search)
% of Page Views Searching
% of Search Inventory Sold
20.0%
5.0%
22.0%
20.0%
24.0%
30.0%
26.0%
40.0%
Embedded Revenue Share -- (In-Stream Ads)
% of Inventory Sold
% Revenue Share
9.0%
30.0%
15.0%
40.0%
25.0%
50.0%
30.0%
60.0%
FY2006
Weighted Average % In-Stream Inventory Sold (from both Direct and Embedded streams)
12.1%
FY2007
18.6%
FY2008
22.6%
FY2009
25.4%
page 27
3d. Employee Base
Grouper currently employs 26 professionals
*
*
* Consultants, not full-time employees
page 28