To All The Longs TransGaming should be considered a growth stock,TransGaming is undervalued, relative to other social gaming plays, other platforms for digital game distribution, and for video game developers. Comparables to consider are Zynga, Steam/Valve, mobile game developers like JamDat and OMGPop, and general game sites like Pogo,Zynga as a comparable to TransGaming. The reality is that TransGaming is significantly undervalued. Also, indirect competitors such as Gaikai are valued at $500MM and OnLive at $2B. GameTree will be the key growth driver for TransGaming. Initially,GameTree growth will be driven by the number of subscribers signing up for GameTree services, and GameTree's Average Revenue Per User ("ARPU"). The analysts covering TGI understand this dynamic, but focus on the number of new contracts with cable and satellite providers signed during the preceding quarter to project revenues and target share price. The opportunity is to present a target share price based on a forward-looking model of number of subscribers and ARPU, one that fully captures upside scenarios and how GameTree is positioned to avoid downside risks. In terms of Number of Subscribers: NoS = (Available Subscribers from New Contracts with Traditional MSOs + Non-Traditional "Over-the-Top" MSOs + Smart TV Manufacturers) x (Percentage of Sign-Ups) TransGaming has a Total Addressable Market in excess of 100MM users and counting. Thus, TransGaming is forecasting a mere 1% penetration rate. Traditional MSOs are cable and satellite providers whose content is delivered via some kind of a set top box. From the standpoint of gaming, the primary limitation of the STB is the lack of an external input device, either a keyboard or dedicated game controller. It is impossible to play video games with real-time graphics with a cable or satellite remote, which means cable/satellite game channel offerings are dominated by casual games, mostly digital incarnations of board games and puzzle games. GameTree's "any screen" capability allows the subscriber to use their smartphone (iOS device only?) as a controller, which is a significant plus. Next generation set-top boxes will have motion based remote controls that are highly conducive to game play. Through a WiFi or Bluetooth connection, some will also support a game controller. In addition, TransGaming has built multi-screen capabilities through an iOS and Android app that lets you control/play games with your handheld device. For the legacy set-top boxes, TransGaming uses left, right, up, down to control the game. All games are specifically chosen and "adapted" based on the controller(s) available in order to ensure TransGaming delivers the best game play experience possible. Another limitation of the STB is processing power. TGI's deal with MIPS is important in that respect, though I don't know whether MIPS is planning to add a graphics or sound element to its STB chipset. This is important b/c xBox360 and PS3 both offer Netflix, Hulu, Amazon Prime, etc. over their consoles, which are already connected to Microsoft's and Sony's game marketplaces. TransGaming is supporting MIPS, Intel, ARM and our catalogue will change depending on the processing capability inside the STB. It's important to note that TransGaming is NOT trying to compete with Xbox or PlayStation; they are "triple A" gaming consoles designed for extremely high-end experiences. TransGaming is, instead, bringing great games to the mainstream audiences and TransGaming is targeting the family demographic.
AppleTV, GoogleTV, Hulu, Netflix, etc. are all considered OTT providers. So, theoretically, are Verizon's FiOS TV and . The content that they delivered comes through the same pipe that delivers the Internet, and uses the same communication protocol used to surf the web, Internet Protocol, or IP. OTT providers are thus able to bypass (go "over the top" of) terrestrial broadcast channels, cable, and satellite. OTT providers deliver their content through a computer and associated display, or through a SmartTV. Beyond FY13, it will be important to understand to what extent OTT providers will take subscribers from cable/satellite providers.
TransGaming knows that subscribers are starting to flock to OTT devices at a rapid pace. TransGaming can (and is) working with OTT providers in addition to the service providers. Interestingly enough, most OTT devices are using similar (if not the same) chipsets as those going into new STBs. The same is true for SmartTV. The biggest player is Apple. Most industry observers believe Apple's next big push will be into AppleTV. This is significant b/c Apple's ecosystem is by and large closed (you can get Netflix and some niche channels (MLBtv, WSJ, YouTube, etc.) but not Amazon Prime or Hulu+. Samsung, Panasonic, and LG will have offerings, and their likely share of this emerging market will need to be understood and quantified to quantify impact on number of subscribers. just 1% seems like a low number with lots of upside, but from what I know about the quality of the game channel on DirecTV (my provider) 1% seems high. Regardless, knowing what drives penetration and how GameTree is positioned relative to those drivers will enable you to zero in on a target price. If you look at the massive adoption of gaming on iOS and other smart phone types of devices, you start to understand our opportunity. The penetration is low today but as MSOs deploy new STBs and as TransGaming builds an increasingly compelling catalog, TransGaming fully expects their own penetration rates to grow dramatically. In terms of ARPU: TransGaming is building a world-class poker game based on the "World Poker Tour" brand. This game will have a free version and a premium version and both versions will have in-game purchases, micro-transactions, etc. Their objective is to reach a $36 per year ARPU ($3 per month). They are also going to leverage their Hasbro licenses and are currently negotiating other big name television licenses. The other option is to sell games for download and play on any supported device without being on the MSO's GameTree channel. So the download is managed using the cable or satellite pipe and STB software, but otherwise is the same as downloading an app from an app store, with similar pricing. That will lock out iOS devices (closed app store) but may leave Windows Mobile and Android devices as potential end use devices. TransGaming doesn’t want to do this since They'll just become another app developer and discovery becomes a big issue in these cluttered app stores. The big picture is that GameTree is strongest with cable and satellite providers, which are ultimately going to be replaced by OTT providers. OTT providers will deliver their content via consoles, computers, and SmartTVs (including AppleTV and GoogleTV, which really aren't TVs but dedicated low-end computers), which are better suited for gaming. GameTree will show growth with traditional MSOs b/c they are still signing new providers, but will need to have an answer for growing revenues in an environment where long-term secular trends are working against the traditional MSOs.
These long-term trends that are working against the MSOs are the reason why GameTree TV's value proposition resonates so strongly. TransGaming help MSOs with the retention of consumers and give MSOs an ARPU lift. In that sense, GameTree's situation is most like Netflix' original business, which was DVD rental through the mail, Reed Hastings split Netflix into it's DVD by mail and OTT components, and started charging subscribers for the two services separately. Now almost all of Netflix' business is OTT. Quite shocking how quickly that change occurred. The question is can GameTree get into (the winning) SmartTV providers, and can they deliver a PC or console gaming experience over the STB? Of course they can! However, They're not trying to deliver a PC or console gaming experience over the STB nor do they think that's what the consumer wants. The STB is the lowest common denominator device that every consumer has. They are offering games that heighten the "socially engaging experience" that the living room has always been about by delivering great games that appeal to mainstream audiences. Seriously folks, look at the data. TransGaming is much undervalued....stay tuned...