Intervu Surges on Microsoft Deal, but Payoff's Still Well Down the Road

The company gets a $1.7 billion market cap after selling a 2% stake to the software behemoth.
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If you're investing in Intervu (ITVU) , you have to take the long view.

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Microsoft

Shares of Intervu, which helps companies stream audio and video over the Internet, rose as much as 41% during early trading Monday after Intervu disclosed that

Microsoft

(MSFT) - Get Report

was spending $30 million to buy a 2% stake. The stock closed higher by 26 7/8, or 31%, to 114 7/8, giving Intervu, which had revenue of $6.6 million in the first nine months of 1999, a market cap of $1.7 billion.

Intervu and Microsoft are hoping that the alliance will hasten the adoption of high-quality streamed media -- in particular, audio and video Webcasts using Microsoft's Windows Media technology. But Intervu's network is in its infancy, the competition it faces is fierce and the company risks getting swept up in competitive battles being fought by Microsoft. So investors will have a long time to wait before they learn whether their bets will pay off.

Streamers and Party Hats

To speed up acceptance of broadband streamed media -- fast-connection video approaching the quality of television broadcasts -- Intervu will invest the Microsoft money in two areas, according to Intervu Chairman and CEO Harry Gruber. One will be subsidizing price cuts for customers, he says; currently, he says, the industry pricing to stream media is about $3 to $5 per gigabyte. In order for content companies to make money from selling advertising in streamed media, he says, the cost has to go down to somewhere between 10 and 50 cents per gigabyte. Gruber wouldn't disclose how close the new subsidies will bring his company's price list to that 50-cent target.

The other half of the $30 million investment will go toward developing new applications for broadband media delivery -- most importantly, enabling customers to insert advertising in programming and enabling pay-per-view programming.

Ultimately, Gruber says, the company's distributed network of server computers will let it charge low prices without having to subsidize them. But he's a long way from building that network: He estimates that the company will end up with servers in 10,000 to 20,000 locations in the U.S.; so far it's in about 40 locations, he says.

The company also faces more immediate challenges.

Prudential Securities

analyst Paul Merenbloom acknowledges that Intervu -- which in the current narrowband world employs competing technologies from Microsoft,

RealNetworks

(RNWK) - Get Report

and

Apple Computer

(AAPL) - Get Report

-- faces a risk by being identified too closely with Microsoft. "The risk here is that they end up in a polarized war between Microsoft and any of that company's potential competitors," Merenbloom says.

But he says he doesn't think it will become a problem. "One of those competitors could become another investor for Intervu," he says. (Intervu shareholders already include

GE's

(GE) - Get Report

NBC

, which has a 5% stake, and

Time Warner's

(TWX)

CNN

, which has 2% of the company.) Merenbloom Monday reiterated a strong buy on Intervu that he's had since Prudential led the company's secondary offering in May.

Islands in the Stream

Intervu also has to fight against numerous other companies in the streaming media technology and services arena, says Seamus McAteer, director of Web technology strategies for research firm

Jupiter Communications

. "I see a business that's fast becoming a commodity and is continually attracting new entrants, poised for a shakeout," McAteer says. "Right now it's a land grab and nobody's making margin." He points out that Intervu competes with RealNetworks,

Yahoo!'s

(YHOO)

Yahoo! Broadcast

(formerly

broadcast.com

),

Vstream

,

iBEAM

,

STV

,

Enron's

(ENE)

Enron Communications

unit,

Akamai

(AKAM) - Get Report

and

Sandpiper Networks

. Jupiter's clients include Intervu, Akamai, Microsoft and RealNetworks, among others in this business.

McAteer says he's rooting for Intervu and its competitors to build an intelligent network, as opposed to a commodity networking business. But, he says, "It's not going to happen tomorrow. It's going to take time, money and elbow grease, and nobody is guaranteed success."

Merenbloom says he thinks Intervu is well positioned against companies that McAteer cites as competitors, adding that RealNetworks' content and services business make it Intervu's only real competitor. Merenbloom, who has a price target of 90 on Intervu based on estimated 2001 revenue, said Monday afternoon he was waiting for a company conference call scheduled for later on Monday before he adjusted earnings estimates or price targets.

Unfortunately for individual investors, the company wasn't planning to open up that call to the public, even though it broadcasts its quarterly earnings calls over the Internet with the help of one of its streaming-media customers,

Investor Broadcast Network

, operator of

Vcall

. Gruber had no immediate explanation why the public couldn't listen into the company's call with analysts Monday. "That's a different setting," he says. "I don't know."