Nielsen Media Research and cable networks are at odds over how to properly track viewership of commercials. And, after a strong third quarter, Oppenheimer & Co. media analyst Tom Eagan is making the case that Rentrak — a newcomer to digital-video measurement — could grow into a significant rival to Nielsen.
The analyst started covering Rentrak’s stock late last month with a “buy” rating. He projects that the Portland, Ore.-based company could become a strong alternative in providing ratings data for cable and even broadcast networks.
Rentrak was formed in 1977, initially collecting and selling data on home-video rentals. It later branched out into providing box-office data for motion picture studios.
Most recently, it began a video-on-demand ratings service for cable operators. It is that product that Eagan believes could vault the company into a position as a significant competitor to Nielsen.
DVR, LINEAR COMING
“We expect [Rentrak] will follow its early success in VOD with similar measurement services in DVR and linear TV,” Eagan wrote. “Recent disputes between U.S. broadcast and cable networks and Nielsen (the worldwide leader in media measurement) may provide an inroad for [Rentrak] to become a second source for ratings.”
Rentrak already counts Comcast — the country’s largest cable operator — among its customers, as well as Cablevision Systems, Charter Communications, Mediacom Communications, Insight Communications and Suddenlink Communications.
But before it can become a viable competitor to Nielsen, it will first have to convince Comcast and other operators to let it distribute VOD and other viewer data it compiles beyond its immediate customer base.
Currently, Comcast does not allow Rentrak data to travel beyond its own corporate walls.
Eagan believes that eventually that might happen. In the meantime, Rentrak’s two divisions, Advanced Media and Information (AMI) and Pay Per Transaction (PPT), will continue to take advantage of opportunities.
Currently, most of Rentrak’s revenue — 88%, or $86.5 million in 2005 — is generated through the PPT division, which facilitates the distribution of home-entertainment products and delivers associated rental and sales information to retailers.
But that should start to change in 2007, when the AMI division — providing software and services to movie studios and distributors, home-video retailers and VOD service providers — is expected to contribute a larger portion of overall revenue.
Eagan estimates PPT’s revenue share will drop to 85% of total revenue beginning in 2007 and continue to decline as AMI’s portion increases. By 2009, Eagan expects AMI to report $26.4 million in revenue, or about 22% of the $120.4 million in estimated total revenue for the year.
NOVEMBER SPIKE
Rentrak shares rose more than 15% over three weeks in November, rising $2.01 each from $12.98 on Nov. 1 to $14.99 on Nov. 28.
The company posted strong third-quarter results: revenue rose 19.4% to $24.1 million from $20.2 million and net income was up 72% to $1.9 million from $1.1 million.
Nielsen, meanwhile, ran into trouble earlier this year when it announced it would measure commercial viewerships.
Cable operators expressed concerns about how to measure DVR-watched programming and the ability of Nielsen to differentiate between local and national ad avails.
Nielsen, which was supposed to launch the commercial-measurement service in November, delayed that release until Dec. 11 as it held talks with clients.
Eagan pointed out Rentrak’s early entry into VOD data collection — it currently has access to 32 million digital set-top boxes, a little more than half of the 60 million digital set-tops in U.S. households.
Rentrak can gain a large portion of the DVR ratings-gathering market relatively quickly, given that it took the company only 18 months to capture 80% of the box office reporting business, he contends.
As video-on-demand increases in importance — and it is growing at an accelerated rate, according to Eagan — so should Rentrak’s status with broadcast and cable networks.
While Eagan concedes that Nielsen is the dominant provider of ratings data to those networks, he expects that “Rentrak’s Census-level, interactive viewership data will prove too valuable to ignore by a wide range of media players.”
For example, through Rentrak, cable operators could learn more about movie or sports rate patterns — key in acquiring and promoting those titles.
Studios could learn which titles sell best on VOD, therefore optimizing their revenue, and clients would be able to determine how their advertising vehicles are performing with greater depth and more interactive detail.
Lastly, broadcast and cable networks could find a compromise with advertisers on how commercial ratings should be measured and how much to pay for DVR viewing.
“For Rentrak, we believe the revenue potential is significant as its customers’ rates are negotiated based on the number of transactions or as a revenue share,” Eagan wrote. “Therefore, the more transactions or the more advertising dollars used, the potentially higher their revenue.”
As a result, Eagan expected Rentrak’s 2007 on-demand revenue to increase more than five times 2006 levels as the number of VOD networks — and the medium’s use as an advertising vehicle — increases.
MOVING TO 50% SHARE
Eagan predicted the number of VOD subscribers would rise from 22 million in 2004 to 27 million by the end of 2006, and to 34 million by year-end 2008. That’s about 50% of all cable subscribers in the country.
The number of VOD networks is expected to grow from a handful in 2004 to “several dozen” by year-end 2006 and “hundreds” by 2008, according to Eagan.
DVR penetration is expected to grow as well. Eagan predicts DVR subscribers will reach 15.7 million by the end of this year and 21 million by year-end 2007, which will put penetration at 19% — close to the 20% considered to be critical mass for advertisers.
Based on that potential, Eagan predicts that Rentrak will grow 2007 revenue to $108 million, a 16% increase, mainly through growth at its AMI unit (where revenue should rise 50%) and its PPT division, where revenue should grow 13%.
