20 Aug 2002, On2 status--AOL?? fisherguy
Well now. Is the picture any more or less fuzzy for everyone? Looks like On2 isn't yet willing to pack it in and slip quietly under the waves after all is it? Must be a real disappointment for all the ambassadors of ill will who have been trying to shovel dirt on the company's grave as of late. I suppose there will be strong arguments from the bashers that recent events are merely forestalling the inevitable demise of the company. Certainly nothing is yet guaranteed about the future of On2. However, the restructuring of the company's operations coupled with the commitment made by management to work for no pay for the next 4 months speaks strongly to a conviction on the part of those in charge that better days lie ahead.
What better days are we looking forward to? To start with we are looking for the company to move decisively into the black. Coming out of this quarter and going forward the company should be profitable; and, if revenue projections previously provided prove accurate, the company could actually start to build a cash cushion. Next, we are looking forward to actual, commercial deployment of On2's products by its signed customers. Already it looks like Picosoft is prepping to begin set top box deliveries in 4th qtr. (Picosoft's publicly stated time frame - not On2's). World Theatre is looking at early year 2003 to release. QBKK and MCS are not are clear on their schedules, but every day of delay means the deployment dates have to be getting sooner - unless they never plan to move forward at all. Real? If anything the Real/On2 relationship seems murky. Real has paid to get their hands on VP technology and exclude certain others from doing so. They have yet to undertake any initiative based on VP, but can they afford not to? Bottom line is that recurring revenue from any one of On2's current partners can make the company successful.
But lets look a bit more proactively at a potential customer we don't have yet. AOL. If there's any customer that can really make this company its AOL. But what's up with AOL? Everybody wants to know. For the past year AOL seems to be in pretty much disarray with no clear strategy or execution under way to stake out the high ground in the digital media landscape. In the mean time their arch foe Microsoft continues plowing ahead prepping new products and offerings designed to eat AOL's lunch. So what's up with AO? Are they just sitting around blowing bubbles?
Trying to read AOL is at best difficult. Clearly there have been many issues of organizational integration plaguing AOL since the Time/Warner merger. These have spilled across many of their divisions and likely play into their seeming lack of initiative over the past several months. That doesn't mean though that AOL is oblivious to the challenges that competitors, namely Microsoft, are attempting to mount. Nor does it mean that AOL is not going to be equipped to respond to those challenges. I suspect that they are probably a lot better prepared than many outside observers realize.
Of most interest to On2 investors are the three key AOL properties - AOL subscription service, Time/Warner cable network, and various video media production companies (e.g. Warner Bros. ) agglomerated under their name. Things are starting to move. Over the past couple of years Time/Warner cable has been upgrading its cable systems to handle digital. That work has been completed at considerable expense. What's next? Obviously they have to begin to generate new and improved revenue streams to pay the costs of this upgrade. One of those streams seems certain to be Video On demand, which has yet to be rolled out by them in serious commercial fashion. Think its not coming? News now comes out that AOL is buying the ATT portion of Time Warner Entertainment. Finally AOL will have complete control of the cable franchise and the ability to roll out consistent service offerings across the entire network. It has released a new version of the AOL browser with specific support for broadband services, although the compelling offerings that would attract or retain subscribers has yet to show up. Think that such offerings won't appear? AOL recently released a new generation multi-modal media player in the form of Winamp, a product clearly capable of streaming a variety of both audio and video formats.
Lets think a little bit about events as they have unfolded over the past year. Last spring, the AOL/Real exclusive player license expired. At that time betting was that they would negotiate a new deal as a means of blocking Microsoft. The license has not been renewed. Now AOL releases its own Winamp product and vague, foggy references are circulated regarding a mysterious, technological advancement AOL has developed to improve streaming via its routers. I now am thinking that AOL is positioning itself to jettison Real. Makes sense also when you think about the subscription service that Real is pushing, which more and more seems to be a competitor for AOL subscribers. Last year, on expiration of the AOL/Real license, Microsoft and AOL got together to talk about a deal for keeping the AOL service icon on the Windows desktop. Microsoft told AOL the price of the renewal included AOL making Windows Media Player its exclusive player. AOL told Microsoft to get lost, whereupon Microsoft immediately began a campaign to woo away AOL subscribers over to its MSN service.
Today its a pretty safe bet that AOL isn't going to be using Microsoft as its source of media player technology. Its looking more and more possible that they won't be using Real either. If this proves to be the case and AOL moves ahead with its own media player then what options are out there for the underlying enabling technology that makes their media player work. Under this scenario it ain't going to be Microsoft's codec and it ain't going to be Real's. What's left? MPEG-4 and On2 VP. That's what left. What's wrong with MPEG? Oh, just a little matter of the royalty arrangements for one, and the fact that part of any royalties AOL would pay to use MPEG would flow back into Microsoft's coffers since they're one of the MPEG patent pool participants. Also, just a bit bigger matter in that there has yet to be an MPEG-4 codec solution demonstrated that can do what On2's VP4/5 codec can do, and there is no evidence to think that one will appear in the immediate future either. How long does anyone think AOL can wait for a competitive product to come out of MPEG? Kind of leaves one wondering about what if any relationship AOL might have with the one company which has delivered a commercial product that does work and handily beats it competition's products. Makes one wonder about AOL's relationship with On2 doesn't it?
Well, those who have been involved with On2 long enough know that a relationship has existed, and does exist. On2 was paid by Warner Bros. to encode a gob of material a year and a half ago under VP3. None of this material has yet been publicly released. On2 has operated under a nondisclosure with AOL for considerable time. Its still subject to this NDA. Now, interestingly, Winamp is released by AOL and it just coincidentally is using open source VP3 as its only embedded video codec. Coincidence? Sure. I personally doubt it. Embedding the VP3 codec permits AOL to release previous VP3 encoded material at any time. But I'm telling you that VP3 is a mere feint by AOL because VP3 won't be and can't be the codec that gives AOL the competitive edge it needs to take on Microsoft Corona or to give Real its walking papers. VP3 is two generations old and is not good enough to out duel either Microsoft's pending Corona or Real's recently released RV9. VP3 may not be good enough, but VP4/VP5 most assuredly is. Its better than good enough ... its kick ass. And if AOL has serious aspirations of knocking out Microsoft and Real, then ultimately VP5 or VP6 is where AOL has to be headed.
So there you have it. I told people well over a year ago that the AOL train was where we wanted, needed to be. I am becoming more convinced everyday that On2 is on board the train. It just isn't ready to be divulged by those in the know that On2 is riding the rails with AOL. On2 on its part is prohibited by their NDA from talking about anything involving AOL. AOL isn't going to say what's going on because its not in their interests to prematurely disclose who they are picking as their technology standard. They don't want to tip Microsoft off ahead of Corona's release. Right. But why then wouldn't they bail On2 out of their cash crisis if they were seriously planning to use VP4/VP5? Simple. If they invested in or financed On2 at this point that information would need to be publicly disclosed and the AOL/On2 connection would become just as clear as if they issued a press release trumpeting their selection of On2's product. Might as well call Bill Gates up on the phone and tell him whose technology Microsoft needs to redesign Corona against. I am convinced that AOL is simply not prepared to disclose what their technology initiative is comprised of until they want to or have to. That time comes when AOL is ready to deploy. When is that? Subsequent to Microsoft shooting its wad with Corona and sometime before the end of the year. Corona supposedly makes its debut in September or October. Once Microsoft's thunder dissipates AOL will has its shot. So I'm anticipating AOL wants nothing revealed until later this fall.
Agree, disagree with my hypothesis. Until factual evidence materializes to substantiate it that's all it is. But here's one last piece to chew on. Given the recent circumstances of On2's existence: the cash crisis, the shortfall of 2nd qtr. revenues against prior projections; the apparent invisibility of timing for deployment on the part of QBKK, MCS, Picosoft (up till today at least), et al, the apparent lack of interest in presumed major customers anteing up what looks like chump change to keep On2 afloat; what would be the rational basis for company management to commit to working for the next 4 months for free? Or wasting their time trying to keep On2 on life support just to end up pulling the plug early next year? My point is that it wouldn't be rational - not unless management is pretty firmly convinced a big paycheck is coming down the road. This paycheck could certainly come from any number of currently signed customers and I actually think paychecks will start coming in from several of them. But I have strong suspicions that the biggest pay check may be coming from somebody that hasn't yet been heard from.
