Ideanomics Inc (IDEX)

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You On Demand (NASDAQ: YOD) is the only company to have been granted a national Pay-per-view (PPV) and Video-on-demand (VOD) license in China. The issuing entity is CCTV-6/CHC, the Chinese Government channel dedicated to movies. This license has roughly 17.5 years left until renewal. This license is exclusive - it is very easy to understand the Chinese government not wanting to give control over content distribution to larger firms. Therefore, it seems unlikely many other entrants will emerge, and even less likely a market ready platform will present as a competitor.

For many years, Hollywood has sought a way to enter its catalog of movies into China, while not falling prey to piracy. Thus far, this has been a losing proposition. This is where YOD comes along. With the strength of the national PPV/VOD license, YOD has inked revenue-sharing agreements to distribute the content of most major US studios. These include Paramount, Warner Bros., Disney, NBC-Universal, Miramax, Lions Gate, and Magnolia Pictures. Sony and Fox are the two remaining majors, but these should be expected to sign favorably with YOD as there really is no other choice.

YOD has also gained distribution rights for Chinese domestic content through the partnership with CCTV-6/CHC.

According to the company's presentation, the Chinese spent $6 billion on pirated DVDs in 2010. YOD is pricing their VOD/PPV in-line with the cost of pirated DVDs. At this cost level, it is easy to see how at least some people will choose to simply click their remote button for a high-quality PPV/VOD rental instead of picking up a pirated DVD on the street.

OPPORTUNITY: CABLE

The United States has roughly 100 million cable households, and is saturated or shrinking. By the end of 2012, that same number was over 200 million in China, of which ~143 million had been converted to digital cable. Of that, 70 million households are covered by bi-directional cable networks, which is required for PPV and VOD. (Source)

Enter YOD. The company has revenue-sharing distribution agreements in place covering 18.2 million cable households, and an additional 1.5 million IPTV (Internet protocol TV, i.e. similar to Verizon FiOS). Combined, between 5 - 5.5 million have converted to 2-way digital cable.

To put this number in context, as of 2012, Time Warner Cable had 12.2 million subscribers, and Cablevision had 3.2 million. (Source) This means YOD has an immediately addressable base as large, or larger, than major US cable companies that have little future growth prospects. YOD subscriber base potential is expected to grow quickly from the 18.2 million current number.

OPPORTUNITY: MOBILE

According to market research firm IDC, China's smartphone market is now the world's largest, with 2014 shipments projected to be 450 million units.

In the last few months, YOD signed an agreement with smartphone maker, Huawei, the number three largest OEM manufacturer globally. (Source)

The disclosed terms of the agreement are such that Huawei will pre-load the YOD app on to one of their phones that will now be branded as a "movie-phone." YOD receives a fee for every phone activation, as well as the normal revenue-share agreement arrangement for videos accessed through the app.

Further, as the Huawei deal is non-exclusive, company commentary has made it clear they are very much engaged in discussions with other device makers / OEMs. I would not be surprised if we got further announcements for similar deals in the not-too-distant future.

The sheer size of the mobile market in China is obviously tremendous, making projected numbers almost meaningless. Enter: C-MEDIA

C-MEDIA: The Strategic Investor

In the last few days it was announced that C-Media completed phase 2 of its strategic investment in YOD, to the tune of $19 million, almost twice what was originally envisioned. The implications for YOD will be discussed next, but first, about the strategic.

According to YOD, C-Media is a private company, in China, that specializes in short-form mobile video (think music videos, vines, user generated videos, etc), that went from zero revenue 2 years ago to over $100 million in revenues last year. They were also ranked 3rd and 6th in Deloitte Technology's China Fast50TM and Fast500TM lists, respectively, for 2012. C-Media helped YOD finish the Huawei app, and is seemingly very excited about mobile possibilities in general.

The CEO of C-Media is also now Executive Chairman of YOD, while Shane McMahon continues as Chairman and Principal Executive Officer. This structure essentially guarantees C-Media will be operating closely with YOD for the foreseeable future

PRO FORMA CAP STRUCTURE, OWNERSHIP, and CASH

The implications of this strategic investment are enormous for YOD. According to the last financials, in the first 9 months of 2013, YOD had a cash burn rate of roughly $650k / month. Now, this was during the launch (02/13) and subsequent heavy promotional activity of their offering, so the current cash burn is likely less. But, let us assume that same cash burn: 19m / 650k = ~2.5 years of fully-funded run-way. I cannot make this point clearer - this is 2.5 years of cash, given at a time when the product has already launched, when the mobile app is live, and promotional activity has already passed. This assumes no revenues generated going forward. TWO AND A HALF YEARS (though likely a fair bit more).

READ MORE ON S.A.:
http://seekingalpha.com/article/2004371-you-on-demand-the-netflix-of-china?source=nasdaq