If you're tired of reading listless earnings reports with bland outlook statements from management, you might want to have a look at SeaChange International's (NASDAQ:SEAC) latest quarterly results. The company blew right past all sales and earnings expectations -- including its own -- with $45.4 million in gross sales and a $0.02 net profit per share. CEO Bill Styslinger then said that "if you believe in [Video] On Demand, you believe in SeaChange." That's a confident outlook if I ever heard one.
The Video On Demand (VOD) that Mr. Styslinger is talking about is poised to transform the entertainment industry as we know it. Digital video recorders (DVRs) like the ones offered by TiVo (NASDAQ:TIVO) are already making the idea of television stations running shows on a fixed schedule feel quaintly outdated, once you get used to the convenience of setting up your recordings and then watching the Survivor finale or the latest episode of 24 on your terms.
VOD is the next level of convenience beyond the DVR, giving you access to shows, movies, music videos, or whatever else you're looking for at the push of a button. There's no need to program anything, no waiting around for your show to air just so you can get in onto your recorder, and once you try it out, you're hooked.
SeaChange plays an important role in the VOD supply chain, since it provides infrastructure for pushing out on-demand content, as well as software that injects appropriate advertising into video streams at the drop of a hat. To put the company into context, the chain starts on your couch, where you're picking what to watch from a menu system on your digital cable or satellite decoder box. That set-top device might be a Scientific-Atlanta model, made by Cisco (NASDAQ:CSCO) and installed to go with your Comcast Cable (NASDAQ:CMCSA) or EchoStar (NASDAQ:DISH) Dish Network service subscription.
Somewhere in a Comcast data center, there are a bunch of SeaChange media servers pushing out video content through Sigma Designs (NASDAQ:SIGM) software and hardware by companies like On2 Technologies (AMEX:ONT) or Ciena (NASDAQ:CIEN). And in the end, the actual content was produced by Viacom (NASDAQ:VIA) or Time Warner (NYSE:TWX) and then licensed to Comcast specifically for on-demand broadcasting.
The last step is the sticking point here, the reason why VOD hasn't quite broken through to the mainstream yet. Many consumers today already have VOD content available, but they don't even know about it. Those channels are easy to miss in an anonymous-looking channel guide, and some might not want to play around with it out of fears that they might break something, or order something expensive by mistake. All of that stems from a lack of publicity about the feature, which in turn is due to a lack of available content.
You see, broadcasters today are comfortable with the existing model of keeping tight control over their content, and showing it through an established network of broadcast affiliates that run everything on schedule, at long-established fees. It's a familiar model that's easy to explain to advertisers, because for all the talk about having the best interest of consumers at heart, these companies find change scary. You don't fix a model that ain't broken, right? Besides, pushing for more on-demand broadcasting will turn old affiliate friends into enemies as they are cut out of the loop entirely.
So the studios that actually make content are hesitant to sign off on VOD licenses, just as they have been tight-fisted in their grips on online streaming and downloading rights. Because of this, the amount of content available as VOD streams on my cable box is tiny, weak, pitiful, and hardly worth the effort of digging through the menus. But times are changing. Studio after studio is presenting more and more material on the Internet, and SeaChange's financial results should tell you something about the demand for set-top VOD, too. I honestly believe that we're standing on the threshold of a new era in filmed entertainment, where the only live shows are sporting events and breaking news reports, and even they (more often than not) will be recorded and watched later.
All of the companies mentioned above stand to benefit hugely from this sea change -- pun very much intended -- and look like tempting investment ideas today. Just remember that the small fish have more room to grow than the sharks and whales that run the seas today. SeaChange is still a mere minnow, but it's hungry and growing.
Further Foolishness:
- Cisco is a shark that wants to nibble on your couch.
- Who will win the Couch Potato Sweepstakes?
- Sigma is another hungry minnow.
Time Warner and TiVo are both Motley Fool Stock Advisor selections. Sign up for a free 30-day trial to see why these companies tickle the fancy of the Gardner brothers.
Fool contributor Anders Bylund holds no position in any of the companies discussed here, but is already addicted to the karaoke-on-demand section of his cable service. You can check out Anders' holdings if you like. Foolish disclosure is always available on demand.
