Mr. Rice: I generally call it "Internet infrastructure" versus "services," although there are several companies with software-as-a-service type of attributes, such as Akamai Technologies and Limelight Networks, which are content delivery networks. Then you have some e-commerce platform providers, Digital River and GSI Commerce, as well as some smaller search engine companies, like InfoSpace and InterActiveCorp. VeriSign also has SaaS attributes given that it provides .com, .net, administration, and security through SSL and authentication. Finally, Rovi Corp., which most people would remember as either Macrovision or a combination of Macrovision and Gemstar, which merged in May of 2008 and then changed their name from Macrovision to Rovi Corp.
TWST: How have the companies you follow weathered the recession? What will the economic recovery to mean for them in 2010?
Mr. Rice: I'll take one step back, and how I think about my coverage as a whole focuses on the convergence of media and the Internet. And so all these companies kind of benefit from the growth of video and entertainment on the Internet, whether it be the delivery of content by Akamai and Limelight, or setting domain names and securing communications on the Internet, like VeriSign. Search engines will help you discover content, and then Rovi Corp. - which, again, most people probably don't remember - but as Gemstar, provides interactive program guides, which are used to discover broadcast content primarily on digital television from cable and satellite operators. It's a grid that provides the time and the channel, and then what's playing on that channel, which I think will become more and more important. As there become more entertainment options, which are already fragmented, the guide provides consumers a place to better identify and discover those things that you want to watch through your television. That's kind of an overview of how I think about my space.
And then so to go back to your question about the recession and how it may have impacted my coverage universe, many of the companies in my coverage universe were impacted by online advertising, as well as e-commerce and then just consumer spending in general. So the negative is as the market declined, people spent less. And that - whether it be advertising or just general consumer spending - I think the good thing about some of my companies, such as VeriSign or Rovi, or I guess really across the board, is that there is some element recurring revenue streams - except for search engines, which directly interface with the customer and there are no long-term contracts. For companies like Akamai and Limelight, contracts are generally at least 12-month contracts. If you go to, let's say, a GSI, they have five- to 10-year contracts. Rovi Corp. has five- to 10-year contracts. So they were buffered somewhat from the downturn because of these longer-term contracts. But at some point, it starts to filter through. I think you saw Akamai, Limelight and VeriSign probably dip down a little bit faster than the other ones simply because those contracts expired probably more frequently than others. But at least they still do not have to close 100% of new business every month or every quarter. So again, the software-as-a-service type of model probably benefited them somewhat, but it is a little bit of a step down. Having said that, looking forward we've already seen the online advertising start to come back. In fact, my analysis shows that cost-per-click (CPC) rates finally reached positive territory in November. For the first time in 2009, they finally climbed back to where they were before 2009. And then you start to see e-commerce coming back. What I think is really interesting about e-commerce is the recession conditioned consumers to look for coupons, discount items, lower-priced items on the Internet, and now we've got the benefit of some economic stability and possibly some recovery. I think people are still looking for those discounts, but they are able to find them faster on the Internet than they are if they go to the mall. So I think that the push in the better economy will continue to spur growth, although it may be for a little bit lower-priced items. I think what happened this weekend - in the very, very near term - is this big snowstorm on the East Coast pushed consumers to search for Christmas gifts on the Internet. I think more and more people are comfortable with going to the Internet to find gifts for the holidays and general shopping, and I think you will see that the online channel benefit a great deal from the bad weather environment. So I just think that overall, more people are more comfortable with spending online. And infrastructure companies like GSI Commerce or Digital River will benefit greatly from that.
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