Video, audio, and Internet technologies are used by hundreds of millions of people and generate billions of dollars in advertising and commercial revenues. Until recently, these technologies were independent of each other, with the Internet mainly used as a mechanism for communicating textual information with associated two-dimensional (2D) graphics.
But recent technological advancements in digital video creation, streaming, compression, caching, bandwidth, and other content-delivery technologies are bringing video, audio, and the Internet together as rich media.
We define rich media as the use (or combination) of video, voice, data, and other technologies, such as animation over IP networks, to create an otherwise unattainable user experience. And according to a 1971 study by University of California at Los Angeles professor Albert Mehrabian, body language and facial expressions represent about 55 percent of the information that people interpret. Rich media also takes advantage of the Internet's reach, interactivity, and data orientation to deliver the communicative power of video or animation. It adds the dimensions of context and personalization to provide relevance that cannot be matched by other communications or broadcast media. For this reason, we expect that rich media will significantly add to the user experience and, therefore, will be the Internet's next "killer app."
While much has been written about rich media's role in the world of online content, very little has focused on its use in the enterprise. Because the need to attract, retain, collaborate with, and better service customers has become more critical in today's environment, we anticipate that companies will look to rich media to gain an advantage. In our opinion, rich media is a compelling array of technologies that will "raise the bar" for e-commerce and enterprise communications.
A RICH OPPORTUNITY FOR GROWTH
We forecast the rich media market to reach $34 billion by 2004 (with a compounded annual growth rate of 53 percent) and expect that e-commerce will be a major driver for rich media use. META Group forecasts that by 2002, more than 66 percent of Global 2000 Web sites will be rich media-enabled. By 2003, it suggests that more than 75 percent of Global 2000 firms will have consistent rich media branding involving sight, sound, and interaction. And a Forrester Research survey shows that 47 percent of enterprises plan to start developing broadband content in the next 12 months; by 2004, Forrester sees rich client interfaces driving the majority of consumers' PC-based Web experiences.
Rich media will become a supporting technology in several revenue-generating and cost-saving applications and will be used by enterprises to attract prospective customers as well as retain and further penetrate existing accounts. Rich media will be deployed to improve the effectiveness of online advertising, Web marketing, sales, customer interaction centers, channel/partner management, collaboration, and training. We also anticipate that rich media technologies will be used to enhance online service and self-help experiences for users.
Of the 184 million abandoned online transactions in 1999, Datamonitor estimates 8 percent, or $1.6 billion in sales, could have been saved by implementing some form of online customer service. They forecast that those losses will double to $3.2 billion in 2000. In our opinion, rich media applications will optimize the user experience by integrating with enterprise database and other IT applications, allowing users to access or be presented with desired information at the optimal time. This combination will present immersive, targeted, and relevant content to users on many types of devices.
Because of their complex nature, specialized tools are required to coördinate, manage, aggregate, and distribute rich media assets within enterprise functional groups as well as across public and proprietary networks. The rich media market is currently in an early stage of development, with four logical markets emerging today: content creation, asset management, distribution technologies, and content access and aggregation.
THE KEY AREAS OF RICH MEDIA
Content creation: Includes applications and services that enable the creation, editing, production, and encoding of digital video/audio, animation, and graphics production. These tools create and edit the original content that end-users see. We expect immediate growth will occur with graphics and animation tools. Without making any judgment concerning the associated stocks, the products in this sector include Macromedia (Nasdaq : MACR)'s Flash; Adobe Systems (Nasdaq : ADBE)'s LiveMotion; privately held Pulse Entertainment's Creator; and Brilliant Digital Entertainment (AMEX : BDE)'s b3d Studio and similar technologies. These tools facilitate the creation of content that grabs users' attention without using tremendous amounts of bandwidth. There are also new technologies that offer advantages over video by providing a realistic, digital representation of a person that can be animated and controlled interactively over low bandwidths, such as digital stand-in technology produced by LifeFX (Nasdaq : LEFX).
Rich media asset management: Includes applications and services that catalog, index, and annotate original content as well as facilitate the repurposing and the search and retrieval of rich media content. These applications allow for video content to be incorporated into enterprise databases and integrated into other IT applications. Asset management applications also handle production management, distribution preparation, syndication management, rights management, and security. This category provides a most compelling set of investment opportunities, in our opinion, since it is here that rich media assets will be managed and made usable on the Internet, and in particular, IT infrastructures. Again, without making any judgment concerning any securities involved, those that participate in this area include a mix of public and private companies: Artesia Technologies, Chuckwalla, Convera (Nasdaq : CNVR), eMotion, IBM (NYSE : IBM)'s Digital Library, Informix (Nasdaq : IFMX)'s Media 360, MediaSite, The Bulldog Group, QB, and Virage (Nasdaq : VRGE).
Distribution technologies: Includes methods and services that facilitate the distribution of rich media assets over corporate networks and the Internet. This includes content distribution, ad insertion, reporting and analysis tools, services, and storage. We anticipate that the distribution market will look to supplement their offerings with added-value technologies to round them out. Akamai Technologies (Nasdaq : AKAM)'s acquisitions of streaming media providers Network24 and Intervu and Inktomi (Nasdaq : INKT)'s acquisition of Fastforward are recent examples.
Content access and aggregation: Includes product companies that develop end-user interfaces to rich media content (e.g., streaming players) in addition to services-based companies that provide content repurposing, aggregation and hosting, integration, syndication, and billing. This area also includes companies, such as Vastvideo, that are focused on providing content that can be delivered easily in a compelling, contextually relevant manner.
WHAT'S NEXT?
In a post-2000 Internet era, the tough question that needs to be addressed is not whether the Global 2000 will continue to spend on e-commerce initiatives, online advertising, and online customer care, but how and where will these investments be made? The Internet is an increasingly important aspect of not just e-business but business, period. The use of the Web is not going away; in fact, its adoption is growing faster than any other medium in history.
We are in the relatively early stages of learning how to use the Internet to its best effect as a powerful business infrastructure tool. Companies will continue to advertise and provide customer support, and they cannot afford to ignore this medium; advertisers and the technology they use will catch up with the opportunity and rich media will improve its effectiveness.
Disappointments are inevitable, especially if expectations are excessive, as has been the case recently. With such disappointments and signs that IT expenditures are softening in certain areas, many technology stocks have faltered lately. At times like this, it is important to be highly selective. The winning stocks will be those that provide technology with a high, tangible value proposition and a demonstrable return on investment.
John Bowen is vice president of equity research for FAC/Equities, the investment banking division of First Albany Corporation. FAC/Equities provides research, corporate finance, and capital markets capabilities to high-growth technology companies in the communications, Internet, and software industries.