Hemscott IPO EYE reports on DDD

DDD

Hemscott IPO Eye view: Very interesting technology and, if 3D TV can catch the corporate imagination, there’s real sales potential too. It’s very early days yet, however. The shares have had a good start on AIM. One to watch.

The background

The move from 2D to 3D imagery on your home TV – without the need for specs – could be as revolutionary as the change from black and white to colour TV, claims DDD. Throw away the multicoloured cardboard glasses, sit back and prepare for a visual bonanza. That’s the theory, but it’s not as far fetched as you might think.

DDD has already got the technology. Set up in 1993, the US group has been in research and development for the past several years, but with the advent of increased processing power and the falling costs of plasma screen technology, DDD is set to make its vision a commercial reality.

There are still some hurdles, but these aren’t technological. The success of 3D, and DDD, is wholly dependent on the acceptability and affordability of the technology. Of the two, acceptability is the biggest barrier. Typically the cost of new technology falls quickly, so that barrier will drop with time, but market acceptance is a catch 22 situation. When it comes down to it, there just aren’t that many 3D consoles around (reducing the impetus to make 3D content), and if you’ve got a 3D screen, there’s precious little 3D content to watch (so why pay extra to have it in the first place?).

To its credit, rather than shirk these problems, DDD has tackled them head-on. It has developed a variety of solutions, emphasising backwards compatibility. In essence, that means that 3D capable screens also show 2D (ensuring that they are not entirely redundant), that 3D content can be provided in parallel with 2D content using the existing 2D content distribution networks, and make sure that affordable technology exists to convert 2D content into 3D.

The technology in focus

Display

DDD provides its 3D experience through a combination of adapted plasma screen displays and a 3D playback system. The display is currently supplied by the US group 4DV and resold by DDD. These are standard plasma display screens which have been fitted with special optical filters. The playback system, again purchased from third parties and sold on by DDD, is essentially a computer which drives the generation of 3D content on the screen. The system uses DDD’s own 3D decoding software to enable encoded content to be played in real-time.

Conversion

To assist in 2D to 3D conversion, DDD has developed two software conversion tools: Depth mapper and Depth tweener. These tools aim to automate the majority of 2D to 3D conversion, allocating depth values to the visual components of visual content. Without these tools, a graphic artist would have to manipulate every single frame manually. That’s not a task to be taken lightly, there are 25 to 30 frames per second of film. The cost and ease of conversion, however, is dependent on the format of the film.

Live action film, like the majority of content at present, is resource intensive to convert. Initially this type of content has no depth information, and so it provides little in the way of assistance to a graphic manipulator. CGI-type content on the other hand, like the recent films Shrek or Antz is a breeze in comparison. Before becoming 2D film, this content already has 3D depth information embedded. DDD’s software manipulates the content at this earlier stage, extracts the data, and uses that to provide the majority of the depth maps.

As a consequence CGI conversion takes 8 hours a minute, whilst live action film conversion takes around 35 hours a minute. According to Schwartz, that adds about 2% to 6% to production costs. Low enough, he feels, that it wouldn’t be prohibitively expensive. Conversion, however, will become more efficient and less costly as time goes on. About a year and a half ago, converting a minute of live action film would have taken 100 hours. Schwartz hopes that this year they’ll trim the current figure of 35 hours per minute by a further 5 hours.

Delivery

DDD has also looked into the delivery technology, and has developed a system which enables 3D imagery to be delivered through existing 2D networks. This would allow both 2D and 3D images to be transmitted in parallel down the same networks and to be viewed in either 2D or 3D, depending on the viewer’s display equipment.

The markets

From this all-encompassing approach to the technology, it’s obvious that DDD is looking to build itself into the very fabric of the 3D future. But while the technology itself is not in doubt, the hardest part will be to convince the market that the attractiveness of going 3D compensates for the trouble and added cost of making the transition.

As yet the market for 3D is unproven; at best it’s only nascent, at worst it’s a dead-end street. And at this early stage there’s little indication that the technology will become, as the group hopes, so commonplace that it’ll be found in every home across the country. The US$22,000 (£15,278) price-tag of 3D plasma screens may be acceptable to a big company, but it will be a long time before Joe Bloggs can afford it. That said, the costs are falling by some 30% to 50% year-on-year. DDD doesn’t expect the domestic market to kick in for another 3 to 5 years.

In the meantime, DDD is set to target the corporate market. The technology itself could prove attractive on two counts. Firstly, as a new technology it has the advantages of having a ‘cutting edge’ impact. Secondly, early preliminary studies have shown that the retention and absorption of the information by viewers is much higher. That latter advantage points to better, more effective advertising. What was the catalyst for the success of colour TV, could well do the same for 3D. It’s this avenue which could drive the big consumer brands to lend their weight to the campaign, again crucial to the success of DDD.

DDD aims to sell its 50″ 3D TV and 3D playback system for use in public spaces or venues like corporate events, shopping centres, airports, sporting venues and theme parks. Anywhere in fact, which requires a high-impact display. DDD’s TriDef™ 3D TV System systems have already been used by Pioneer at INFOCOMM 2001 in June, and at the SEG Conference in San Antonio on the Veritas DGC booth at the back end of last year. Units have also been sold on to Disney and Boeing.

Direct advertising is the other principle use. It is, says Schwartz, a niche growth sector in the outdoor advertising market. Plasma screens are now in evidence in 90+ of the Virgin V-Shops, and have the advantage of making an impact on the customer when they are ‘aisles away, rather than miles away’ from a cash till’. The outdoor advertising market grows by around 2% to 3% per year, but the use of electronic screens is ‘increasing dramatically’.

For those who think that it’s a purely American phenomenon, think again. Some estimate that the growth in the outdoor advertising market within the UK leapt from £8m to £15m in 2001. DDD is even currently in negotiations with a ‘leading nightclub operator’ to provide the screens within UK venues. The idea is to provide highly targeted advertising: to start selling converted 3D adverts from drinks manufactures while the bar – and its cash till – is just metres away. The sale of 3D content conversion provides an additional revenue stream for DDD.

The numbers

Unfortunately, as DDD has only just made the transition from research and development to commercialisation, the group’s trading history has not been established. Sales in the nine months to 1 September 2001 reached £130,000, but as yet have not received a real push. The glasses-free system only came into operation a year ago. Part of the £5.5m raised at flotation (net of expenses) will be used to bolster the group’s sales and marketing team. Hopefully, sales will then begin to offset the group’s annual cash burn.

Encouragingly, however, the group has high operational gearing. The initial upfront investment has already been made. The profitability threshold is roughly £10m of turnover, a target which the group hopes to achieve on the back of sales to the corporate market. In later years this will include increasing revenues from the domestic market and from content conversion licenses.

In pre-float research, Old Mutual estimates the following sales and earnings progress:-

Why the Aim Market?

For a company that is primarily based in the US, getting a listing in the UK initially seems a strange thing to do. At the same time the group listed on Aim on 3 January, the group de-listed from the Canadian Venture Exchange. The reason for the move says Schwartz is primarily to do with the size of the business. Local Nasdaq and other markets already offer a huge number of companies to investors, so much so, that a company as relatively small as DDD would go unnoticed. A group would have to have a half billion market cap before brokers would even consider starting coverage. He says that the Aim market, well known around the world as a good quality market for small growth companies, offers a far better alternative for DDD to get the recognition it deserves.

Should I buy the shares?

For DDD to be successful, it’s crucial that it can successfully capture the imagination of the corporate market. The high impact of the technology on viewers may be guaranteed – but its successful sale to companies is not. The use of such systems by the corporate market in today’s economically subdued market could be seen as discretionary, especially if during this belt-tighening climate a back to basics policy to the tried and tested approaches of marketing is prevalent. That could jeopardise the group’s shorter-term revenue stream.

With additional revenue streams from home use not expected for a number of years, that could have serious implications. It’s all too easy to theorise possible outcomes with such new technology – and be horribly, horribly wrong. The bottom line for investors is that the progressive sales and profit figures will tell the real story.

At this early, transitional stage it’s just impossible to tell. Having come to the market on 3 January at 65p, the shares have risen 20% to 78p. At this level, they trade on a hefty multiple of 195 times not even this year’s but next year’s earnings. Not until 2004 does the multiple fall to a more reasonable 12 times Old Mutual’s forecast and there must be a huge question mark over the validity of an earnings estimate that far out.

Once there’s more trading history behind DDD, then investors will be in a better position to judge the real value of the technology. In the group’s favour, DDD has already done the hard work – the research and development behind the scenes. It’s now a case of waiting to see if clients are willing to pay for the use of 3D technology. In time, no doubt, with falling costs and further increases in technology, they will be more willing to do so. One to watch.