Crackle Russia Business Plan July 2013
Russian Market Overview Russia has the Largest Online Population of any European Country Broadband households in Russia are expected to grow at a 8% CAGR from 18.7mm in 2012 to 25.4mm in 2016, representing approximately 22%-28% of total U.S. broadband households each year Mobile phone users in Russia are expected to grow at a 2% CAGR from 102.2mm in 2012 to 110.9mm in 2016 while mobile internet penetration is expected to increase from 24% in 2012 to 55% in 2016 Broadband Households (millions) Mobile Phone Users (millions) 30.0 25.0 20.0 15.0 20.5 23.9 22.3 25.4 18.7 [ New Check ad spend 41.2% with 16.3 previous 38.9% page ] 29.2% 33.3% 36.2% 12 16 CAGR: 8% 43.4% 55.0% 45.0% 35.0% 115.0 110.0 105.0 100.0 95.0 99.9 16.6% 102.2 23.7% 108.8 106.6 104.4 31.9% 48.8% 42.1% 12 16 CAGR: 2% 110.9 54.9% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0 CY 2011 2012 2013 2014 2015 2016 25.0% 90.0 CY 2011 2012 2013 2014 2015 2016 10.0% Broadband Households Penetration Mobile Phone Users Mobile Internet Penetration 2 Source: Screen Digest and emarketer 2
Russian Market Overview (cont.) Traditional television dominates ad spending budgets in Russia and is expected to account for half of Russia s total ad spending over the next few years; however, online ad spending is the second largest platform Digital ad spending is expected to grow at a 16% CAGR from $1.7bn in 2012 to $3.1bn in 2016 as a result of advertisers growing familiarity with internet advertising and the potential for new advertising purchase paths such as real-time bidding Russia s online ecosystem is dominated by Russian, homegrown, websites with an emphasis on social media (78% of internet users, or 58mm people, will access a social network at least once a month in 2013) Digital Ad Spending in Russia Top 10 Websites Among Internet Users in Russia ($ in billions) $3.5 $3.0 $2.5 $2.0 $1.7 $2.1 $2.5 12 16 CAGR: 16% $2.8 $3.1 $1.5 $1.3 $1.0 $0.5 $-- 2011 2012 2013 2014 2015 2016 3 Source: emarketer (1) Tvigle monthly uniques include users from Tvigle.ru, partner sites and connected devices. Tvigle projects 31%-38% of uniques from Tvigle.ru in CY13-CY17. 3
Discussion of Content Piracy is currently one of the key market challenges in the online video space to both internet properties and content providers as only 5% of content is downloaded from legal sources in Russia Crackle addresses this problem through its focus on the free for user AVOD distribution model and its premium content There is strong evidence that piracy will decline significantly in the next 2-3 years Government policies and content holders are increasingly focused on reducing illegal content online (particularly due to Russia joining WTO in 2012) The Agreement on Trade-Related Aspects of Intellectual Property Rights sets the minimum international standards of intellectual property rights recognition and protection and has been adopted as a result of Russia joining the WTO In the past, internet users were liable for the uploading of illegal content, however; recent laws have changed to make service providers liable for distributing illegal content in the Internet New measurements recently implemented to reduce online piracy include: Creating an open-to-public register of digital movies which will be fulfilled by content right owners on a voluntary basis and enabling information intermediaries to check the legal status of the content prior to their upload on web resources Obliging information intermediaries (internet providers, domain name owners, web-sites and social networks administrators) to track the content uploaded by users, to instantly block access to pirated content and prohibit its further distribution, and prohibiting indexation of the information about sites containing illegal content by search engines 4 4
Competitive Landscape Opportunity to capitalize on limited premium AVOD content in online market as consumer appetite is rapidly building Hulu and Netflix are not offered in Russia, but representatives of Hulu and Netflix are understood to have held preliminary talks in 2012 about the possibility of entering the Russian market Ivi.ru raised $40M in 2012 to fight off the threat of Hulu, Netflix and YouTube Top Competitors Ad Supported Video Services 5 Ivi.ru is considered to be the Hulu of Russia Offers streamed premium TV and films from international and local big-name content holders In 2012, it raised a $40M round of funding expected to be used to build out the company s technology as well as its content catalog More than 10M monthly uniques 98% of content is free, 2% is reserved for paid subscribers (ivi+) Streams TV episodes, webisodes and other videos Offers content from Disney, FOX, ABC, and BBC, amongst other networks 10M monthly uniques(1) Distribution model based on syndication of content through partner sites and related advertising revenue sharing arrangements 2012 gross revenue and gross profit of $10M and $2M, respectively Seeking a $20M investment to fund content acquisition, marketing and personnel expenses; also key shareholders selling 27% interest (1) Tvigle monthly uniques include users from Tvigle.ru, partner sites and connected devices. Tvigle projects 31%-38% of uniques from Tvigle.ru in CY13-CY17. 5
Russian Online Video Competitors Overview 6 (1) Tvigle monthly uniques include users from Tvigle.ru, partner sites and connected devices. Tvigle projects 31%-38% of uniques from Tvigle.ru in CY13-CY17. 6
CPMs Bridge Net network CPMs of $7-$9 based on conversations with Sony s ad sales team and information from Russian video service providers and ad networks. Premium net CPMs can reach $12 The following tables provide a bridge from gross to net CPMs CPMs for Tvigle were $9 in 2012 The following table provides Tvigle s historical and projected bridge from gross to net CPMs 7 7
Operating Assumptions Distribution Ad Sales Content / Programming Launch in Russia in October 2014 on Web, Mobile, and CTV 4.1M uniques / month in FY15 growing to 10.2M uniques / month in FY19 Uniques % by platform: 54%/26%/17% for Web/Mobile/CTV in FY15 shifting to 50%/28%/22% in FY19 2.4 streams / unique (average) in FY15 growing to 3.7 streams / unique in FY19 (average) $1.4 of revenue in FY15 (assumes mid-year launch) growing to $19.2M of revenue in FY19 Direct ad sales headcount of 5 starting in FY16 and growing to 9 by FY17 Revenue mix: FY15: 0% direct sales / 100% network, shifting to 50% direct sales / 50% network in FY19 Direct Sales CPMs: FY15-FY19: $12 -$14 for Web/Mobile/CTV Network CPMs: FY15-FY19: $8 for Web/Mobile/CTV Streams monetized FY15-FY19: 70%-85% for CTV/Mobile/Web 2.8 monetized ads / stream in FY15 (average) growing to 3.9 monetized ads / stream in FY19 (average) Content mix: Movies and TV 311 movie titles per month in FY15 growing to 450 in FY19 Movie content licensed from third parties: 33% in FY15 growing to 59% in FY19 85 TV shows per month in FY15 growing to 108 TV shows in FY19 TV content licensed from third parties: 26% in FY15 growing to 51% in FY19 Operations Marketing Utilize Crackle s Digital Platform Group for core platform and app development support Hire 12 new employees in FY15, an additional 5 employees in FY16 and an additional 4 employees in FY17 $1.6M of marketing support in FY15 (includes $300K launch marketing). FY15-FY19: $1.6M $2.3M per year 8 8
Uniques & Ad Projections ($ in thousands) 9 9
Financial Projections ($ in thousands) 10 (1) Includes Finance headcount to be allocated to the Corporate P&L. (2) Cash flow assumes 2 month lag on inflow of cash and 1 month lag on outflow of cash. (3) Cash flow after Licensing Revenue to SPT. 10
Risks & Mitigants Risks Mitigants Premium ad sales in Russia currently account for less than 10% of all ad sales Premium ad sales market grows slower than expected Hiring of an in-house ad sales team Potential for a Sony minimum guarantee Piracy continues at current rate and legal content remains only 5% of the total market Government policies and content holders are increasingly focused on reducing illegal content online (particularly due to Russia joining WTO in 2012) An increase in market share of legal content provides upside for Crackle Competitive market with established players The online video audience in Russia is expected to grow from 42M people in 2012 to 82M people in 2015 Online advertising market expected to grow from $2.0bn in 2012 to $4.3bn in 2015 In-stream advertising market expected to grow from $45M in 2012 to $270M in 2015 11 11
12 Appendix
Headcount ($ in thousands) 13 Note: Includes Finance headcount to be allocated to the Corporate P&L. (1) Assumes 50% bonus for Ad Sales employees and 15% for all other employees. (2) Assumes fringe benefits of 27% on salaries and 4% on bonuses. 13
Programming ($ in thousands, except rate card) Assumes 5%-10% rate card increase every year for movies and TV Rate card for 3rd party content at a 50% premium to Sony content Assumes approximately 65-75% of costs per year allocated to movies Total annual programming cost of $1.6M (annualized for full year) in FY15 growing to $3.6M in FY19 14 Note: Cost of movie titles and TV shows represent FY 2015 costs for Sony content 14
Marketing (in thousands except for cost per unique) 15 (1) Assumes OTT promotions through partner marketing. (2) Represents the cost for organic uniques that exceed the target organic mix. 15