Analyst Research Report Written by Osman Ghani,
Chartered Financial Analyst
Osman Ghani is a CFA charter-holder and has prior experience in working in Investment banking, corporate finance, and business advisory services. His prior work experience includes working on a number of sectors including Healthcare, manufacturing, IT, real estate, financial services, and business services. He is currently completing his Phd in Finance from the Warwick Business School, University of Warwick, and has a undergraduate and graduate degrees in Accounting and Finance from the London School of Economics. He is also a qualified chartered accountant and a member of the Institute of Chartered Accountants in England and Wales, and he also holds the CAIA designation.
February 24th, 2014
Current Price: $0.76 Target Price: $6.71
Rightscorp has created a business model that uses current laws to monetize the illegal distributing of copyrights through file sharing software for artists and holders of IP (Intellectual Property).
The company has been able to grow its inventory of copyright material over the past few quarters and has been able to obtain approval to over 1 million copyright material. The company’s revenue is expected to grow significantly due to a 25x increase in copyright material.
The company has strong relationships with over 50 ISPs in the US and is able to work effectively with these ISPs to target and receive payment from subscribers that infringe on copyright material.
I estimate that the current market price is under-valued and that the expected price target is $6.71/Share (See Explanantion Below).
Rightscorp, Inc. (OTCQB: RIHT) is a leading provider of monetization services for artists and holders of copyrighted Intellectual property (IP). The Company’s patent pending digital loss prevention technology focuses on the infringement of digital content such as music, movies, software, and games. This software ensures that owners and creators are rightfully paid for their IP. Rightscorp implements existing laws to solve copyright infringements by collecting payments from illegal file sharing activities via notifications sent through Internet Service Providers (ISPs). The Company’s technology identifies copyright infringers, who are offered a reasonable settlement option when compared to the legal liability defined in the Digital Millennium Copyrights Act (DMCA).
The proprietary technology enforces existing laws protecting IP. The technology first examines P2P networks such as The Pirate Bay and BitTorrent. It then sends automated settlement offers to infringers via their ISPs for $20 per infringement versus a potential legal liability of up to $150,000 per infringement if they do not settle. The company then identifies non-responsive repeat infringers. Finally, the company makes the respective ISP terminate internet service for repeat infringers, which the ISPs agree to do in order to reduce their potential legal liabilities.
The relationship of the company with the 50+ ISPs allow it to be effective, by suspending the service provided by the ISP for repeat offenders. The ISP may suspend or terminate the subscriber until settlement is reached. The ISPs are motivated to work with Rightscorp because under the DMCA, ISPs are required to make a reasonable effort to curtail illegal activity on their networks. ISPs are also motivated because this will reduce their operating costs due to a lower amount of illegal content. Which in turn means a lower traffic expense for the ISP and a reduced illegal download or upload which equates to a lower maintenance costs.
The company has at present closed over 50,000 cases of copyright infringement on over 50 ISPs. This has made then the most successful player in the industry that is monetizing IP.
The company has over 40,000 copyrights active in their system and have recently received approval to collect on 1 million additional copyrights.
The company collects daily from infringers who accept the company’s settlement offers and the company then splits the proceeds 50/50 with the intellectual property (IP) holders.
Key features of the Global Telecommunication Services Industry
According to Online Piracy statistics, 22% of all global internet bandwidth is used for online piracy.
Table 1: Piracy by region (2009 and 2010)
Table 1 shows that the worldwide percentage of online piracy is approximately 42%. The percentage is lowest in North America and in the EU and Western Europe, however, the percentage is over 50% for the Middle East and Africa, Asia-Pacific, Eastern Europe and Latin America.
Table 2: Top 10 countries for online piracy in 2010.
Table 2 above shows the top 10 countries in the world for online piracy of copyright material. China is the leading market, with nearly 91% of subscribers infringing on copyrighted material in 2010. Colombia, Russia, Malaysia, and India all had more than 50% of subscribers infringing on copyrighted material. Italy is the only EU country to be in the top 10, with 20% of subscribers infringing on copyrighted material.
Table 3: Percentage of copyright infringement by category.
According to the RIAA, ‘Music theft is a real, ongoing and evolving challenge. Both the volume of music acquired illegally and the resulting drop in revenues are staggering. Digital sales, while on the rise, are not making up the difference.
Consider these staggering statistics:
-In the decade since peer-to-peer (p2p) file-sharing site Napster emerged in 1999, music sales in the U.S. have dropped 47 percent, from $14.6 billion to $7.7 billion.
-From 2004 through 2009 alone, approximately 30 billion songs were illegally downloaded on file-sharing networks.
-NPD reports that only 37 percent of music acquired by U.S. consumers in 2009 was paid for.
-Frontier Economics recently estimated that U.S. Internet users annually consume between $7 and $20 billion worth of digitally pirated recorded music.
-According to the Information Technology & Innovation Foundation, the digital theft of music, movies and copyrighted content takes up huge amounts of Internet bandwidth – 24 percent globally, and 17.5 percent in the U.S.
-Digital storage locker downloads constitute 7 percent of all Internet traffic, while 91 percent of the links found on them were for copyrighted material, and 10 percent of those links were to music specifically.
While the music business has increased its digital revenues by 1,000 percent from 2004 to 2010, digital music theft has been a major factor behind the overall global market decline of around 31 percent in the same period. Although the use of peer-to-peer sites has flattened during recent years, other forms of digital theft are emerging, most notably digital storage lockers used to distribute copyrighted music.
According to a report by the Institute for Policy Innovation (www.ipi.org), global music piracy causes $12.5 billion of economic losses every year, 71,060 U.S. jobs lost, a loss of $2.7 billion in workers’ earnings, a loss of $422 million in tax revenues, $291 million in personal income tax and $131 million in lost corporate income and production taxes.
In terms of the Software Industry, nearly $59 billion worth of software was illegally downloaded in 2010. Emerging economies account for more than half the global value of PC software theft, accounting for nearly $31.9 billion a year in lost revenue. Half of the 116 economies studies in 2010 had piracy rates of 62 percent or higher, and two-thirds had at least one software program pirated for every one installed legally. Factors that can contribute to differences in software piracy include: software prices relative to income, the strength of intellectual property protection and cultural attitudes. The countries with the lower piracy rates also tend to be strong producers of intellectual property, and vice versa. The world average for pirated software infringement is 59.9%.
Many of these countries internet use is controlled by the government. With the illegal distributing of IP, these countries face harsh penalties from the U.S. Therefor, these countries are motivated on two fronts to work with Rightscorp to recoup revenues for the IP holders. They would be in good standing with the U.S. and create another revenue stream by getting a percentage of the settlement.
Rightscorp Inc’s potential growth
The company is targeting a total market of $2.33 billion, which is the estimated annual revenue from representing all 27 million copyrights and receiving payments from all 1,800 ISPs in the US. This does not include the potential global market.
The company’s potential revenue if it represents 27 million copyrights and continues to receive payments from the 50 ISPs that they currently works would be $345 million.
At present the company represents over 1 million copyrights. These include copyrights held by major motion picture studios, sixteen songs on the Billboard Hot 100, several current Platinum recording artists, recent Academy award winning films and several top 10 TV shows.
To date, Rightscorp has received settlements from subscribers of more than 50 ISPs including five of the top 10 ISPs: Qwest, CenturyLink, Charter, Suddenlink and Mediacom.
As the company continues to add to its copyright inventory and continues to send notices on every infringement it finds to all US ISPs, more ISPs will be compelled to cooperate with Rightscorp in order to comply with applicable copyright laws. This cooperative relationship between Rightscorp and ISPs is expected to grow revenue substantially in the future.
The company’s revenue is also expected to grow as copyright holders get more involved in tackling piracy of their copyrights. Evidence of this is in a a July article of the Hollywood Reporter concerning Warner Bros attempts to crack down on infringers via agents and cooperation from the infringer’s ISPs.
Recent financial performance
Rightscorp reported revenues for its fourth quarter ended December 31, 2013 of $155,381. This represents an increase of 195% over the same period last year. Revenues for the full year for 2013 were $324,000, which was 239% higher than the $95,565 reported for 2012. The growth in revenues was driven by the company’s ability to increase the amount of copyrights in its automated system by 135%, from approximately 17,000 in the fourth quarter of 2012 to more than 40,000 in the fourth quarter of 2013.
Value of the company
The company has over 40,000 copyrights active in their system and have recently received approval to collect on 1 million copyrights.
Table 4: Estimated revenue
Revenue for 2013
Average copyrights in system
Average revenue per copyright
Copyright in system
Estimated revenue from copyright inventory
ISP market of total US households
The company earned $324,000 in 2013 with only 25,000 copyrights in the system. This equates to revenue of nearly $13 per copyright.
The company has now acquired over 1,000,000 copyrights in its system. The estimated revenue from the total inventory of copyright assuming no change in the number of ISPs or a change in the response rate from subscribers is $12,960,000 per year.
The 50 ISPs currently cooperating with the company represents approximately 10% of the US households.
Table 5: Forecast revenue for 2014-2016
Table 5 above forecasts revenue for 2014-2016 assuming that the company observes a 40% increase in copyright inventory in its system every year, assuming a growth in the percentage of US households serviced by the ISPs by 10% every year, and assuming a growth in the response rate of subscribers that infringe on copyright by 75% every year. The forecast assumes that by 2016, the company’s copyright inventory will be approximately 2.7 million, representing nearly 10% of the total number of copyrights in the U.S. By 2016, the company will be cooperating with ISPs accounting for nearly 40% of all U.S. households and that the response rate would increase by nearly 535% over the three years.
The estimated revenue makes no assumption about the company’s ability to earn revenue in markets other than the US. The estimated revenue and therefore estimated value would be higher if the company enters into other markets such as the European Union, Western Europe, China or Canada just to name a few markets.
We assume a discount rate per year of 30% to reflect the risk associated with realizing the revenues. We also assume that by 2016 the company’s revenue will become more stable and representative of its earning potential.
This gives an estimated discounted revenue for 2016 of $115.5 million.
Using the average Price/Sales (P/S) ratios of public IP players such as Acacia (ACTG), RPX (RPXC) and Interdigital (IDCC), we obtain an estimated ratio of 4x.
This gives us an estimated value of the company of $461.86 million.
Assuming that the number of shares remains constant at 68.8 million, we obtain an estimated price per share of $6.71.
This represents a premium of nearly 783% over the current market price.
Rightscorp Inc (OTC: RIHT) is a leading provider of monetization services for artists and holders of copyrighted Intellectual property (IP). The Company’s patent pending digital loss prevention technology focuses on the infringement of digital content such as music, movies, software, and games. This technology ensures that owners and creators are rightfully paid for their IP. Rightscorp implements existing laws to solve copyright infringements by collecting payments from illegal file sharing activities via notifications sent through Internet Service Providers (ISPs). The Company’s technology identifies copyright infringers who are offered a reasonable settlement option when compared to the legal liability defined in the Digital Millennium Copyrights Act (DMCA).
The IP portfolio that RIHT has along with the current relationships with over 50 ISPs and copyright holders and the historical ability of the company to increase its revenue base over the past few quarters gives us an estimated price per share of $6.71. This leads us to recommend that the Rightscorp should be a strong BUY.
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