understanding destra

I've attached one of the best articles I've seen on destra - if anyone does not understand the company and wants to, please read this article and then you'll question if you hold enough shares - happy reading.

New Media Is Here, And It?s Called destra


By Greg Peel
2908 words
4 April 2007
FN Arena
English
Copyright 2007. FN Arena Ltd.


If you hail from Gen X or Gen Y, or have children that do, chances are you might be aware of something called Planet X. In its most obvious form, Planet X is a television show dedicated to extreme sports (skateboarding, snowboarding, BMX motocross etc). But Planet X is more than that. It is a 'brand'.


Young Australians can get their fix of extreme sports via Planet X live events, or through Planet X content on free-to-air TV, pay TV, on-line and on their mobile phones. Recently fast food giant KFC paid the owners of Planet X to licence the brand as part of a promotion of a new range of chicken products aimed at young people. KFC is currently spending millions to promote its products, and in so doing promotes Planet X at the same time. Likewise, Soul Pattison (SOL) has recently paid for naming rights, to thus promote the Soul Planet X Games.


The cost to the company that owns Planet X is zero. KFC and Soul pay for the right to spend all their own money on the brand's cross-promotion. That company is destra corporation (DES). We know it must be hip because it uses lower case.


destra was created by a young brother-and-sister team back in the nineties as an Australian pioneer of online music downloads. By the time it listed in May 2000 it had morphed into a pure-play web-hosting operation. If ever there was a bad time to list a dotcom, it was just after the dotcom crash.


Nevertheless, destra sold the web-hosting operation to Blue Freeway last year for $19 million, booking a profit of $12 million in the process. By divesting almost entirely of this business (destra still holds a small stake in Blue Freeway) destra was able to pay down debt and pursue further acquisitions in its mission to become Australia's pre-eminent digital media company.


So what exactly is a digital media company?


For those of us who still watch free television, read the newspapers and go to a shop to buy CDs it's all a bit of an alien concept. It really is enough to make your brain hurt. But your teenage sons and daughters can't understand why all the confusion.


Perhaps one easy way to try and get one's head around the mechanics of new media is to consider the simple entertainment field of recorded music.


Once upon a time we would spend a Saturday night in the local pub listening to rock'n'roll bands. Those bands could be seen week in, week out at pubs across the city trying hard to get themselves noticed (while often just playing for beers). If a band was lucky, a record company executive might have come to watch.


If the record company talent-spotter liked what he saw, the band will be signed up, and the record company would finance the cost of recording an album. It would then send singles from the album to radio stations in the hope the radio station liked the music as well. If the radio station played the singles, record sales would follow, and, sometimes, fame and success.


Fast forward to 2007.


A rock'n'roll band can now create its own digital recording of its songs, while playing in the guitarist's bedroom, by utilising inexpensive recording software on a personal computer. That recording can then be uploaded onto a dedicated website such as MP3.com.au. Millions of potential fans across the globe now have access to listen to the recording for free.


The owners of the website can then play talent spotters as well, and perhaps decide to sign up the band, spend money for a professional recording, and release and promote a CD. It can also on-sell the recording to other music download websites (think iTunes).


There is no longer a risk that the 'talent spotters' will pick a dud (or conversely, in the case of Decca, decide not to sign the Beatles) because they will already know the extent of the band's potential fan base. This will be indicated by the number of free downloads made across the globe of the original recording that the band themselves uploaded.


Fast forward just a little bit further.


An obvious question arises: if the world can download a song for free, why would it ever pay for a CD or iTunes download? And aren't record companies struggling to survive against digital piracy?


The simple answer is: give the music away for nothing. This is exactly where the music industry is heading. And while physical recordings (ie the
CD) still account for about 90% of all record sales, your children don't know what the inside of a record shop looks like. But if the music is given away, how does anyone make money?


You actually know the answer to this question, because you have been watching free TV and listening to free radio for decades. And paying very little for your newspaper. The income is generated by selling advertising.


Fear not, for your favourite new three minute pop song is not about to be interrupted by an ad break. Rather, the 'record company' will build a website for the band, where like-minded fans can 'hang out', chat, listen to music, and be bombarded by ads. Other websites will be (or have
been)
created around a particular music genre. If your son is into bands like Slipknot, he might like to spend time checking out a trash rock tragic website.


A music video of the band could be played on the Planet X show, which your child may like to watch on TV, or online, where again ads will appear. The song could be sold as a jingle to promote a particular company (when was the last time you heard an original jingle on an ad?). In fact a whole broadcast can be built around music clips, as well as sport or fashion or movies or lifestyle, and in each case, ads will be an integral part. There is far more revenue available in selling such advertising space than there is in selling a digital recording for one dollar.


That's music ? now consider television. It was not long ago that any Hollywood blockbuster movie began gratuitously showing close-ups of a particular car, watch or soft drink, or (worse still) including lines like 'Let's take the BMW and stop off at Starbucks'. This is called 'embedded' advertising. The advertisers pay the movie producers (which helps to fund the film) to embed their products into a script and in turn save the cost of actually creating an ad.


The same practice is occurring in television. Digital technology allows for television programs to be downloaded from the net, and also allows for traditional ad breaks to be skipped. So a show like Desperate Housewives can alternatively 'embed' ads. It can also sell the embedded products online. 'Did you like the bracelet such and such was wearing? You can buy it now at www?'


Of course we have all endured, for some time, programs such as fishing 'shows'. You know how it goes: 'Having just eaten a fabulous breakfast at the (insert brand) lodge we set out in our (insert brand) runabout along with Macca from (insert brand) fishing tours and spent the day pulling in bream using our new (insert brand) rods with nine pound (insert brand) line and (insert brand) rubber lures. Pass us another VB will ya Macca?'


Think of that style of show, but then imagine content that will appeal to today's youth. A fashion and lifestyle show perhaps, or sport, or dance music or movies or, indeed all of the above. Then consider that the show can be formatted to be delivered on television, online, or over a mobile phone. The content appearing on the show has been pre-selected and acquired based on 'hit' numbers collated from websites. Advertisers are lining up to buy space.


If you can imagine that, then you've now about figured out destra.


destra's digital media business formula works on a three step process:
(1)
acquire the intellectual property (content); (2) build 'communities' around that content; and (3) monetise (on-sell the content and advertising). Co-founder and CEO Domenic Carosa's motto is 'Build once, sell many times'.


When destra started out Domenic used to have to go around knocking on hundreds of doors seeking out the sort of content that he hoped would appeal to his target audiences, before building websites and 'brands' and soliciting advertisers. Now it is the hundreds who are lining up to provide the content, and there is a queue of advertisers out the door.


As an example, you can now visit The Wiggles' website and purchase or download music and videos and paraphernalia for your children and be hit with advertising. That is a destra website. By the end of the year all Virgin Blue (VBA) aeroplanes will be fitted with back-of-the-seat televisions on which you can watch free, pre-programmed destra entertainment, complete with ads or, with the swipe of a card, Foxtel programming (brought to you by destra) and, yes, complete with ads. If for some strange reason you might wish to purchase or download music by Danii Minogue, she too belongs to destra.


Did you join the whole nation in euphoria over Australia's World Cup qualifying, penalty shoot-out win against Uruguay in 2005? destra had the DVD in the stores the very next morning. AFL grand final? In stores on the Sunday. destra also owns distribution rights with the A-League, NRL, and V8 Supercars. It also makes the content available on digital platforms.


If you happen to be in Australia watching pay TV channels such as the Movie Network, CNBC, ESPN or fashiontv, to name a few, all advertising is brought to you by destra.


If you go to the new JB Hi-Fi (JBH) or Harvey Norman (HVN) downloading websites, they are created by destra.


If you go to a new downloading 'kiosk' in a record store near you, in which you can create your own compilation CDs of the new songs you choose yourself, that facility will be provided by destra.


The growth of online advertising in this country is now well documented. It continues to grow at about 60% per annum. Online is rapidly catching up with, and will eventually consume, traditional old-media advertising on free TV, radio and in newspapers. Advertising agencies have only just started waking up to not only the possibilities but also the necessity of securing advertising space across a range of media platforms.


And while the virtual world might be a new and foreign place to traditional advertisers, life for the advertiser in the virtual world is actually one hell of a lot easier.


If you like to check out the TV ratings each week, you will know that ratings agencies provide a comprehensive breakdown of viewing figures into demographics. Male or female, young or old, high or low income ? what are they watching? This will determine just where an ad agency will decide to place an ad, and how much that ad might cost. There is little point advertising retirement homes on Big Brother. Nor Australian Opera on the NRL replay. But not every television show has an audience that is clearly distinct, and some of them don't even make it past three episodes. It's a fingers-crossed game.


But what if you knew exactly what the demographic was before your ad was seen? What, in fact, if the 'show' you want to advertise on was created with the specific purpose of being a platform to sell your product directly to those who would be most likely to buy it? Welcome to online communities.


Let's come back to Planet X, for example. Specifically designed around extreme sports, this television program/website et al would obviously be a great place to sell Pepsi-Max, some sick new fashion items for teenagers, or a particularly rad BMX bike. All the work the advertisers previously had to go through to determine just where their products are best placed ? is circumvented. An enormous amount of risk is removed.


At the same time, extreme sports fans are not sitting through tedious ads for life insurance. It's win-win all around. In fact, they're not 'sitting through' ads at all. That sick new fashion range actually becomes part of the show.


Where destra sees one of its greatest advantages in this new game is in the ability to identify opportunities and create or exploit 'communities' of like-minded individuals. Amongst its stable, destra includes Planet X, MP3.com.au, transfusion.com (dance music), thescene.com.au (fashion and lifestyle), and Nice Shorts, to name a few. The latter is a website where you can upload your short film, and thus follow the same potential path as a music recording.


destra does actually claim to provide something for the baby boomers as well, but let's face it ? give us the ABC and our best of Creedence Clearwater CD any day. And we are not exactly the market of the future. In fact, advertisers have found one of the hardest demographics to tap is indeed the youth market, and they're the ones with all the disposal income and impetuous spending habits. The Ten Network (TEN) has tried, and largely failed, to corner the youth market. Today's kids don't even watch television.


And when Australia finally introduces fast broadband, and this will happen, one way or another, sooner rather than later, concepts such as free-to-air television will become museum pieces, and a company like destra will have just been presented with the key to the city.


destra's list of advertisers does not, however, read simply as a bunch of kid-friendly, smaller franchises. We're talking Telstra, Optus, 3, Apple, Intel, NAB, Samsung, Warner Music, Nokia, Tooheys and Domino's Pizza, just to name a few.


Who is destra's competition? In Australia at present the only real competition is provided by such new concepts as PBL Media (PBL), Seven Media (SEV), and Fairfax Digital (FXJ). But these companies are in their infancy, and are hindered by the legacy of past success in traditional media fields. These companies are a belated response to what has already been going on in the market for some time now. The gates were opened a while back.


Internationally one would have to say that News Corp (NWS) has become (and is still becoming) what destra is, albeit on a slightly grander scale. Through its movie, television and pay TV, its sport investments, and through its paying up for such established new media vehicles as the internet community site MySpace, News Corp is evolving into a new media company. A lumbering giant of a new media company.


And like father like son, Lachlan Murdoch has hitched his independent wagon to new media in the form of his investment in Quickflix, an online DVD hire business. destra had already taken a stake. destra also has a stake in other ventures, including its retained holding in Blue Freeway (web-hosting). It has this week entered into a scheme of arrangement with independent film and DVD distributor Magna Pacific (MPH). With Magna on board, destra will become Australia's largest non-studio distributor of entertainment.


destra intends to make further acquisitions, utilising a debt finance arrangement that the company has in place. There are no plans in the short term to raise further equity capital, but Domenic Carosa will not rule out the possibility in the future if the right opportunity came along.


The company currently boasts a market cap of some $47m, of which about 30% is held by the board and key executives. Revenues in the first half of FY07 were $52m for EBITDA of $4m (ex-web-hosting sale). destra has not provided guidance, but independent research from Lodge Partners forecasts second half earnings of $5.2m.


destra shares currently trade around $0.26, and Lodge Partners has valued the company at $0.32 per share. Says Lodge:


'The synergies and leverage in destra's business through multiple distribution channels and an expansion of advertising sales capacity are only starting to appear and are not fully reflected in our forecasts?Thus our valuation of $0.32 per share reflects a base case scenario with potential for further upside'.


Lodge rates destra a Buy, as does Intersuisse. Intersuisse has not set a target.


This might be only a micro-cap, but its upside can only be blue sky, and it is screaming out to be taken over.


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