MAGNA Global On-Demand Quarterly

Fourth Quarter 2007 Review March 2008
Contact: Brian Wieser, CFA, Director of Industry Analysis Tel: 917-542-7008 Email: brian.wieser@magnaglobal.com

1

MAGNA Global On-Demand Quarterly: March 2008
• Overview • DVRs: Crouching Hardware, Hidden Software • Addressing Advertising • DVR and VOD News • Appendix 1: DVR and VOD Forecast Data • Appendix 2: DVR Forecast Chart • Appendix 3: VOD Forecast Chart • Appendix 4: Internet Access Forecast Data • Appendix 5: Internet Access Forecast Chart

2

Overview
• We have updated our On-Demand models to account for the most recently completed quarter, modified our historical data slightly to incorporate new information about the past and extended our forecasts through 2012 • Our year-end 2012 forecast for DVR subscriber households is 42.7 million (36.3% of TV households), up from our estimate of 24.6 million (22.1% of TV households) as of the end of the fourth quarter of 2007 • By 2012, we expect that true Video-on-Demand (distinct from the simulated VOD offered by DBS providers DirecTV and EchoStar) will reach 61.9 million households (approximately 52.7% of television households). This compares with 36.0 million VOD households (32.3% of total TV households) at the end of the fourth quarter of 2007 • As of the end of December 2007, we estimate that 63.9 million households had broadband access out of 116.8 million total households. We estimate that internet access was enjoyed by approximately 72.4 million households by the end of the fourth quarter of 2007. We expect that total broadband access will rise to cover 87.5 million households by the end of 2012. These figures have been revised from prior estimates to reflect new information from recent US Census data for October 2007, and now exclude rapidly growing mobile broadband services from our totals. These latter figures are likely duplicative, as they represent mostly secondary internet access services

3

DVRs: Crouching Hardware, Hidden Software
DVR set-tops will become pervasive as hardware prices fall, but use will continue to require a service fee • During its annual investor day last month, DirecTV provided data associated with the cost of the set-top boxes it supplies to its customers • DVRs have fallen significantly in price, from $245 each in early 2005, to $150 during the present quarter – a drop of almost 40% • During the same time period, DVR subscription fees for DirecTV’s basic subscribers have held generally constant at $5.99 per month(a). Other MSOs continue to charge more than $10 per month for DVR service, with generally rising – not falling – pricing, despite less expensive hardware • These data points highlight our oft-stated view of cable and satellite operators’ business models around DVRs: they are a value-added service. Although falling prices of DVRs mean that hard drives will increasingly be included in standard set-top boxes, DVR subscription fees are not going away. MSOs focus on the profitable deployment of technology, and this in turn means that the majority of consumers who focus on value-oriented basic video services will be unlikely to adopt advanced DVR services any time soon

DirecTV OEM Set-top Box Costs

Source: DirecTV, February 2008 Investor Presentation

4

(a) As of October 7, 2005, DirecTV was charging $5.99 per month for DVR service according to a New York Times article from the same date. On DirecTV’s website as of March 2008, the fee remains $5.99 for DVR services on basic packages

Addressing Advertising
Addressable advertising holds promise for TV’s future, as the technical infrastructure gradually falls in place • Addressable advertising is viewed by many as an optimal form of marketing communications. Getting the right message to the right person without “waste” is clearly appealing. But how close are we to making addressable advertising a reality in a television context? Incrementally closer as it turns out, although widespread opportunities for marketers to use the technology are at least a few years away • Defined as the delivery of unique commercials to unique set-top boxes (as a proxy for unique viewers or families), addressable advertising can be delivered with Video on Demand (VOD) streams or through insertion into traditional linear content • Although VOD offers the more significant opportunity for addressable advertising today, its limited scale(a) suggests that linear TV will remain the primary environment for application in the future. However, this will only be feasible when combined with the unicast (rather than broadcast) delivery of traditional video, accomplished through a technology known as switched digital video (or SDV), or via IPTV delivered by a telco’s video service (such as AT&T’s U-Verse) • Deployments of SDV are driven by cable operators’ needs to efficiently manage bandwidth, an important proposition as they compete with satellite operators’ provision of bandwidth-intensive high definition (HD) channels. Because SDV means that a channel is only “served” when requested, bandwidth is not consumed by channels that no-one is watching. Vendors of SDV software such as BigBand Networks claim 50% bandwidth improvements from their solutions
Traditional Broadcast Video Video Signals Video Signals Unicast / Switched Digital Video

Source: BigBand Networks
(a) We estimate VOD ad insertion opportunities as representing less than 0.1% of total TV inventory today. To illustrate, if during 2008 each of the 300 million people in the United States viewed 32 hours of TV per week, this would equate to nearly 500 billion person-hours of TV viewed annually. Assuming 16 minutes of commercials per hour, or 32 commercial impressions per person-hour, television generates 16 trillion commercial impressions. By comparison, with VOD streams served by Comcast likely to total 4 billion, Time Warner close to 2 billion, and all others combined another 2 billion, this equals 8 billion VOD streams served during 2008, with fewer than 1 commercial impressions per stream. It would take a doubling of the number of households with VOD, a doubling the number of views of VOD per household and 5 commercial impressions per asset to equate to even 1.0% of traditional commercial impressions

5

Addressing Advertising (continued)
• Cable operators are expected to continue broadcasting the most popular channels (traditional TV networks as well as some cable networks), and switch all others. After the appropriate ad serving technology is implemented, addressable advertising will be possible on networks which are switched – on inventory representing less than a third of all TV viewing, and then, only on inventory controlled by the cable operator (typically 2 minutes per hour, or 10-15% of total inventory on these networks). Conversely, all video served by AT&T’s U-Verse is switched today, so addressable advertising could theoretically be included on all inventory they control • On the following page we summarize recent comments from cable operator management teams related to this technology, as well as our near-term forecasts • Although we expect that cable operators will aggressively expand the use of SDV as much as possible for its broader economic benefits, in the near term, addressable advertising will continue to be the domain of direct mail, e-mail and online display and search advertising. However, the potential for applying this technology to the dominant form of media consumption – television – will sustain continued efforts from MSOs, programmers, technology vendors and advertisers alike in the years ahead

Most popular channels will be broadcast in conventional manner, and will not likely have capability for unicast addressable advertising

Long-tail of channels will be switched, and will likely have capability for unicast addressable advertising

6

Source: Comcast Investor Presentation, May 2007

Addressing Advertising (continued)
• More than 17 million U.S. households – at least 15% of the total – will receive some or all of their “traditional” TV/video services through unicast / switched digital video by the end of 2008 • This represents households with potential for receiving unicast addressable advertising through linear broadcasts • However, addressable advertising software has not yet been deployed beyond trials • The primary near-term use of SDV will be to expand the availability HD content
MSO Comcast YE2008 Estimated Digital Subscribers with SDV 2.7 million Notes •Trialing in two markets (Cherry Hill, NJ + Denver) as of Jan 2008 •15% of footprint to have SDV deployed by end of 2008 Time Warner Cable 7.0 million •9 of 23 divisions as of end of 2007, presently installing in 9 more •Will deploy it in every division “that needs it” by end of 2008 Charter 1.5 million •Tested rollout in LA •Complete deployment expected across majority of footprint by end of 2009 Cox Cablevision Bright House Mediacom AT&T Total 1.0 million 2.8 million 1.0 million 0.2 million 1.1 million 17.3 million •3 divisions deployed as of August 2007 (Phoenix, N.Virginia, Orange County) •Deployed SDV across entire system •Launched in Orlando system in 2007 •Introducing in 3 markets in 2008 •Entire system unicast at launch

7

Source: MAGNA Global, Light Reading, Company Reports

DVR and VOD News
DBS providers DirecTV and EchoStar remain the leading suppliers of DVRs • We estimate that DirecTV added 300,000 DVR subscribers, as more than 50% of new subscribers ordered advanced set-top boxes (HD and/or DVR). By our estimates, the company now has approximately 5.2 million households with DVRs (30.9% of total subscribers) • Despite a smaller overall subscriber base, similar dynamics are driving EchoStar’s DVR subscriber levels, which we estimate now total 5.7 million households (41.6% of total subs)

8

DVR and VOD News
Comcast remains the leading provider of DVRs and VOD among cable operators • The company reported that it now has 6.3 million HD and/or DVR customers as of the end of 2007. With approximately 275,000 DVR additions by our estimates, we believe the company now has 3.8 million DVR homes (equal to 15.8% of its total customer base). Comcast also has by far the largest number of subscribers with access to video-on-demand: virtually all of its 15.2 million digital subscribers have access at the present time • Subsequent to the end of the quarter, Comcast provided new VOD viewing data for these customers. Reporting 7 billion VOD views from launch in 2004, the company posted 1 billion views between November and March 19, growing at a rate of 275 million views per month. This is up from a rate of 250 million per month last fall and ~200 million per month earlier last year, outpacing the greater than 20% growth in subscribers with access to VOD over the same time period • In its press release, Comcast noted that that its 7 billion historical views generated 1 billion hours watched, indicating that historically the average view lasted 8 minutes in duration. However, for the most recent month, Comcast also indicated that its 275 million views generated 130 million hours of viewing on a current monthly basis, equivalent to 28 minutes in duration per average view • This rapid increase in viewing time likely reflects the change in assets available to Comcast’s VOD customers, which at one time were dominated by shorter clips such as music videos, and now include hundreds of free movies alongside thousands of pay movies. According to the company, their customers now view 40 million movies per month (almost 3 per VOD customer per month) through VOD • To put total VOD viewership in a broader context, assuming the 15.2 million VOD households’ total TV consumption is in line with the rest of the country’s at 58.2 hours per week, or 256 hours per month, total VOD viewing accounts for 3.3% of total TV viewing among these subscribers

9

DVR and VOD News
Other highlights reported during the quarter include: • Time Warner Cable added 253, 000 DVR subscribers, and now reach 23.1% of its basic cable homes. The company did state that it delivered 1.3 billion streams for all of 2007, implying approximately 300 million VOD streams during the final quarter of the year, or 13 streams per VOD household per month, roughly consistent with totals reported earlier in the year • TiVo’s stand-alone DVR subscriber total was roughly flat at 1.7 million as of the end of that company’s fourth quarter • Charter reported that its VOD orders are up by 40% compared with a year ago, over a time when its VOD subscribers increased by 15%. Advanced video subscribers – including HD and DVR subs – grew by 60% year over year. We estimate the company now has 462,000 DVR subscribers, equivalent to 16% of its digital subscriber base

10

Appendix 1: DVR and VOD Forecast Data

Brian Wieser, CFA MAGNA Global Director of Industry Analysis (917) 542-7008 2001A Total US TV Households
• YOY Growth

MAGNA Global On-Demand Deployment and Subscriber Estimates

2002A 105,500
3.2%

2003A 106,700
1.1%

2004A 108,400
1.6%

2005A 109,600
1.1%

2006A 110,200
0.5%

2007A 111,400
1.1%

1Q08E 111,447
1.0%

2Q08E 111,860
0.8%

3Q08E 111,952
0.8%

4Q08E 112,800
1.3%

2008E 112,800
1.3%

2009E 113,928
1.0%

2010E 115,067
1.0%

2011E 116,218
1.0%

2012E 117,380
1.0%

102,200
------

Total Multichannel Subscribers
• YOY Growth • % of TV Households With DBS, Cable or TelcoTV

89,980
-----88.0%

92,881
3.2% 88.0%

95,003
2.3% 89.0%

97,562
2.7% 90.0%

98,698
1.2% 90.1%

98,114
-0.6% 89.0%

99,769
1.7% 89.6%

99,716
1.8% 89.5%

99,948
1.9% 89.4%

101,432
2.0% 90.6%

101,945
2.2% 90.4%

101,945
2.2% 90.4%

103,331
1.4% 90.7%

104,313
0.9% 90.7%

104,850
0.5% 90.2%

105,241
0.4% 89.7%

Digital Multichannel Subscribers
• Digital Penetration

33,747
37.5%

41,025
44.2%

46,462
48.9%

52,485
53.8%

58,178
58.9%

63,972
65.2%

71,205
71.4%

72,671
72.9%

74,149
74.2%

76,171
75.1%

78,079
76.6%

78,079
76.6%

87,014
84.2%

93,152
89.3%

97,928
93.4%

101,608
96.5%

VOD-Enabled Subscribers
• YOY Growth • % of Cable Footprint Enabled With VOD

3,243
-----19.4%

7,660
-----35.3%

12,910
68.6% 52.0%

19,278
49.3% 69.7%

24,160
25.3% 76.6%

29,902
23.8% 85.6%

36,030
20.5% 88.8%

37,485
18.7% 89.9%

38,736
16.6% 90.5%

40,249
16.4% 90.5%

41,797
16.0% 90.9%

41,797
16.0% 90.9%

49,248
17.8% 91.2%

54,340
10.3% 91.4%

58,503
7.7% 91.4%

61,857
5.7% 91.9%

MSO DVR Subscribers
• YOY Growth • % of Basic Subscribers with DVRs

620
-----0.7%

1,018
-----1.1%

2,212
117.3% 2.3%

5,495
148.4% 5.6%

10,610
93.1% 10.7%

16,719
57.6% 17.0%

22,746
36.1% 22.8%

24,160
32.4% 24.2%

25,458
30.2% 25.5%

26,776
26.8% 26.4%

28,161
23.8% 27.6%

28,161
23.8% 27.6%

32,356
14.9% 31.3%

35,941
11.1% 34.5%

38,795
7.9% 37.0%

41,257
6.3% 39.2%

Stand-Alone DVR Subscribers
• YOY Growth • Net Additions

315
-----------

443
-----128

704
58.9% 261

1,269
80.3% 565

1,621
27.7% 352

1,851
14.2% 230

1,821
-1.6% (30)

1,761
-4.3% (60)

1,691
-7.1% (70)

1,621
-10.0% (70)

1,591
-12.6% (30)

1,591
-12.6% (230)

1,471
-7.5% (120)

1,401
-4.8% (70)

1,401
0.0% 0

1,401
0.0% 0

Total DVR Subscribers
• YOY Growth • DVR Subscribers as % of TV Households • DVR Subscribers as % of Multichannel Households

935
-----0.9% 1.0%

1,461
-----1.4% 1.6%

2,916
99.6% 2.7% 3.1%

6,764
132.0% 6.2% 6.9%

12,231
80.8% 11.2% 12.4%

18,570
51.8% 16.9% 18.9%

24,567
32.3% 22.1% 24.6%

25,921
29.0% 23.3% 26.0%

27,149
27.0% 24.3% 27.2%

28,397
23.9% 25.4% 28.0%

29,752
21.1% 26.4% 29.2%

29,752
21.1% 26.4% 29.2%

33,827
13.7% 29.7% 32.7%

37,342
10.4% 32.5% 35.8%

40,196
7.6% 34.6% 38.3%

42,658
6.1% 36.3% 40.5%

11

Source: MAGNA Global, Company Reports

Appendix 2: DVR Forecast
DVR FORECAST

US DVR Subscribers - Cable, DBS and Stand-Alone Units
120,000.0

100,000.0

80,000.0 Subscribers (000s)

60,000.0

Total Multichannel Subscribers Total DVR Subscribers 37,341.9 33,826.6 40,196.1

42,658.3

40,000.0 29,751.6 12,231.0 2,915.7 935.0 2001A 2002A 2003A 2004A 2005A 2006A 2007A 2008E 2009E 2010E 2011E 2012E 1,460.6 6,763.8 18,570.1 24,567.4

20,000.0

12

Source: MAGNA Global, Company Reports

Appendix 3: VOD Forecast
VOD FORECAST

US Homes With VOD Access
70,000.0 61,857.4 60,000.0 49,248.1 Homes With Access (000s) 50,000.0 36,029.8 40,000.0 29,902.4 30,000.0 19,277.5 20,000.0 12,910.2 10,000.0 7,659.6 3,243.2 2001A 2002A 2003A 2004A 2005A 2006A 2007A 2008E 2009E 2010E 2011E 2012E 24,160.4 41,796.8 58,502.5 54,339.9

13

Source: MAGNA Global, Company Reports

Appendix 4: Internet Access Forecast Data
INTERNET ACCESS FORECAST

Brian Wieser, CFA MAGNA Global Director of Industry Analysis (917) 542-7008 2000A Total Households (Census)
• YOY Growth

MAGNA Global Internet Access Forecast

2001A 109,608.9
-2.3%

2002A 111,000.0
1.3%

2003A 111,545.8
0.5%

2004A 113,324.5
1.6%

2005A 114,738.6
1.2%

2006A 115,838.7
1.0%

2007A 116,835.6
0.9%

2008E 117,419.7
0.5%

2009E 118,006.8
0.5%

2010E 119,186.9
1.0%

2011E 120,378.8
1.0%

2012E 121,582.6
1.0%

112,215.0
3.3%

Total Residential Broadband Access
• % of Internet Access

5,067.9
10.6%

10,810.5
19.3%

17,099.9
29.1%

25,635.0
41.8%

34,843.7
54.2%

43,432.4
64.8%

54,772.4
78.6%

63,905.5
88.2%

71,221.8
95.2%

74,769.1
96.0%

78,615.7
97.0%

82,579.8
98.0%

86,664.1
99.0%

Total Narrowband Only(a)
• % of Internet Access

42,623.4
89.4%

45,189.5
80.7%

41,619.1
70.9%

35,743.1
58.2%

29,439.7
45.8%

23,603.6
35.2%

14,875.6
21.4%

8,532.5
11.8%

3,574.6
4.8%

3,115.4
4.0%

2,431.4
3.0%

1,685.3
2.0%

875.4
1.0%

Total Residential Internet Access
• Internet Household Penetration • Net Adds

47,691.4
42.5% 9,687.9

56,000.0
51.0% 8,308.6

58,719.0
52.9% 2,719.0

61,378.1
55.0% 2,659.1

64,283.3
56.7% 2,905.2

67,036.0
58.4% 2,752.7

69,648.0
60.1% 2,612.0

72,438.0
62.0% 2,790.0

74,796.4
63.7% 2,358.3

77,884.5
66.0% 3,088.1

81,047.1
68.0% 3,162.6

84,265.1
70.0% 3,218.0

87,539.4
72.0% 3,274.3

(a) Represents implied number of subscribers to dial-up services who do not also have broadband services

14

Source: MAGNA Global, US Census, FCC, Company Reports

Appendix 5: Internet Access Forecast

Internet Access - Broadband and Total
100,000 90,000 80,000 70,000 Subscribers (000s) 71,221.8 60,000 50,000 40,000 43,432.4 30,000 34,843.7 20,000 10,000 1,695.2 0 1999A 2000A 2001A 2002A 2003A 2004A 2005A 2006E 2007E 2008E 2009E 2010E 2011E 2012E 5,067.9 10,810.5 25,635.0 17,099.9 Broadband Total Internet Access 63,905.5 54,772.4 86,664.1

82,579.8 78,615.7 74,769.1

15

Source: MAGNA Global, US Census, FCC, Company Reports

MAGNA Global On-Demand Quarterly
Contact: Brian Wieser, CFA, Director of Industry Analysis Tel: 917-542-7008 Email: brian.wieser@magnaglobal.com

16