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Chairman's Annual Report Letter - 1999
Dear Ampex Shareholder;
In last year's letter to you, I wrote about our strategy to position Ampex in faster growing markets that continue to draw on the visual information technology that is our core strength. This letter describes our entry into the markets for Internet video programming, technology and services, which focus our core expertise on the rapidly growing streaming video market.
Before covering strategic activities, I would like to address some important financial developments. On February 8, 2000, we announced that our mass data storage subsidiary, Ampex Data Systems Corporation (Data Systems), would be offered for sale to strengthen the Corporation's focus on its Internet video businesses. Proceeds from the sale will be invested in these new businesses, principally our iNEXTV.com Internet video network, and also used to repay long-term debt. Accordingly, Data Systems is now shown in our financial statements as a business held for disposition. We have also made several other changes in the presentation of our financial statements. These include the reporting of royalties from technology licensing as revenue, rather than as a reduction of expenses as in prior years.
The cost of building and integrating several new Internet video businesses is the primary reason that, after five consecutive profitable years, Ampex reported a loss from continuing operations of $12.4 million or $0.23 per diluted share. Of this amount, Internet video operations contributed an operating loss of $20.3 million or $0.38 per diluted share. The rest of our operations in the aggregate were profitable and, in particular, technology licensing enjoyed a very good year. Cash and short-term equivalents ended 1999 at approximately $41.7 million.
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In 2000, we plan to continue last year's emphasis on creating and growing Internet video programming technology and services for businesses and consumers.
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Given the expected costs of continuing to invest in our new businesses, we are anticipating that we will report a loss in 2000. Additionally, the planned sale of Data Systems and the increased investment in Internet video activities represents a significant change in our business profile from prior years. I urge you to read the detailed review of our financial performance and other important matters that can be found elsewhere in this report, as well as in our 1999 Form 10-K which has been filed with the SEC.
Last year Ampex was reorganized into a holding company with investments and subsidiaries in various markets for visual information, especially Internet video. This structure provides improved measurability and motivation. It also increases our flexibility to raise capital for individual subsidiaries, or to acquire or divest businesses in the future. Each of our three continuing lines of business addresses the visual information market and they are discussed in detail below.
When we originally decided to enter the Internet video business, we realized that video quality on the Internet was marginal. However, based on Ampex's in-depth understanding of the key video streaming technologies used on the Internet, we saw the opportunity to be the first to improve it. The result is that we formed a dedicated engineering team, the Ampex Internet Technology Group (ITG), to develop enhanced technology for video streaming. ITG gives us an important advantage because, while broadband Internet access is clearly coming and will be a major benefit to iNEXTV and the streaming video industry, it is not yet widely used. The first generation of ITG technology, which debuted at year-end, has enabled us to deliver Internet video quality that noticeably enhances the Internet experience and is easier to watch.
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Each of these sites is actually a brand that is targeted to a specific web user segment, and is located in a geographic media center that is best suited for the content it provides.
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ITG is continuing to work on further improvements, but our technology already delivers images that are dramatically better - 80% larger in area than standard video - and clearer and smoother as well. For lower bandwidth users, Ampex has raised video quality to a level that is highly acceptable. For higher bandwidth users, the improvements are quite exceptional. Importantly, ITG-enhanced video can be seen using standard player software from leading providers, without any additional downloads or modifications. The new technology is now featured on two of our sites, istyleTV.com and EXBTV.com, where you can log on to see these improvements for yourself.
We are evaluating a business plan to turn ITG into a separate profit center to provide encoding technology and services to the streaming video industry at large. A market study is currently in progress to determine the feasibility of this strategy, and we will make a decision later this year. In the meantime, this technology is proprietary to Ampex's Internet video content network. Being first to market with good quality video that today's users can actually view with ease is a key competitive feature of our Internet strategy.
In 2000, we will continue last year's emphasis on creating and growing Internet video programming technology and services for businesses and consumers, primarily through iNEXTV (www.inextv.com). This new subsidiary holds our Internet video programming operations and controls a network of targeted Internet video content sites. Each of these sites is actually a brand that is targeted to a specific web user segment, and is located in a geographic media center that is best suited for the content it provides.
The first of these video websites is Alternative Entertainment Network (www.aentv.com), based in Los Angeles. In 1999, we acquired 51% of this company, with an option to acquire additional ownership. AENTV has used Ampex's investment to generate an aggressive schedule of original programming. This website will continue to evolve into a provider of programming about the business of entertainment. AENTV has successfully partnered with The Hollywood Reporter and Billboard to produce daily video segments and is planning similar alliances in additional markets. AENTVâs content is available directly and through the iNEXTV network. During 2000, a large portion of its programming will also be made available for syndication to portals and other Internet destinations that are looking to add Internet video content, something that is in short supply. Los Angeles is a major center for content and production talent. To take advantage of this, in 1999, iNEXTV constructed a dedicated Internet video production and distribution facility that it shares with AENTV. We plan to produce an increasing portion of iNEXTVâs overall programming in this state-of-the-art facility.
Last year we established another new site in Washington, D.C., EXBTV (www.exbtv.com), complete with its own production and encoding facilities located near the White House. Initially this site offers up-to-the-minute live and archived coverage of the executive agencies of the federal government. The primary market for this content is business users, because each government agency has a tremendous impact on corporations or business groups in its area of regulation. For example, Federal Communications Commission decisions are of vital importance to the media and telecommunications industries; Food and Drug Administration approvals can dramatically affect the prospects of a drug or biotechnology company; and the Antitrust Division of the Justice Department may determine the fate of a large segment of the computer software industry. Our recent advertisements showcasing our coverage of Federal Reserve chairman Alan Greenspan highlight the relevance this site has to the financial community and to investors in general. By bringing these agencies to users in video form, EXBTV delivers timely information and reveals the critical nuances of what was really said, something that transcripts and written reports simply cannot match.
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AENTV has successfully partnered with The Hollywood Reporter and Billboard to produce daily video segments and is planning similar alliances in additional markets.
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EXBTV is also expanding its service to its users by providing unique original content, including high profile interviews and commentary by Jed Duvall, formerly of CBS, and by Hugh Downs, formerly of ABC's 20/20. Over time we will evolve EXBTV into a video destination for an increasing number of business and professional users by adding programming relevant to their needs and interests, and by drawing on our other network resources in New York and Europe. EXBTV is available directly and through the iNEXTV network. In the coming year, we will be developing partnerships that will expand the range of EXBTV's content and distribution.
iNEXTV's programming is currently targeted to web users in corporations, the media and professions such as law or finance. The somewhat older and more affluent web users that we reach control the majority of business and government purchasing decisions. This makes them a most attractive and valuable audience for advertisers or e-commerce providers. Additionally, affluent web users are not solely focused on work. They represent a market in the United States alone of more than 40 million consumers whose purchases represent a very large share of the nation's total discretionary spending power.
To address the personal interests of viewers who are already using our business-oriented sites, we have launched a new video site, istyleTV, based in New York City. istyleTV operates a growing number of channels that are targeted to the pursuits and lifestyles of affluent web users. istyleTV will be covering some relatively large categories of interest such as cars and travel, and some smaller ones such as wine and polo. The value of the consumer audience that istyleTV targets is extremely large. More than the other iNEXTV sites, the timing of istyleTV's market growth will depend on the penetration of broadband into consumer's homes. This is happening quickly, and we are clearly early in this market.
The first channels on istyleTV are produced by iNEXTV's own staff, in our own facilities. We are taking this approach because there is little Internet video content available from anywhere else. It is crucial for us to establish our own brands with online users while the field is relatively undeveloped. This strategy allows us to educate advertisers and e-commerce providers in how effective video content can be when it is specifically designed for the new Internet medium, rather than trying to adapt unsuitable, old-style television programming to the Internet.
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Internet video is developing into a new medium with tremendous power to change the economies of the Internet.
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Eventually, we will be creating the majority of the content on istyleTV in cooperation with qualified partners. The increased resources that they can provide will enable the site to become a single destination for web users to enjoy video coverage of multiple lifestyle topics from many authoritative sources. A key advantage that istyleTV can use to attract partners is the unique synergistic capability of the iNEXTV network.
iNEXTV was formed in mid-1999 to hold most of our Internet video assets and to provide infrastructure and network services to our affiliated sites. Each of our websites has considerable operating autonomy and they are, in fact, separate entities that could be financed independently. The iNEXTV network does not create any programming under its own name. It exists to provide advertising, marketing and business development services to each of our sites as needed. In addition, iNEXTV provides financing and a nationwide Internet video production, encoding and serving infrastructure that is more robust, expandable, and technically advanced than any individual site could do alone.
We offer the same set of network capabilities to potential partners of all kinds. This offers them a path to get their content to market faster, with less cost and higher quality than they could do otherwise. iNEXTV's sales group can also help to obtain advertising and e-commerce revenue for content partners, bring traffic to them from other sites, and even finance or acquire their content or invest in affiliated sites as appropriate. As iNEXTV establishes a separate identity from its programming affiliates, we feel that offering this network capability to potential partners will be an increasingly important source of competitive advantage for the Company.
We see similar potential in markets outside the United States. Late in 1999, we acquired a minority interest in TV1 Internet Television (www.tv1.de), of Munich, Germany which is now affiliated with the iNEXTV network. With our assistance, TV1 is expanding to Berlin and is providing iNEXTV with valuable Internet video experience in the European market. Germany has the largest population of web users and the highest amount of Internet usage of any of the European nations. As a result, it is both an attractive market to invest in and an excellent base for further European expansion. We continue to look at other opportunities in Europe, and it is likely that we will add to our presence there in the coming year.
We are making a large commitment to Internet video through iNEXTV, and we believe that this can be an exceptional business. Despite what many are saying, todayâs television and the Internet are not actually converging. Instead, Internet video is evolving into a new medium with tremendous power to change the economics of the Internet. How many television commercials have you found to be attention getting but ineffective because the product was not relevant to you? When visiting a website, do you notice any of the banner advertisements and, if so, are you influenced by them? The answers to these questions indicate why we believe that video, when it is targeted to relevant web users, will have very high value not just to advertisers, but to the e-commerce providers who increasingly want you to buy their products directly. iNEXTV has prepared a report that discusses some of the issues surrounding television for the Internet. You can access this report at www.inextv.com or by contacting Investor Relations.
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Each of our websites have considerable operating autonomy and are, in fact, separate entities that could be financed independently of iNEXTV.
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Turning from Internet video to our other continuing business operations, MicroNet Technology, Inc. (MicroNet), a disk array manufacturer that Ampex acquired in 1998, generated an operating loss of approximately $0.07 per diluted share. MicroNet made major progress during the year in developing new disk arrays that serve the high-end graphics and image-processing markets. Importantly, as a result of the continuing investment by Ampex, MicroNet also expanded into a new business area, Storage Area Networking, with an innovative product called SANcube. MicroNet's product is targeted at the very fast growing market for storage in data-intensive applications such as graphics and video. Initially introduced at MacWorld in January, SANcube captured the prestigious "Best of Show Award." Shipments are expected to begin in the second quarter of 2000, and SANcube represents a significant revenue opportunity for MicroNet.
Our licensing of technology for use in consumer video products enjoyed an excellent year, with revenues of almost $20 million. For various reasons, royalties can fluctuate widely from year to year, and we do not expect to equal this level in 2000. We do, however, continue to seek additional licensing opportunities from companies that use our technology in new product applications. We are optimistic that licensing income in 2000 will continue at satisfactory levels.
With regard to Data Systems, we recognize that the capital markets generally assign higher valuations to service or Internet-related businesses than to those in manufacturing. This is why we are applying our assets and Ampex's core technology strengths to the future of the Internet. This effort requires substantial capital for investment, which the sale of Data Systems will address. I shall not discuss its operations in detail, but I should note that the recent restructuring and manufacturing relocation to Colorado has made it a stronger and financially healthier business. Moreover, our continuing investment in maintaining the performance leadership of Data Systems' products has positioned the company to capitalize on the demand for digital image storage. This trend is finally beginning to accelerate as television stations transition to digital operations, and as the Internet begins to migrate from low bandwidth material, such as text, to high bandwidth applications such as video, which exponentially requires more storage. AENTV has already acquired a DST¨ data library to meet the dramatic growth of its Internet storage needs. EXBTV and istyleTV will also be using DST systems for online video archiving in 2000, and we believe that other video websites will soon be needing the performance that only DST storage can provide.
As a result of these industry factors, Data Systems is now as well positioned for sale as we can make it. We believe it will be an excellent fit for any company that wishes to expand into this storage market segment by acquiring the leadership position that only Ampex can offer. Few organizations can claim to make the best product of its kind in the world, and Data Systems has done so for years. In my long association with the Company, I have had the privilege to work with an absolutely wonderful group of people. I shall miss them, but I know that a sale is the best thing for Data Systems and its employees, as well as for Ampex and its shareholders.
Shifting the balance of Ampex towards Internet video so far and so fast obviously entails very significant risks and it makes Ampex's financial performance unpredictable. However, as indicated earlier, waiting for broadband to become commonplace is not a viable strategy. The leaders in tomorrowâs broadband video economy are establishing themselves today on the Internet as it currently exists. The opportunity will escape if it is not pursued vigorously. Ampex, through its holdings in ITG and iNEXTV, is clearly in contention to become a leader in the next generation of the Internet.
1999 was a year of significant change as we took Ampex's technology÷developed over many years÷and refocused it on the most exciting new market opportunity in decades. Many very bright and experienced people have joined Ampex in the past year, in large part based on their belief in our ability to achieve the goals we have set for ourselves on the Internet. They are joining equally talented people who were already with us. It is very easy for such people to find opportunities elsewhere in the Internet industry, and we should all be pleased and encouraged that they have chosen to work with Ampex.
For our shareholders with Internet access, we will be repeating the successful webcasting experiment that we initiated last year. Our Internet video activities will inevitably gain increasing visibility, and I expect that recognition of the future that Ampex is building will benefit the Company as well as its shareholders as the year progresses.
Yours sincerely,
Edward J. Bramson
Chairman
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