MarketWatch: ROO as pure-play online video company

NET STOCKS, By MarketWatch, Last update: 7:15 p.m. EDT June 26, 2006

SAN FRANCISCO (MarketWatch) — Even though the online video business appears to be the growth opportunity on the Web, there aren’t many pure-play opportunities for stock investors.

Yahoo (YHOO), Microsoft (MSFT) , and Google (GOOG), along with large media companies, such as Time Warner’s (TWX) AOL and News Corp’s (NWS) Fox, are making inroads into this nascent industry of digital video, but they have many other businesses lines.

One company in the digital broadcasting space is public, however. It’s called ROO Group Inc. (RGRP). On Monday, ROO Group was initiated with a “buy” rating by Richard Fetyko, an analyst at Merriman Curhan Ford.

According to Fetyko, Roo aggregates video content from dozens of sources and then distributes the content across a network of more than 150 Web sites. The content is preceded or followed by a 10 to 20-second advertisement.

Content downloads have apparently increased in the last 18 months. To this end, Fetyko is predicting that ROO can grow sales by 47% to $9.7 million in 2006, and up 70% next year to $16.5 million. In 2005, ROO Group generated $6.6 million in sales.

Based on the company’s download volume of between 40 and 50 million downloads a month and a cost-per-impression of $20 per thousand of impressions, ROO could take in $2.4 million to $3 million in sales per quarter, Fetyko calculates.

Fetyko, however, did not break down just how much of those sales would be shared with the content and distribution partners. If that amount were split 50/50, then ROO would only take in $1.5 million a quarter, or $6 million a year.

The company is also not profitable. In fact, Fetyko is predicting that ROO will remain unprofitable through next year.

Another caveat is that being the distributor and advertising agent for online video content companies is becoming very competitive. Other emerging competitors in this sector include Brightcove, Maven Networks and Booyah Networks.

At $2.75, ROO is valued at $50 million in market cap.

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