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EVR Holdings recently completed its reverse takeover of melody VR, a music virtual reality content provider. The IPO valued Melody VR at £5.12m. The Melody VR 2015 Accounts showed that shareholders invested just £158,000 to the year ended 31st December 2015, so the RTO gave shareholders of Melody upto a 35x return on their intial capital. The share price has since raced ahead to 3p which capitalises the company at around £34 million, including deferred shares, the September Placing and ‘in the money’ warrants. This values the initial investment (the founders and current directors) at 200 times what was initially invested! This is a monumental return, so is it too late for new shareholders to get on board? Or is this just the start?
What is VR?
You can’t have escaped to notice that Virtual Reality (VR) has exploded in the last few months. VR has though been around since the early 90s with Sega being first mover and introducing the Sega VR Headset. The product was launched as a prototype but this early exploration of VR technology failed, it was simply too expensive and some users even became ill after extended use. Nothing much more happened in the VR world for the next few decades, not until 2014 when facebook acquired Oculus for $2bn. This was a important deal which eventually led to the development of the most well known VR Headset, the Oculus Rift. This headset is focused on PC gamers and gives them a choice of around 40 titles available at present. The experience is apparently superb with users feeling fully immersed in the game, experiencing running, jumping and falling, just like the real thing. This experience though in Real Reality (RR) is actually taking place from the safety of the user’s sofa through a combination of headset, earphones, gamepad and head movements. Two other hardware providers have recently also launched into the hardware market, the Playstation VR, compatible with the Sony Playstation console and the Samsung Gear VR which combines a Samsung Phone and the Oculus Store for its content.
Where do Melody VR fit into this space
Melody VR are a content provider who are looking ‘to offer an end-to-end, integrated offering that takes an artist’s performances and repackages them within an immersive VR format and then makes such performances available to music lovers.’ They have a library of comprising over 400 artists, that is both individual songs and segments of live events. The forward plan is also to live stream concert and events. There is also the intention to add interactive elements in co-operation with the artists. Melody VR doesn’t specify what these interactive elements are but they would create further interesting marketing/consumer engagement opportunities, meeting the artist in a social media virtual setting could be one example.
The content will be accessed through a compatible VR Headset and the MelodyVR app, which is due to be launched later in 2016 in the Android Store, Apple Store and the Oculus Store. The app will be initially launched in the UK, Germany and potentially further afield, although it is unclear when the launch will be expanded globally. The Melody VR team are actively looking at the USA but I suspect with the complexities of music licensing this could take some time.
The below video gives an introduction to Melody VR, it shows the CEO of Melody being interviewed at the excellent recent Momentus Events Private Investor show. It is a good introduction but a very soft interview, you should just be mindful this is a marketing interview.
Who are the team behind Melody VR?
The company was founded by Steven Hancock and Anthony Matchett. The two were retained as executive directors, COO and CEO in the enlarged EVR Holdings group on RTO. Steven and Anthony are aged 33 and 27, some of the younger board members on the AIM market, but don’t let that affect your investment decision. Look at Mark Zuckerberg! Steven and Anthony are joined on the board by Sean Nicholson as Chairman, he has had multiple roles at e-Therapeutics, most recently as an executive director in 2015. I don’t know Sean, but what I can see is that e-Therapeutics has lost 86% of it’s value since IPO in 2007.
How big is the Music VR market? How do Melody VR plan to Monetise the business?
According to Mintel, “Brits were estimated to spend to £2.1 billion in 2015 on live music. Two in five (40%) Brits [25 million] have been to a music concert or festival in the past 12 months*, with 7% going at least once a month.” This is the market that Melody VR will be targeting. Looking now at the VR market size, Gartner estimate that 1.6 million VR sets will be sold per year in 2016 and this will hit sales of 64.8 million a year by 2020. There is no UK specific figure but 10% of the population owning a headset by 2020 feels reasonable. Applying 25 million ‘music lovers’ market size to a 10% VR set ownership, it’s crude but this gives a potential market size of 2.5million. To reiterate – It’s back of fag packet stuff but it helps me to put the market size into perspective. As a sanity check to the 2.5 million market size, Spotify the music streaming service has 3.6 million paid users. Using this as a benchmark the 2.5 million potential UK users for Melody VR appears generous. Spotify has mass appeal but if we are to see Melody VR as a niche product, at least for the foreseeable future then taking 1o% of the above market size seems much more realistic. This would give 0.25m users which feels more achievable.
In terms of monetising these users, they will be able to download VR concerts/music videos from the MelodyVR app as ‘in app’ purchases. It is not clear yet the pricing, but back catalogue concerts in the none VR form are available on iTunes. Ed Sheeran’s recent live concert from Wembley is available for example in HD format for £10.99. I would think something in the region of £5-£15 per VR concert would therefore appear reasonable, perhaps more for a ‘live ticket’ and less for a ‘back catalogue’ concert, with a couple of quid or less for music videos.
As mentioned above my numbers are crude, but let’s extend the ‘back of the fag packet’ calculation for the UK market to estimate the revenue potential. Applying the market size we calculated of 0.25million to a £10 mid price for a concert gives a yearly revenue potential for the UK market of £2.5m a year. This assumes 1 concert per year, some users may buy numerous concerts but other users are likely to rarely buy a concert. Average user spend could be much higher though, such as £120 for Spotify and £100 for Netflix, i.e. £25m revenue per year, but I struggle to see this level of annual spends for something which is unlikely to generate mass appeal and where the content may be limited. £2.5m for each major market entered seems more achievable, with a theoretical maximum of £25m per market if VR becomes mainstream.
Fundamentally though there is a strong social element to attending live music, and I can’t see the appeal of making it a virtual solo sport. One likely revenue spinner therefore is being able to add a social element to the ‘live ticket’ concert attendance, i.e. attending with friends, or even branching out into ‘virtual chat ups’ etc. This I believe would be a more significant money spinner and increase the appeal, but not something explicitly proposed by Melody VR. I’d be ringing my broker in seconds if this was part of the product, not that I have any problem ‘chatting up’ in Real Reality!
Anyhow, you probably think my calculations are flawed in one way or another, but if nothing else hopefully this illustrates that even with 0.25m active users, which itself is a tough ask, that the market revenue potential may be capped somewhat.
It’s also worth noting that the model that has emerged for on demand entertainment is increasingly a flat fee for unlimited content, think Netflix, Spotify etc. If this model was adopted then revenue is likely to be in a similar order to the above, although perhaps a little larger, Spotify and Netflix charge £9.99 and £7.99 per month. So would £2.99 per month feels about right for this service? I’ll extend on the revenue projections further into a valuation of Melody VR further below the article.
Who are the most relevant competitors to Melody VR?
Looking at the Oculus VR store, there doesn’t appear to be any other apps also doing live music VR. Melody VR names two competitors in its IPO prospectus though:
Jaunt VR who has a small selection of music live performances, including artists such as Paul McCartney. I downloaded the app but it only seems to offer short preview clips and no option to download the full versions.
Next VR is partnering with various producers to bring live content such as sports, music and tv. The content at the moment is limited.
Both of the above players are in the very early stages of developing a platform for VR and are not in exactly the same space. Melody VR are recording their own content, which theoretically gives them a monopoly over the content they record.
All in all, I am pretty satisfied that Melody VR is an early adopter in this space, but that doesn’t guarantee success…
Are there any risks to be aware of?
The most fundamental risk is macro, i.e. will VR really take off? 3D was a big fad a few years ago and whilst it is still popular in cinemas the use at home is declining. There is a major risk that VR may also be a fad, is it really feasible that many users will plug into VR on a regular basis? You will need to make your own assessment on this, but in the meantime let’s explore the company specific risks…
Firstly, to create an appealing app there needs to be lots of content, this is not just to physically have the manpower to make the recording but manpower is also needed to on post production. For a small team it is challenging to create lots of content. The obtaining of event and artist rights is also complicated. This can be time consuming, Melody VR does already though have exposure to 400 artists and has entered into a number of agreements with artists, venues and promoters to obtain these necessary rights. It has also entered into an exclusive licensing agreement with a major record label which will see a number VR experiences exclusive to the Melody VR app. It does seem to have content, but is it enough to really retain a user base? To put things in context, spotify has almost 2 million artists, so 400 is a drop in the ocean. Melody VR clearly cannot compete without significant investment and manpower.
Even assuming you have a great app with lots of content, the next challenge is marketing, i.e. getting your product ‘out there’ is always difficult in this segment and this is a huge challenge for the junior players in markets such as this one. I am though extremely impressed with the deal struck with Telefonica which will result in the Melody VR app being showcased in over 600 O2 German stores. This is a huge coup for a smaller app developer and this should be acknowledged.
My overall assessment of the risks is that so far the management have been impressive, appearing to have pulled together a reasonable content library and also securing the relevant rights. The deal with Telefonica is also punching above Melody VRs weight, so at present I am optimistic that Melody will get attention, but it is far too big a task to create enough content to go it alone in my opinion. This doesn’t mean Melody VR will be a failure but it does require significant investment, strategic partnerships or an outright acquisition.
Before we move onto the valuation, another short term risk is regarding the recent placing which was approved by shareholders on 10th October. The placing was for 200m shares at 1.7p and 33m warrants at 1.85p. Today’s share price is around 80% higher than the placing price, I think it is fairly likely that you will therefore see some profit taking and warrant exercises. The average daily volume of shares traded is 8.5m, so if I am correct we may well see some short term price weakness independent of any fundamental assessment.
If I am happy the risks can be managed, can I value Melody VR?
It is extremely difficult to have an accurate valuation, it is all guess work at this stage. But let’s play again with some numbers, I calculated above a realistic yearly revenue of £2.5m in the UK market and let’s assume it can achieve the same revenue for each major market it enters. If Melody VR does enter all of Europe, USA and Asia then £25m+ revenue is possible based on my numbers. However, what about the costs? We don’t yet have any visibility as to how the costs will be other than for the 6 months to June 2016 the company spent £0.8m. I suspect the costs will ramp up significantly from that level but we have no benchmark as to how much the company needs to spend to sustain a user base. The core costs though will be, royalties to artists/venues, recording costs, post production costs, marketing expenses and app development expenditure.
Let’s look at an industry benchmark to try and develop the valuation further. Spotify is a similar business in a sense, in that it also streams music, albeit conventionally. Spotify also has the same categories of costs to contend with, we could therefore assume similar margins. Spotify is now generating €2bn of revenue but its losses are growing each year. Although the revenue model for Melody VR is different I am turned off a little as to the level of profitability in this industry. As spotify is loss making we can’t therefore use earnings based valuation models, but we could assume a revenue based valuation instead. As at March 2016 Spotify was valued at around $8bn. That is around 4x multiple on its 2015 revenues. So if Melody can achieve a £25m revenue, the valuation would be around £100m.
WARNING – I again must reiterate I have done my own calculations here and they are extremely crude. Until the app is launched it will be impossible to start preparing more accurate market sizes, revenues and costings.
If you can though follow the logic of my £100m valuation then read on. The company is currently at a very early stage in its development so I would normally apply a 75% risking to a valuation at this stage. This accounts for the risk that it can’t create sufficient content, the risk that music VR does not take off and the risk that Melody VR can’t secure entry into enough countries. Securing £25m revenue based on where Melody is today feels like a mammoth task so the 75% risking feels perfectly prudent. This would ultimately gives a risked valuation of around (£25mx4x75%) £25m, which would be a share price of 2.2p today.
What about if EVR holdings was Acquired though? I believe this is the most likely outcome. Melody VR could be an easy way for a big player like Apple Music or Spotify to quickly move into the VR world. Whilst both have existing rights agreements with major labels it would be relatively easy for them to move into this sector organically, however Melody VR already have lots of content and the recording know how, which means the speed they can move into the sector would be so much quicker by bolting on Melody VR. How much would an acquirer pay? At the top of a technology bull market that is anyones guess, I do feel we are coming to the end of this type of market though. The jury is therefore out on this one!
Neutral – Based on the crude valuation I have prepared I believe a valuation of 2.2p a share is fair, i.e. 28% reduction on todays share price. However, I would not want to issue a SELL on this stock at this stage.
This is a very exciting, growing sector and the management team have impressed me with what they have achieved so far in such a short space of time. What excites me more though is the potential to add social elements to live concert VR rather than simply just the ‘more immersive back catalogue music video/concert’ product. I am keeping EVRH firmly on the watch list and will look to enter if the risk/reward appears more favourable based on my own valuation. Once the app is launched we will soon get an idea of numbers of active users and I will certainly have another look at that stage. In the meantime I of course welcome any alternative valuations that anyone is willing to put forward!
Disclaimer – I have no positions in this stock and to my knowledge nor do any close family, friends nor associates. This post is purely my opinion and should not be taken as financial advice. I welcome any alternative comments and will consider adjusting posts based on information made available to me.