Proposal for a Joint Venture between International Interactive

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					Proposal for a Joint Venture (GTK-7)

Between the International Interactive Television Group (IITG) and the Cooper Union iTV Team (CUITV)

Proposed JV Name: “Interactive Innovations” (I2) The Cooper Union iTV Team: Jason Brown (brown5@cooper.edu) – Group leader Patricia Setti (setti@cooper.edu) – Social & Political consultant Atif Kidwai (kidwai@cooper.edu) – Financial officer Ari Welner (welner@cooper.edu) – Technological advisor

New York City, November 20th, 2001

Proposal Contents:

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1. Introduction

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2. Social & Economic concerns

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3. Joint Venture Financial Analysis

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4. Technical Specifications

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5. Management of the Joint Venture .

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6. Concluding Remarks

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Contact Information:

We may be contacted at the following mailing address, or more readily, at our respective e-mail addresses listed on the front page of this document.

The Cooper Union iTV Team c/o Professor Roxanne Jacoby The Cooper Union for the Advancement of Science and Art 51 Astor Place New York, NY 10003

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I. Introduction:

In keeping with the goals and standards of the IITG, we, The Cooper Union iTV Team, are pleased to propose a Joint Venture between our respective organizations that will maximize mutual benefits. Our establishment of an iTV distribution network within Italy is the first concrete step toward a wider standard of interactive television throughout the world. We also believe that future expansion in other European countries and beyond is not only a distinct possibility, but in fact, a major goal of our joint venture. The only question that remains is what corporation(s) will be the leaders in this new trend and will dominate world markets. We hope that our future joint venture will be one of the world leaders in this field.

With today's advances in broadcasting technology, the future can be summed up in one word: expansion. Italy's cable network growth process is expected to continue on course, and will eventually reach well over 100 cable sites, and over 5 million Italian homes by the year 2003. The number of channels offered to these viewers is expected to grow as demand increases.

Another important reason for which we suggest Italy as the base for our joint venture is because CUITV has a long, very successful experience in the telecommunications industry in Italy. As such, it is able to provide invaluable local political, law, tax, economic, etc. expertise and advice to the joint venture.

II. Social & Economic concerns: “The market for interactive TV in Italy has been slower to develop than elsewhere in Europe, with only around 16% penetration for digital TV. However, with this figure set to reach 48% penetration by 2005, the race is on to capture market share and establish an effective presence in the iTV market (Broadcasting Strategy & Finance Week).” Interactive Innovations (I2) will be poised to take full advantage of the opportunities in the Italian market and beyond.

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Italy’s broadband usage compared with other Western European nations:

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Italy’s broadband breakdown (i.e. T1/Leased Line, Satellite, Cable, and ADSL):

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Unfortunately, interactive television doesn't come cheap. The costs associated with laying new fiber optic and coaxial cable alone have been staggering. Why then is this venture considered so promising? In addition to increased viewing options and clearer picture, Italian viewers may soon be able to directly take part in talk shows and other interactive programs, using the television remote from the comfort of their living rooms. Interactive technology may also allow “Video on Demand” (VOD) services, where viewers can choose the movie they want to see and when they want to see it, without running out to their local video rental outlet (This is not dissimilar to the current system of Pay-per-view in the U.S, except here the selection will be on the scale of a traditional video store). Our system will also anticipate new changes in technology. This means that when it comes time to add new functionality, such as the extremely high picture quality of high-definition television (HDTV), the distribution head end sites will be ready.

Several factors have made Italy a promising market for interactive TV technology:     

A highly trained labor force (50,000 new graduates in professional/technology sectors). High productivity (highest productivity in the sector after Germany). Relatively low labor costs (high flexibility and low turnover rates). High innovation rate (research and development spending & investment increasing steadily). High tech eruption in the South of Italy (low labor cost, skilled labor force, low real estate costs).

Some key figures for Italy:

Total Area Population

301,230 sq. km 57,679,825 (July 2001 est.) 0-14 years: 14.17%

Age Structure

15-64 years: 67.48% 65 years and older: 18.35%

Television broadcast stations Televisions Internet Service Providers (ISPs) Internet users Source: CIA Factbook, 2000

358 (plus 4,728 repeaters) (Year: 1995) 24 million (Year: 1997) 93 (Year: 2000) 11.6 million (Year: 2000)

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Wage Rates: Wage rates in Italy are established by collective contract, by agreement with employers or, in the absence of either, by a court of law. Wages may be supplemented by fringe benefits, such as cafeteria facilities or, in the case of management, the right to specific utilities (company cars, accommodation, insurance policies, and concessionaire loans). Each December, all employees are paid a Christmas bonus, the "tredicesima", equal to a month's salary. Set holidays and national holidays are paid, as is annual leave for a minimum of three weeks. Average Salaries: The following gross salaries for key positions in foreign-owned companies in Italy are mean figures reflecting 0-10 years experience and 12 salaries plus two bonuses a year. In the case of clerks, secretaries and managers the employer is assumed to be paying a premium for foreign language skills. Bookkeeper 1.7mn - 4.2mn ITL ($770 - $1905) Chartered 3mn - 7mn ITL ($1360 - $3175) Clerk 1.7mn - 2.1mn ITL ($770 - $953) Engineer 3.2mn - 7mn ITL ($1451 - $3175) Foreman 2.4mn - 3.8mn ITL ($1088 - $1723) Laborer 1.3mn - 2mn ITL ($589 - $907) Manager 5.2mn -11.5mn ITL ($2358 - $5215) Secretary 1.9mn - 3.8mn ITL ($862 - $1723) Specialized mechanic 1.9mn - 2.9mn ITL ($862 - $1315) Source: EUI Estimates, 2000 (Note also that mn = million & ITL = Italian Lira) 6

Locations within Italy: Based on the above factors as well as technological limitations requiring at least three bases to cover all of northern and most of central Italy, CUITV proposes the following three locations for the company. 2 in northern Italy: 1 outside Milan, 1 outside Trento and 1 in central Italy: Rome. Due to the extensive benefits of the location listed below, CUITV proposes the Scrivia Valley, outside Milan for its headquarters.

The Valle Scrivia Telecommunications Park is located in Tortona near the motorway junction, in a strategic position for the main trunk routes, making it easily accessible from Milan, Genoa and Turin. It is part of the much larger Equipped Industrial Area of Tortona opposite the Rivalta Scrivia Interporto rail/road transport terminal.

This vast location is dedicated to a Scientific, Technological, and Telecommunications companies and set up by the Italian Government as an incentive for growth and investment.

More Advantages: 

Possibility of access to innovative services for applied research and technological innovation as well as for strategic company management, with particular attention to information and access to grants and funding;

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Possibility of enjoying particularly competitive rents, and laboratories and offices equipped with special high tech equipment;

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Availability of common spaces (videoconference room, multimedia room, classrooms) for training, conferences and seminars;

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Possibility of location in premises with a customized lay-out, with fiber optic cabling and advanced security systems;

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Possibility of access to specific technological equipment at advantageous conditions;

Easier contact with other companies as well as close and rapid links with university institutes and research centers, thanks to the laboratories present in the Park.

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Italian Government Incentives:

Additional government incentives exist for new companies seeking out Italian markets, especially in the less-favored Southern region of Italy. Expansion of the JV should include thorough research of these figures (including extensive tax credits) and consider establishing a branch in the South (Naples, Bari, Palermo, Cagliari, etc.).

Provided below is a graphic of Italy, indicated our respective starting locations, as well as areas for proposed expansion:

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III. Joint Venture Financial Analysis:

Our approach here is guided by the principles of our global outlook. One of the primary concerns in this Joint Venture is to standardize the utilization and distribution of iTV technologies. In our technical outline, we are allowing for future advances in technology (therefore leading to significant upgrades in our services) as well as territorial expansion into other regions and countries, as appropriate, based on the same developmental model. First however, we note that there are of course several aspects to the cost analysis of this project. They are as follows:      

Computer equipment Licensing Networking Human/Structural Infrastructure Marketing/Marketing Other costs

Computer Equipment: This part outlines the necessary computer equipment. This includes the mini-mainframes, servers and workstations to make the project successful. We allocated a number of workstations for content as well as costs for licensing most of the content. Licensing: In order to achieve the multiple redundancy fiber optic system, a contract deal with Sprint International is being established. In order to achieve the multiple platform system, we are licensing software from Spartan Networks and obtaining licenses for Open TV/Liberate TV and World Gate. We feel this level of multifunctionality is sufficient in meeting the demands of the Italian people, as well as a practical solution for further expansion and development within the iTV market.

Networking: This portion details the fiscal aspects of the network environment needed to span across northern Italy. The approximate cost of the internal and external hardware is given in this subsection.

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Infrastructure: These costs are primarily concerned with the housing, security and maintenance of the mini-mainframes and servers. Five network specialists will be hired for each location. Building costs in and around Italy were researched and we found competitive pricing for the size we are looking for. We also intend to provide content for Italy’s special interests and issues, i.e. soccer. Content providers, Network administrators and Managers will be paid competitive prices compared against the average Italian salary. Joint venture Advertising/Marketing: To avoid prior mistakes that digital and satellite companies have made in Italy, we intend to pervade a strong marketing and advertising campaign, including appealing rebates and/or incentives for early service subscribers, prior to our release to ensure a strong customer base. This marketing campaign will commence six to nine months prior to commencement of the iTV program. We will also undertake through our outside contractors, a further research of the market to establish the size and demographic composition of our customer base and the correct pricing of our services.

We expect the special soccer-related content and movies will attract a large customer base approximately equal to the current satellite and digital cable users. While only 24% of Italians currently have access to the Internet, the market is wide open for development. Through an aggressive advertising and incentives campaign, we feel that we will be able to capture the market successfully.

Other expenses: First of all for the interest and for the unexpected costs, there are ratios linked with the cost of the general project. Other costs are usually hard to account for, yet one may assume that other licensing costs and building maintenance costs and such are to be expected and accounted for.

Further, we assume that subscriptions will be for 120 Euros/year and with the special content bonus package will be 156 Euros/year (for a total extra charge of 36 Euros/year). This translates to 108 dollars/year per subscriber and 140.4 dollars/year per subscriber, respectively. This rate is competitive against Stream’s 9 Euros/month and Teipei’s 15 Euros/month plans. Teipei has special soccer TV channels as well, which forces its price to be higher. Since we don’t have to actually provide extra TV content (only extra Internet coverage), it should keep our plan more attractive to the average Italian consumer. Our service will also be providing Internet coverage (via the iTV connection), which is a rare commodity in Italy (only 24% of Italians are wired). 10

Thus, by providing the Internet and special content at such a low rate, we should see a very high demand. Using this knowledge we assumed an initial customer base of 160,000 (100,000 normal/60,000 special) and 4% subscription growth rate in both areas. Using these calculations, we devised a strong nine-year plan. This robust plan assumes a one year set up time before coming out on to the market and includes pay increases for workers and some inflationary costs. All figures are given in dollars. As you can see, an initial return on the investment can be seen by the second year, under our fairly modest customer base assumptions.

We estimate that the initial investment into this project will be around 14 million dollars (see Table 1). Since we are providing much of the technical, financial and local market expertise, we propose that we should hold 55% of the equity. This will also give IITG a strong standing in the Joint Venture, without losing out on the vast potential gain that we have to offer. 60% of the initial investment will be comprised of debt, and that number amounts to approximately $8,400,000. We propose to raise the debt requirements through investment banks such as Credit Suisse First Boston and other local Italian lending corporations (see Chart 1). Currently, we have a relationship with CSFB that offers us favorable interest rates.

Initial Investment ($14 million)

Debt: $8,400,000 Equity by CUITV: $3,080,000 Equity by IITG: $2,520,000

Chart 1: Division of $14 million investment among members of JV

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Lastly, we project that if our contract is signed by December 31st of 2001, that our facilities will be fully operational within 12 months, thereby yielding a date of January 1st, 2003 for the start of operations. This allows us 6 – 9 months for our advertising campaign, as well as 6 months for equipment set-up and the finalization of our facilities. We would plan on beginning physical preparation after the first three months of our advertising inception, allowing us to meet the one-year start date.

Note: The detailed Cost Analysis Tables follow; also note that the figures quoted herein are estimated for a network capacity of 10 million users. They cover all associated hardware and software/licensing costs, as appropriate. So, it is in the joint venture’s advantage to enlarge its’ customer base as fast as possible. All our efforts will be geared towards this very important goal. Please see our assumed customer base for our financial calculations.

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Cost Analysis – ( including start-up costs) Investment Costs: Computer Equipment IBM Mini Mainframes DELL Servers Content Workstations Licensing Sprint International Fiber Optic Network Spartan Networks Liberate TV Open TV Software World Gate Software Cable License

Item:

Quantity: Cost/Item:

Amount:

Equipment 3 Equipment 42 Equipment 25 Subtotal (a): License License License License License License Subtotal (b): 1 3 1 1 1 1

$250,000 $7,500 $10,000

$750,000 $315,000 $250,000 $1,315,000 $674,000 $1,725,000 $250,000 $426,000 $50,000 $0 $ 3,125,000

$674,000 $575,000 $250,000 $426,000 $50,000 $0

Networking Internal Network (cables, hubs, switches) External Network (installation costs) Set Top Boxes Advertising Television Magazines Infrastructure Building Space (1500 sq. ft) Management Training costs Network Specialists Content Programmers Advertising Specialists Other costs Other Licensing Interest Unexpected costs

Equipment 3 Equipment 1 Equipment 0 Subtotal (c): Propagation 1 Propagation 1 Subtotal (d): Land Human Human Human Human Human Subtotal (e): 3 12 30 15 25 2

$400,000 $100,000 $0

$1,200,000 $100,000 $0 $1,300,000 $3,000,000 $1,000,000 $4,000,000 $450,000 $720,000 $300,000 $450,000 $750,000 $120,000 $2,790,000 $200,000 $626,500 $626,500 $1,253,000 $13,783,000

$3,000,000 $1,000,000

$150,000 $60,000 / year $10,000 / year $30,000 / year $30,000 / year $60,000 / year

License 1 % 5% of % 5% of Subtotal (f):

$200,000 $12,530,000 $12,530,000

Total Investment Cost: Table 1: Forecasted Initial Investment

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Years Initial Investment % Interest Total Investment

2003 13,783,000 689,150 14,472,150

2004 0 0 0 11,556,000 9,013,680 20,569,680 50,000 787,500 735,000 2,520,000 1,000,000 30,000 5,122,500

2005 0 0 0 12,364,920 9,644,638 22,009,558 50,000 826,875 771,750 2,646,000 1,000,000 30,000 5,324,625

2006 0 0 0 13,230,464 10,319,762 23,550,227 50,000 868,219 810,338 2,778,300 1,000,000 30,000 5,536,856

2007 0 0 0 14,156,597 11,042,146 25,198,742 50,000 911,630 850,854 2,917,215 1,000,000 30,000 5,759,699

2008 0 0 0 15,147,559 11,815,096 26,962,654 50,000 957,211 893,397 3,063,076 1,000,000 30,000 5,993,684

2009 0 0 0 16,207,888 12,642,152 28,850,040 50,000 1,005,072 938,067 3,216,230 1,000,000 30,000 6,239,368

2010 0 0 0 17,342,440 13,527,103 30,869,543 50,000 1,055,325 984,970 3,377,041 1,000,000 30,000 6,497,337

Sale of yearly subscriptions* 10,800,000 (with 100,000 @ 120 Euros/year
subscribers)

Special Content PPV* @ 156 Euros/year Total Income Additional Yearly Training Management Costs* Licensing Costs (Sprint) Personnel costs* Advertising Costs Building Maintenance Total Costs

8,424,000
(with 60,000 subscribers)

19,224,000 50,000 750,000 700,000 2,400,000 1,000,000 30,000 4,930,000

Net Cash Flows

(178,150) 15,447,180

16,684,933

18,013,370

19,439,043

20,968,970

22,610,672

24,372,206

Table 2: Forecasted Profit/Expenses (yearly) *This table has also factored in the following assumptions:    5% annual increase in regular customers. 5 % annual increase in special customers. 5% annual increase in salaries due to inflation & raises. 14

IV. Technical Specifications: 

Distribution and Load Balancing Network

We propose to provide a reliable high-speed delivery path to all customers running over fiber-optic lines provided through a contract with SPRINT International Business Services. This would provide for an OC-92 connection speed (9.953 Gbps) and multiple redundancies. This would give us enough capacity to handle all immediate and future needs for iTV in Italy. With server locations in three major northern cities, we will be able to serve all current and future cable subscribers in Northern Italy.

Our IBM built custom mainframes will provide for reliable logins and security with increased load balancing capabilities sufficient to handle all incoming and outgoing data requests. Our “Standards” driven use of quality CISCO switching and routing equipment will yield superior response time and enhanced customer satisfaction. We will be capable of handling the heaviest loads even at peak usage times with plenty of capacity to spare. 

WEB Servers

Our WEB servers will consist of reliable DELL manufactured machines backed by their award winning support. They will deliver content using universally compatible standards such as HTTP and Java. We are leaving room open for future languages to become standards. Our equipment is XML and ECML ready as soon as the standards are ready for delivery. We are providing for the highest levels of digital security by enabling Triple DES 168 bit encoding algorithms and Kerberos authentication.

We will be capable of providing most common services such as real-time streaming, full e-commerce solutions, synchronized TV/web browsing, and usage tracking. We will also provide monitoring and filtering services to protect children from adult content. Using software technology created by Spartan Networks, Inc. We will multicast the same signal over our network using various iTV standards. We will be totally compliant with Liberate, OpenTV, and World Gate. 

Database Servers

Our database servers, also DELL made, will provide storage capacity and archive capabilities sufficient to track all user activity. The content providers and advertisers will have the ability to see where and when users 15

browsed their content and from where they were browsing it. Using the same high encryption procedures as on the WEB servers, users can be assured of the protection of their personal information. We will allow for complete user anonymity while still providing useful statistical information to the advertisers and content providers about who is using their services. 

Content Development

We will provide a means for companies to create their own content as they see fit in our in house content development dept. We will have on hand 25 Sun Blade 1000 content workstations for the development of formatted content ready for delivery over the network. 

User Equipment

The users will be able to use any set-top box that is compliant with the Liberate, OpenTV, or World Gate standards. They will also be able to receive our service over satellite or cable modems provided by their ISP and/or cable company. 

Warranty Information for Services:

IBM Mainframes have limited lifetime service warranties. DELL machines all have 3-year parts and labor warranties. CISCO’s routing and switching equipment all have 10-year warranties.

All other products and services provided by us have a 3 year limited warranty, unless otherwise indicated.

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V. Management of the Joint Venture:

Our proposal also includes negotiable suggestions for the Board of Directors, to be composed of a total of 7 members. We propose CUITV to nominate four of the seven BOD members, since we have proposed to have an interest of 55% ownership within the Joint Venture. The remaining three members are to be selected from IITG management group. Our proposal is as follows:

1) Chief Executive Officer and Chairman of the Board: Jason Brown (CUITV) 2) Chief Financial Officer: Atif Kidwai (CUITV) 3) Legal Representative: To be nominated by CUITV, with the consent of IITG. 4) Marketing Director: To be nominated by CUITV, with the consent of IITG. 5, 6, 7) Members of the IITG group, upon their selection.

The joint venture staff will consist of the Board of Directors, as well as a small staff for each of our three locations. This group consists of 12 first line managers, 15 network specialists and LAN administrators per location, and 25 content programmers. Further, we have hired 2 marketing specialists to aid us in our marketing campaign. In addition to these figures, all other services such as law, accounting and secretarial duties will be outsourced to local union contractors.

Additionally however, there are some technological concerns with regards to the Joint Venture. When the time comes for future expansion into neighboring counties and regions, it is in the best of our interests to protect our technology. Therefore, our plans for technology transfer and training of outside workers will have to be very carefully designed and executed (strictly on a "need to know" basis).

VI. In Conclusion: First, we’d like to thank you, the IITG, for your time and consideration of our proposal. We look forward to a prompt, favorable response from your company, and to many years of fruitful collaboration in Italy and beyond, within a strong, innovative, growth oriented joint venture. Please do not hesitate to get in touch with us if you have any questions regarding our proposal. Thank you again.

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