Zoo Digital Group plc (LON:ZOO) recently presented at Mello 2018 in Derby, followed by a questions and answers session:
Good afternoon, everyone. I’m going to be speaking about ZOO Digital. We are an AIM quoted business that provides services into the entertainment industry.
There’s an important disclaimer that you must all read very carefully here. I’ll give you time to read it. I think that’s enough.
This is quite an important product that was introduced to the market in the 1970s, and I’m looking around and I can see we’re all of an age where we would have experienced this first hand.
What was important about the video tape was that it created the home entertainment market. Until the advent of this product, if you wanted to watch a movie, you’d have to first of all, go and watch it in cinemas, and then you’d have to wait until it was released on cable or satellite, and then, eventually, it would reach you via terrestrial TV. There was never really an opportunity for you to be able to watch it at the time and place of your choosing, and this technology obviously enabled consumers to do that.
This was predominantly a rental market. In the main, we all went out and we rented from Blockbuster and other rental stores. In the days of VHS, most of the market for the producers of content, studios and others, was domestic, so only the big blockbuster titles would have been translated so that they can be sold in multiple countries. One of the reasons for that was its cost and the logistics of it, because this product will be in a single language. If you want to deliver it into different languages, then you must create a new version of that product which has subtitles or dubbed audio into each target language. Consequently, these products didn’t travel globally on any enormous scale.
As a matter of interest, raise your hand if you still have the means in your home to play one of these. Interesting. Quite a few people. In fact, the last player came off the production line as recently as 2016, so although this technology has been around for 40 years, it’s only recently deceased.
Twenty years later, in the late ’90s, came along DVD-Video, and this was a transformational point within the home entertainment industry for a number of reasons. Not least of which is because, on a DVD-Video disc, it’s possible to provide multiple languages – many subtitle languages, many dubbed languages – and that meant that for a producer you can create one product that you can sell into many countries. That gave rise to a significant growth in demand for localisation of entertainment content to adapt it for different countries.
Quick question, how many people made their own collection in their home of something that looks a bit like this? Maybe not on this scale. Right, the key thing about the DVD market was that it was predominantly a sell-through market. Studios made fantastic revenues and profits because we all went out and bought these discs. And that was obviously a very lucrative time, and a time of very fast growth within the industry.
Actually, this technology, DVD, peaked sales in 2006. Here’s a chart that’s showing spending by consumers in the US market on home entertainment. The global market has quite a similar profile, and as you can see it was growing like topsy until 2006, and then it started to decline. There are a number of reasons for that, but the most significant was the availability at around that time of the first services that allowed consumers to buy this kind of content over the internet. The iTunes Store offered video products from 2006, and the first of the video streaming platforms became available in 2007. And so, as consumers, we all thought, well, perhaps DVD has had its day, perhaps continuing to build that nice big collection has a limited shelf life. We decided to stop spending money on DVDs and instead look to other ways in which we can watch home entertainment content.
Unfortunately, back in those days, most of us didn’t really have a broadband internet connection that was capable enough to be able to stream high quality video. That led to a period of about ten years within which sales of physical products – DVDs and Blu-ray discs – were in decline, but the services from digital platforms were relatively slow to take off.
The point of transition occurred as recently as 2016. In 2016, that was the first year in which the industry spend by consumers on digital products exceeded that of physical products. And winding forward to 2017, in that year, the worldwide home entertainment market was estimated to have a value of about 48 billion dollars, of which about two-thirds was on digital platforms. These digital platforms have become very significant, and today there are at least 200 different services available around the world by which we as consumers can gain access to home entertainment content.
Whereas, in the case of DVD, content was routinely sold into, say, tens of countries, now the barriers to entry for a content owner to reach a global market have completely fallen away. The leading platforms that offer digital services for home entertainment to consumers are available, typically, in 200 different countries. That creates an interesting challenge for content producers. A two-fold challenge. First of all, in order to maximise on the opportunity to commercialise this content, the greater market exists on an international basis, rather than domestically. And to capitalise on that means localising into many different languages, and then being able to deliver those entertainment products through many different channels: physical products, because DVDs and Blu-ray discs are still being sold, but also through these hundreds of different digital streaming platforms.
So, there are two key things that a content owner must do to maximise return on investment in an entertainment product – a TV series or a feature film – and those are: they must arrange for it to be localised into different languages and for it to be prepared for delivery into the different platforms and routes to market that now exist.
I use the word “localise”. Localisation is often thought of being the same as translation. If I were arranging for someone to translate the manual for a printer, for example, then the translator’s job is to convey the same factual information in their target language. If the instruction says, “Press the ‘power’ button,” then there would be a translation of that into French. There may be many ways in which you can translate that into French, but it doesn’t really matter as long as you convey the same factual information. Most translation that’s done in the 50-billion-dollar global localisation industry is of that sort.
Localising for entertainment content is very different, and the reason for that is that what’s being localised is the spoken word, and the spoken word is very heavily nuanced, it may contain idioms, it may contain cultural references to characters and places that are well known in the original country, but not known at all in the target country. There may be jokes where the humour just does not work – an English joke just may not work in another country.
Audience member – “Scotland”.
Such as in Scotland, that’s quite right. And indeed, when we talk of localisation, whilst I can say that we have never localised into Scottish, we have localised into Australian and American English from UK English original content. Localisation even exists within the same language. Localisation is a very specialised field for media, for entertainment content, because of these challenges.
When we think about localisation of entertainment, there are two main approaches that are taken. The first of which is to place words on the screen of the translation of those that are being spoken by the actors, something that looks like this. Those are called subtitles, of course, and subtitles are relatively inexpensive to produce and typically are used all around the world.
The second approach that’s taken is known as dubbing, and if, like me, your first experience of dubbing was of some pretty terrible Kung Fu movies in the 1970s, then you may have this preconceived idea that dubbing is really awful. Whilst there are undoubtedly some very poor executions of it, believe me that when it is done today, to a high standard, it can be exceptionally good. Importantly, is the preferred way in which many countries around the world and the consumers within those countries, prefer to watch, for example, English original content.
I’m just showing Europe here, because that’s the only data I have to hand, but something similar I could show for the Americas and for Asia and elsewhere. In this chart, which shows the main European countries, the red countries are those where the audiences prefer dubbing rather that subtitling, while the yellow ones are those where the preferences are for subtitling. You’ll see that the UK actually is known as a subtitling country. So, that’s to say that if someone were taking a foreign language product to localise it for the UK, they will know that most people would prefer that to be done by way of subtitles, which is great, because they can be produced relatively inexpensively.
Dubbing is obviously much more involved, and I’ll talk a little bit more about that in a second, and it costs a lot more, but it’s essential in order for a content owner to be able to maximise the return on their investment in the content.
Let me spend a moment just explaining how the industry works today, before then explaining how ZOO differs in the market. The way that localisation is done for entertainment today is such that, in the main, subtitling and dubbing are performed
through separate work streams, and in many cases, by different organisations. In the industry, there are not a huge number, but there are some companies, like ZOO, that can offer a multi-lingual subtitling service. The client places an order, and that order will be, for example, to create subtitles in 25 different languages, and an organisation like ZOO will fulfil that and deliver those subtitles back to the client. In the case of dubbing though, things work rather differently.
With dubbing, you need to replace the voices of the screen actors with voices of speakers in the target language, and obviously, if there are forty or fifty different characters in your original program, then clearly you need quite a number of voice actors in order to make that convincing. Those voice actors, in the main, are living in territory. So, what that means is that if you want to dub into French, you probably need to work with a dubbing studio, as they’re called, located in Paris, or elsewhere in France. Consequently, the dubbing market today is highly fragmented. In Europe, Middle East and Africa, in 2016, the top four providers of dubbing services accounted for only 20 percent of the market, whereas for subtitling, the top four providers accounted for more like 60 percent of that market. So, there’s a very highly fragmented market in dubbing, and subtitling is generally performed in a different way by different organisations.
ZOO is a company that provides services to content owners and to providers of streaming video and other over-the-top services, to take entertainment products and to adapt them so that they can be delivered all around the world in the best way for the target audiences. We work with the biggest names in the entertainment industry, with the major Hollywood studios, the BBC, the leading providers of streaming and transactional video on demand services. We take their original materials, do what’s needed so that those materials can then be delivered into the many different digital services.
What happens in the middle, and the ZOO secret sauce, is that all the work that we do is performed using innovative proprietary software technology that we’ve created, and indeed, invested in for ten plus years. What that technology does is proactively manage the end-to-end process of creating these localised materials. In that we look to provide automation and to virtualise certain functions that, in our competitor organisations, would be fulfilled by human labour. We, of course, preserve those aspects of the process with humans where that actually makes sense, and where people add value, and two cases in point are for translation and voice acting.
Although machine translation can do a great job of translating, “Press the ‘power’ button”, it can do a pretty terrible job of translating, “Of all the gin joints in all the towns in all the world”, because it’s contextual, it’s idiomatic, it’s a challenging thing to translate on an automated basis, and consequently, in our industry, machine translation is not widely used. It’s hardly ever used for this kind of work.
Similarly, for the voices to create dubbed audio, we work with voice actors and we don’t use synthesised voices. But for everything else that wraps around what we do, we’ve developed software that enables us to undertake these practices in a very efficient way.
That software, which gives inherent, huge scalability, is coupled together with a large network of freelance workers. We have approaching now 4,000 people, freelancers, located all around the world, specialists in different languages, who collaborate with us over the internet through our cloud platforms. By working with them, in conjunction with the software that we have, we’re able to provide enormous scalability in our operations, and operate a business that has very significant operational gearing.
When I talk about our software, this is software that’s deployed in the cloud, which means that all of those thousands of freelance workers who we’re collaborating with are using nothing more than a web browser on a PC with an internet connection. Everything that they need to do – translators who are creating translations and adaptations of subtitles into a different language or translating a script, or voice actors who are actually recording lines of dialogue – all their work is done simply through a cloud-based platform. In our environment,
we have made that a very scalable capability, and we can tap into this enormous resource that exists in order to fulfil the work for our clients.
I’ll just take a moment to explain dubbing. To be clear, we have been working in the area of subtitling for five years, over which time we have refined our processes, we’ve built our network of freelancers, and we are now operating a very efficient process of subtitling that is delivering consistently high quality with a very fast turnaround at a very competitive price for our clients and has been growing significantly year on year. In our most recent year to March, the subtitling sales have almost doubled on a year-on-year basis. Dubbing is a more recent development for us. The technology has been in development for a couple of years and we started using our technology to fulfil client projects only from August of last year. So, we are only six months into this process, at a much earlier stage.
For a number of reasons, dubbing represents a very significant opportunity to ZOO, and can deliver enormous operational gearing in the business. I will take some time to help you understand the way in which dubbing operates in the industry today and how ZOO’s approach sets us apart from others.
The photograph here shows a typical, traditional recording environment for doing dubbing. You’ll see at the back a voice actor. That voice actor is in a room which has been acoustically treated. That’s to say it has sound proofing and also materials that prevent resonance within the room, so there are no echoes or other kind of background sounds, so they can produce a very clean recording. In that room there will be a computer monitor on which they will see the video that they are dubbing. They’ll have a microphone that the studio has spent several thousand dollars on. They are wearing headphones and they are being directed by people who are in this adjacent control room.
On the left you see a recording engineer, and that’s an engineer who, as you can see, uses some very sophisticated equipment, and is a highly trained individual. His job is to cue up different takes of the lines of dialogue to play the video, so the voice actor can see them. The voice actor will then deliver each line. It won’t be right first time around; they’ll try again, and they’ll do several takes until they’ve got a recording that they’re happy with, and then they’ll move on.
The whole creative process is overseen, typically, by a dubbing director, whose job is to be the arbiter of quality for these recordings, to make sure that, if the part calls for certain gritty, emotional delivery, then that is what the voice actor delivers.
This operates within a facility known as a dubbing studio. A dubbing studio typically will have a number of recording rooms, so there may be, say, five or six rooms. Clearly, it’s an investment in capital infrastructure, there is equipment, there are people on the payroll to do this work who are on staff the whole time. Importantly, it has a finite capacity. Those five recording rooms, if that’s what there are, can operate 24 hours a day, but that would define the capacity of that studio to perform this kind of work. In a nutshell, this traditional arrangement is limited in scale, it is cumbersome – as you can imagine, diarising many voice actors to come in and do their recordings is a logistical challenge – and it is costly and takes some time.
Now let me explain the way in which ZOO operates. At the heart of everything we do is our proprietary software that we’ve created that gives us this scalability. Our cloud computing platforms essentially manage the end-to-end process. An order that comes in for us may involve us localising into 25 subtitle languages and nine dub languages, for example. That would be a fairly typical order. And all that entire process will be managed within our systems.
Thinking about it: what, in that traditional dubbing studio, do we still need? Think about what’s there. First of all, there is a recording engineer. Well, what we have done in our system is to virtualise the function of that recording engineer. That role is implemented in ZOOdubs, our dubbing platform. We don’t need that particular person.
The environment, of course, has a dubbing director who is overseeing quality, but that person does not need to be in the same room, they could be somewhere else on the internet, collaborating via a video call.
Clearly, the actor must be in a recording environment that is controlled, that doesn’t have any characteristics that would detract from the quality of the recording. But that could be in any of a very large number of places; it could be in a regular recording studio that’s used by musicians, or indeed it could be in a home recording set up by and that belongs to the voice actor him or herself. Many of these voice actors will, for example, provide services to their clients to record audio books or do voice-overs for commercials. So, many of them actually already have a home recording set up that we can work with.
So, the last thing is, clearly to record you need a microphone, and in the professional studios these cost several thousand dollars. But this technology has come on enormously in the past few years, and now for 100 or 200 dollars it’s possible to provide a microphone that gives a perfectly adequate resource for doing this work.
It’s a very scalable opportunity for us, because we can tap into practically unlimited capacity by working with these voice actors and their recording spaces. What that means is, of course, that we have enormous scalability in our operations. We don’t have the kind of capital investment required that our competitors do. We can turn projects around much more quickly, because we are not constrained by having to diarise particular recording spaces.
With dubbing, even more so, we can produce consistently high-quality projects turned around very quickly and at a very competitive price in the market. And that market, how big is it?
Well, in some recent research from just last year, in Europe, Middle East and Africa, the estimated spend on these activities was about two billion dollars on the very services that we provide. And that market has been growing at a rate of over ten percent per year, growth that is all fuelled by the very factors that I described earlier: the explosion in digital distribution and availability of content in many languages.
As a business, we’ve been, over the last couple of years, growing very strongly. Until that transition that I described earlier, most of the work that we were doing was related to packaged media – DVD-Video and Blu-ray discs – and consequently, it was seasonal, because most of the production of those titles occurs in the first half of our year. But from 2017 onwards, we are now on a very strong growth trajectory as a result of these changes that have taken place in the market. There is great value in the proposition in which we’ve been investing for a decade that puts us in a prime spot to be able to capitalise on these opportunities.
The numbers for 2018 are not audited here. Our year runs until March, but we put out a trading statement on Monday to give guidance on the ’18 numbers, and we indicated that sales will be at least 28 million dollars for the year, and that’s up almost 70 percent on the 16-and-a-half million that we did the year prior.
In summary, hopefully you’ll have a sense that this is a very large and fast-growing market, within which we have a winning proposition.
We have a very defensible position in that market by virtue of this unique technology that we’ve created, especially considering that our major competitors, typically, are very service-oriented organisations who have not made anything like the kind of investment that we have made in technology to assist in this work.
We have very strong long-term client relationships – we’ve been working with major film studios in Hollywood for well over ten years and providing services to them throughout that period.
The services that we are offering will deliver good contribution margins, and you’ll see that in the years ahead when it should start to show through at EBITDA level. We’re generating cash – we’ve just announced this week that our gross cash at the year-end was 2.4 million dollars, and that’s up from 0.7 million dollars six months prior.
And finally, this company is run by a management team that’s been working together for 12 years, that has been investing heavily in technology that will provide us with this platform for excellent growth in the periods ahead.
Q: I just wonder if you could comment on the 2018 EBITDA number for me, please?
Sure. The service lines that we’re providing will deliver strong contribution margins. At the moment, that is not showing up fully at EBITDA level. And the reason for that is that we are currently investing heavily in this opportunity. A year ago, we did a placing to raise some cash and we’ve been accelerating our activities in R&D, for example. We’ve expanded our R&D team in order to maximise the opportunity that lies ahead, as well as recruiting into the business individuals who have specialism and strong experience in the dubbing industry.
Q: Could I ask you about lip-sync dubbing? I think April was quite an important month, or potentially quite an important month for you. What’s happening about lip-sync dubbing? Are you able to tell us how you’re getting on?
Okay. For everyone else’s benefit, there are two main approaches to dubbing. The first one is generally referred to as “voice-over,” and in that chart that I showed earlier, I pointed to dubbing and I pointed to subtitling, I didn’t mention voice-over, but there are some countries that actually prefer a certain style of dubbing, known as voice-over, in which a target language voice is overlaid on top of the entire soundtrack, so you can still hear the original language voice beneath it. That’s called voice-over. There are certain categories of content where you have to dub via that method. And the service that we’ve been offering and the platform that we’ve developed initially was designed to start with this voice-over capability. The first six months that we’ve been doing this work has been predominantly voice-over dubbing projects.
Lip-sync dubbing is a different approach where, essentially, the ultimate aim is to remove the original language voice and create voices in the target language that seem to match up – so that what you hear seems to coincide with the movements of the lips on screen. That’s a much more demanding process and it commands a higher price in the market. The technology to do that is a more recent introduction for us, and as you alluded, we’ve been trialling that and ensuring that it meets the requirements and we’re now satisfied that it does. We’ve had positive feedback from our clients, and as of today, we’re providing services for both voice-over and lip-sync dubbing.