Two boutique investment banks, Silverwood Partners and Pharus Advisors have recently published notes to clients detailing their impressions of the NAB 2010 show. Both companies gave me permission to re-publish them here.
Silverwood has been involved in a number of broadcast M&A deals including Blackmagic / DaVinci and Avid / Euphonix. Prior to the 2010 NAB show the company published a 40 page report about the broadcast industry for their investment banking clients, which is worth reading to get their full perspective on the broadcast market.
Pharus has also been involved in a number of industry transactions including Neural Audio / DTS and Virgin Media / Two Way Media. The company published their post-NAB thoughts in their industry newsletter, which also includes a summary of recent M&A transactions in the digital media space, and a comparison of publicly traded companies.
Silverwood NAB Perspectives:
Revenue Flow versus Work Flow. Broadcast and media customers are principally focused on sustaining advertising revenue from traditional outlets and driving incremental revenue over emerging outlets. The focus over recent years on cost containment through automation and technology efficiencies has been eclipsed by the need to adapt technology infrastructure to a changing business model. The Newspaper industry provides an instructive lesson on the need to be responsive to external challenges to traditional business norms. Technology vendors are faced with customers that have shifting purchasing priorities and that are scrutinizing expenditures on conventional broadcast infrastructure.
3D will not Reverse Industry Revenue Decline. While 3D may drive some additional short term revenue, widespread adoption is still in question because certain content will never lend itself to the 3D medium. Furthermore, with the exception of large screen environments showing purpose produced content (Avatar, Alice in Wonderland), the current 3D experience requires additional improvement. There are no clear standards for end user devices (TVs and glasses) so mass end-consumer device adoption – if it is to occur – will take time. Consider that the ongoing HD transition began with the first HDTV broadcast in 1998 and is still only 40% complete in the US market. Lastly, production methods themselves must also adapt to the creation of 3D content – there is no consistency in the content acquisition process, much of which is based on trial and error and research. 3D requires a new approach in the creative production process as fast switching and cuts can prove to be nauseating to the viewer. There are also concerns that poorly produced 3D will lead to negative customer perceptions in the near term which will slow adoption and the long term success of the medium.
Pricing is Collapsing. Years of substantial profitability for media and broadcast customers masked poor cost discipline in the sourcing of technology. Recent weakness in the advertising market and the broader economic disruption has caused customers to focus on capital budgets and look for more cost effective solutions. Compounding this challenge, inexpensive general purpose IT infrastructure continues to replace purpose built hardware solutions, creating good enough solutions at attractive prices for many use cases. This is putting pressure on margins for many traditional Broadcast technology vendors who organized their cost structures for the high price, ‘boom’ years and cannot adapt quickly enough to the changed industry circumstances.
Value Separation: Software, Hardware, Connectivity. Historically, broadcast and post-production customers purchased purpose built solutions where the discrete software, hardware and connectivity components were blended within a hardware solution. As the hardware portion becomes increasingly standardized, vendors will need to focus on defensible segments of the value chain, particularly within the software layer. In many cases specialized hardware vendors are effectively software companies burdened with a legacy hardware orientation. It is expected that vendors will need transformative change rather than evolutionary adaptation to address the fundamental changes in the media technology industry.
Growing Software Opportunity. It is expected that software companies will continue to be a growing presence in the media technology industry. Differentiation from IT solutions for incumbent vendors resides in the software layer. Well-positioned companies have software solutions that extend and leverage basic IT functionality, which will continue to improve in speed and capability. From a product perspective, technology vendors should examine their product portfolios to identify and extract the unique software functionality that is truly differentiating their offerings. In addition, the increasing use of standardized IT platform technology is creating a growing market for software vendors that can use the standardization to scale efficiently.
Commercial Opportunity: Customer Diversification. Well-positioned companies are diversifying and selling to a broader customer base, particularly customers outside the traditional broadcast market. Targeting other industry verticals is not feasible with a customized hardware solution and an industry focused direct sales model. In contrast, software solutions that extend standardized hardware and that are deployed through VARs and channel partners can be more easily adapted to large, adjacent industry verticals (Medical, Military, Enterprise).
Business Model Disruption. For NAB exhibitors there remains fundamental weakness in the traditional broadcast technology industry. The reduction in industry revenues will highlight one of the principal difficulties for many NAB exhibitors: sales and marketing expense is too high for revenue levels. With pricing pressure, many vendors will need to change to a distribution model or become part of a larger solution that can support the fixed sales expense. Well-positioned, well-capitalized vendors will have a unique opportunity to acquire established, respected brands with large user bases over the coming year.
Service Opportunity – Revenue Flow. Broadcasters and media companies are faced with a proliferation of technologies and monetization possibilities, and an accelerating rate of technology change. Historically, broadcasting challenges were solved by buying incremental technologies to plug into an existing well-understood technology infrastructure. Current business challenges require business model innovation coupled with technology platform innovation to drive revenues across a growing range of end-point devices and outlets. Given the lack of clarity on the optimal revenue model and the rapid pace of technology change, broadcasters and media customers are reluctant to invest in standalone technology purchases. This is creating an attractive service opportunity driven by the ability to provide incremental revenue growth with a low barrier to entry, a receptive customer and an attractive ROI.
PHARUS ADVISORS
PUBLIC MARKET AND M&A UPDATE ON MEDIA AND BROADCAST TECHNOLOGY INDUSTRY
NAB OVERVIEW
We recently attended the NAB 2010 conference in Las Vegas. We came out of the conference feeling the media and broadcast technology market is experiencing a healthy recovery from 2009. The recurring comment echoed by many industry players was that the deals in the customer pipeline that were stalled in 2009 are now morphing into real opportunities. The RFP activity is showing decent improvement, however, the sales‐cycle continues to be long and spending not completely flowing.
Even though the network spending in North America, which was driven by conversion to HDTV over last few years, is slowing, other factors like changes in customer preferences, and pressure to generate new sources of revenues and reduce costs are expected to continue to drive technology capital expenditure for networks. These new developments are adding new dynamism to the sector, which can be witnessed by the plethora of vendors and solutions.
Here are some of prominent themes that we witnessed at the NAB show this year.
- Emergence of 3D television broadcasting: As expected, this was the major theme at NAB similar to what was the case at CES earlier this year. TV manufacturers continue to be enthusiastic about this trend. CES expects 4.3 million 3D TV sets to be sold in 2010, with about 25% of total TVs sold in 2013 to be 3D‐enabled. Even though some major players (like DIRECTV, Discovery, IMAX, and etc.) have made announcements over last few months about launching 3D content, a lot of the content producers and broadcasters are still not sure about how quickly this market opportunity will grow in the near term. As a result, they tend to be reticent to make investment in this area at this point.
- Development of multi‐platform content distribution (broadcast, web and mobile) capability: The spending on TV advertising is gradually declining. According to Yankee Group, the TV ad market declined 21.2%, from $52 billion to $41 billion, between 2008 and 2009. During this same period spending on Internet advertising grew as a result of consumers spending more time online and less time watching TV. With more and more eyeballs consuming video content on Web and mobile devices, broadcasters are investing in technologies which enable delivery of content over multitude of platforms.
- Adoption of file‐based workflows: One of the important areas of investment for broadcasters remains implementation of file‐based workflow infrastructure. This is viewed as important by broadcasters to augment flexibility in day‐to‐day operations, facilitate reduction in operational costs, and enable efficient multi‐platform content distribution.
Emergence of Over‐the‐Top (OTT) Video and convergence of TV and Internet: The other recurring trend at the show was the focus on growing convergence between broadcast TV and Web video. Internet users are increasingly interested in streaming full length video directly onto their TVs and as a result variety of models are appearing to provide consumers with this capability. According to report by Tender Research from October 2009, about 7% of households will forgo Pay TV subscriptions by 2012 in favor of OTT services and free over‐the‐air television. OTT market is moving very fast with proliferation of enabling devices like Roku, Xbox, and a range of new HDTV models and growth of online video sites such as Hulu, Netflix,
