End of the hype on valuations of Media & Entertainment technology companies
And what it means for the consolidation of the market
In these last few days, two deals (Seachange buying Xstream and Brightcove buying Ooyala’s OVP assets) have been announced at multiples of revenue roughly around 1. This comes after Belden/Grass Valley bought Snell Advanced Media in early 2018 at about $94.2 million (including earn-out) also at (probably) slightly less than x1 revenue.
The situation is therefore in sharp contrast with a few years ago when the mention of cloud, SaaS or OTT drove valuations to the sky : Brightcove buying Zencoder in 2012 at about x15 revenue, Amazon buying Elemental Technologies for USD $ 296 million in 2015 (or about x6 revenue of 2014), Francisco Partners buying SintecMedia at x3.6 LTM revenue in 2016, etc.
On the stock market too, market capitalisations have been questioned with the Nasdaq index for example loosing 25% in Q4 2018, the first loss of this importance in 5 years. However it was followed by a 20% rebound in the beginning of 2019, thus reducing the loss. But greater declines have been experienced by some individual stocks of Media & Entertainment technology companies in the last year or two (EVS down 40 % in the last 2 years, Ateme down 40 % in the last year, for example).
Why is the hype in valuations finished ? I believe there are three main factors to this :
1. The markets have now understood that in the Media & Entertainment value chain, most of the value is captured by those who create the content and those who own the relationship with the viewers ; anything in the middle is left with … not as much as was sometimes expected.
2. The industry is experiencing a significant technology revolution with technical solutions migrating from distinct pieces of hardware and software for each function, built on proprietary technologies and sold on a CAPEX model, to microservice architectures in the cloud sold as SaaS (where by the way quite some of the value is captured by AWS, Microsoft Azure or Google Cloud). This revolution allows new companies to break into what used to be a high entry barrier, high margin market, with products offering a total cost of ownership 10 times lower, better agility and a pay as you use business proposal.
3. The number of clients for Media & Entertainment technology companies are less in numbers (because of consolidation within broadcasters), bigger in size (up to the point that they might chose to vertically integrate the technology side of the business) and they put more pressure on technology costs. Broadcasters in particular are under pressure to save costs due to the competition of new OTT services.
In this context, how can companies in the Media & Entertainment technology industry maximize value for their shareholders ?
Legacy companies benefit from historical client relationships, which are very important in a market where trust is of paramount importance, but struggle with the new technology and with adapting their cost structures to the new market realities. Start-ups on the other hand have a great opportunity to enter a market, if they have a clear USP, but need enough financial backing to fuel the sales efforts necessary to grab a significant market share (in a market which is worldwide).
Some technology companies (mostly around OTT) have been vertically integrated by content owners wanting to own the technology enabling them to connect directly with their viewers (Disney buying BAMTech, Turner buying istreamplanet, Endeavour/IMG buying Neulion are example of this). This has been a good exit option for these companies which had managed to build a sizeable business but which still had many competitors. Valuations offered by these media companies were usually high because it was a strategic move for them to enter OTT distribution.
Cloud providers have also been good exit options for companies having a virtualized software solution performing a specific function which could be integrated and sold by cloud providers as a value-added service. Examples of these transactions include IBM buying Aspera in 2014 and Ustream and ClearLeap in 2016, Google buying Anvato in 2016 or Amazon buying Elemental in 2015. These types of exits will continue to exist for some start-ups which have managed to built a leadership in their niche, but might not be as easy in an increasingly multi-cloud strategy environment.
However, many of the 1700 companies exhibiting at IBC (Amsterdam in September) or NAB (Las Vegas in April) do not fit the description to be acquired by either Media companies or Cloud companies. Many Media & Entertainment technology companies are within the USD10 to 100 millions revenue range which, in the “old world”, allowed them to exist in their niche. However, with increasing pricing pressure, consolidation of clients and changing technologies necessitating important R&D budgets, increasing the size of these companies is now of paramount importance. A revenue of at least several 100 millions dollars is necessary to fund R&D, have a worldwide presence and a leader status (which is necessary to be included in all relevant RFPs). Given that the intrinsic market top line growth is insufficient to bring them to these levels, M&A will have an essential role to play going forward.
So now that valuations have become more “realistic”, and that interest rates are still low, companies with a good balance sheet should actively pursue acquisitions to aim for the leadership position at least in part of the market and/or extent their portfolio of solutions along the value-chain.
As for companies with a good product, a great team and/or a good roaster of clients but not the financial power to be the consolidator, it is probably time to do some window dressing !
I am your disposal to discuss further.