The industry is on point of being eviscerated by consolidation and M&A
Is the broadcast equipment industry cratering? The warnings have been apparent for years but at some point over the past few years media and broadcast crossed the threshold where commodity technologies perform at the levels needed for professional media. This squeezes what consultants Deloitte have termed the ‘special sauce’ out of hardware and into software and there’s no return.
On the one hand this seismic transition is enabling new infrastructure options like cloud and new business models for vendors like software as a service but it comes at a brutal cost.
Technology that was once the exclusive preserve of large broadcast organisations is now available to the masses at consumer prices. This influences every aspect of a technology supply company.
The swallowing of what remained of fabled brand Quantel (Snell Advanced Media, last owned by owned private equity firm LDC) by Belden in February is the latest remainder that the healthy margins many vendors enjoyed selling proprietary hardware systems has been whittled away to nothing.
Belden has grown fat treating cables and connectivity as a commodity, generating U$2.4bn revenues last year. The broadcast market is way smaller than other verticals like cyber security and industry which Belden, caters to.
“Of all the industries we’re in, media and broadcast is where the economic capabilities of the vendors are the least developed, and that creates a lot of stress for us,” admitted Belden CEO John Stroup to the 2017 Devoncroft Media Technology Business Summit. “This is a business that requires a lot of scale. To operate globally, you need to generate the amount of revenue that gives you the scale from an R&D point of view.”
Scale is what those in traditional kit supply do not have. IHS Markit reports the broadcast equipment industry generating U$23.5bn in 2017 although the IABM’s own figures (for 2016) double this at U$51bn. Regardless, this is dwarfed by revenues in the global IT industry of about $3.5tn in 2017 according to Gartner. This means that the broadcast and media technology market is about 1.5% of the total value of the IT industry.
Changing market boundaries
The boundaries of the market are changing. While bespoke broadcast technology is on the decline, new categories such as cloud and OTT services are growing significantly. The IABM is working to redefine its industry model to reflect this – expect an announcement at NAB.
“While the ‘traditional’ industry is largely static in terms of size, today’s wider industry is expanding dramatically, but doing so at a lower price point,” says IABM CEO Peter White.
HIS Markit highlights two “realities” shaping the industry’s value. First, as a share of the wider Pro AV market – which wholly subsumes the broadcast equipment industry – equipment revenue is falling. Second, the composition of broadcast equipment value is changing. As recently as 2-3 years ago, capture and production equipment and media servers served as the market’s main stores of value.
“Through 2022, capture equipment revenues will flatten, and media servers will lose considerable value,” states analyst Merrick Kingston. “Broadcast services, encompassing everything from engineering and design, to fully managed broadcast media services, will near-exclusively catalyze the industry’s net value creation over the next five years. Hardware will retain high nominal value, but will cease to be a growth catalyst.”
Value creation in the IT and broadcast equipment segments resembles a parallel evolutionary process. Value – and revenue – doesn’t reside in the sale of a camera, a conferencing phone, or a server. Hardware is simply a conduit for the sale of software and services.
Hardware value sinks
According to IABM data, the deflationary effect of hardware commoditisation continues to stifle traditional broadcast technology suppliers’ profitability despite the sustained level of R&D investment made in recent years.
“While hardware has intrinsic and high nominal value, the sale of production services, teleconferencing services, and cloud computing underlie the net creation of new worth,” says Kingston.
SAM’s sale fits a wider pattern of merger & acquisition as companies seek scale. Belden itself accumulated Miranda, Softel and Telecast Fibre Systems as well as Grass Valley under which SAM products will be sold.
Another industry behemoth, Imagine Communications (owned by venture capitalists Gores Group) was formed from the merger of Harris Broadcast and GatesAir in 2013, Harris Corporation having earlier spent a billion dollars swallowing Leitch, Louth and Encoda.
At the end of January, Ericsson divested itself of its Media Solution Business which was built in part through the acquisitions of Tandberg Television (2007), Microsoft Mediaroom (2013) and Envivio (2015). What’s interesting is the scale. While the Media Solutions assets are fairly significant in the media technology sector, it only accounted for 3% (U$380 million) of Ericsson’s annual revenue. Nothing like a core business.
“Traditional businesses are going through a transformation to adapt to their customers’ changing requirements,” says White. “What they need to do is change, offering products that tackle their customers’ issues in a multi-platform world and moving to new business models centred on the flexible provision of software.”
Think out of the box
Jon Ive, who delivers strategic insight for the IABM, thinks he has put his finger on the problem. He says that the old method of designing, releasing and then fine-tuning a product over successive product generations is no longer fit for purpose. All this succeeds in doing is optimising the status quo.
“Being obsessed with improvement inhibits thinking ‘out of the box’,” Ive argues. “Continuous product improvement follows a law of diminishing returns despite escalating support costs. Once the product has peaked and market penetration is high there is a diminishing return on investment.”
Some companies find that by the time they’ve achieved the perfect product, having diligently responded to customer feedback, the reality is that the industry no longer wants the product at all.
“Alternative, radically new approaches are now preferred,” says Ive. “Freeing development minds from building entirely on past tradition and experience is neither comfortable nor easy but necessary to stay relevant,” he urges.
There is some evidence to suggest that vendors with entrepreneur-owners face less internal politics or stock market pressure in getting product to market despite selling traditional black box hardware. Blackmagic Design, Ross Video and Riedel Communications spring to mind.
Even here, though, lowering prices for technology (Blackmagic, for example, offers a free version of grading software Resolve) means lower margins and that only makes sense if the market can be expanded to compensate.
“For an industry built on high value capital items and small volumes this is a real challenge,” Ive contends. “Potentially larger markets are opened by commoditisation, but they cannot be addressed with a high value, low volume business infrastructure.”
Another area where broadcast product design needs to improve if vendors are to survive commoditisation is user interface design. This speaks to the merging of IT and AV skill sets within organisations.
“Professionals have prided themselves in understanding how to ‘drive’ specialist-only devices.. [but an] intuitive and attractive user experience is becoming increasingly important, especially as time for training is limited,” says Ive. “Rapid familiarisation and intuitive working environments are critical to success.”
Expensive single function hardware is no longer attractive, the lure of the Cloud with instant scalability, limitless compute power and pay per use is a revelation too attractive to pass up.
Not surprisingly, companies that primarily rely on software revenues report significantly more confidence in the future than those primarily relying on hardware sales, per IABM.
Consolidation pressures
There are additional pressures on the tech supply chain stemming from consolidation on the content creation and distribution side. Disney’s acquisition of 21st Century Fox’s assets and Comcast’s bid for Sky are a case in point.
“How do we consolidate around a customer base that’s consolidating around us? Hundred [media companies] reducing to 20 puts pressure on us,” Charlie Vogt, who advises M&A activities for The Gores Group, asked an IABM event last autumn. “This consolidation has created a healthy base of customers but put a lot of strain on us – we have to consolidate on the supplier side too.”
The IABM itself expects significant M&A activity to continue. “We now have several thousand technology suppliers chasing business from an ever-diminishing number of customers thanks to ongoing M&A activity between many major players,” says White. “This inevitably puts pressure on prices and reduces profitability for vendors. Further consolidation is inevitable.
“Additionally, traditional suppliers with an enterprise mentality can find it hard to develop innovative new solutions, and they will often look to buy this innovation in by acquiring smaller, more agile companies.”
There is another major trend gathering pace in the industry – towards collaborative solutions developed jointly by vendors and their end-user customers. All the talk over many years of ‘solutions’ - which actually just meant selling a mix of products in most cases - is finally becoming a reality, and this will increasingly be the way forward
With 98% of technology users demanding interoperable solutions, the IABM urges vendors to adopt a more open approach to product interoperability.
“Although SMPTE ST2110 will address many on-premise interop problems, it takes on quite a different character in the cloud because it’s software interoperability that’s the issue, and transportability of solutions will become a major consideration,” says White.
He spies a silver lining for traditional vendors in rising adoption of emerging technologies such as cloud, IP and AI driving more growth “for those that have invested in them”.
Let’s take AI, which is one of the main themes at NAB2018. The primer driver for AI is the opportunity to automate routine workflows that are manually executed.
While vendors are falling over themselves to add an AI layer to their core products while promoting the idea that customers can save money by applying it, the science and the technology and therefore most revenue from AI applications lies outside the immediate scope of the kit supply industry.
It will be the web titans companies like Alphabet, Amazon, Microsoft, Google as well as IT giants such as Juniper, IBM, Arista, Cisco who own the data centres and the network infrastructure which will reap the rewards.
Short of all firms’ investing in managed services and software – which raises its own saturation and competitive differentiation issues – broadcast kit companies would do well, at a minimum, to re-evaluate their core sales model.
Any silver lining?
“Selling a widget at a high one-off price is equivalent to selling a high-margin, perpetual-use software license,” asserts IHS’ Kingston. “Selling access to a widget – and bundling this with a convincing product roadmap and lifecycle that provides opportunity to sell new licenses and upgrade services – offers more continuity, and potential for long-term value creation.”
Figuratively, some elements of the broadcast industry are indivisible. You can’t cleverly re-package your data centre and cloud-computing offerings to enter, and compete in, the 4K digital camera market. For products that face encroachment risk from the web and IT giants – studio networking; storage, server, and disaster-recovery design; scheduling systems; compression and encoding platforms – the broadcast industry’s saving grace is that the software behemoths have shown little interest in this form of adjacent and vertical market expansion.
“Most media technology users still prefer best-of-breed solutions, leaving many doors open for media technology vendors,” says White. “In fact, their customers are still looking for the dedication, support and flexibility provided by smaller specialist suppliers – large IT companies have a weaker interest in this as the broadcast and media sector represents a small slice of a big pie for them.”
If product excellence, support and interoperability are crucial factors in determining vendor survival through this “unprecedented change” as White terms it, what if the software titans do enter broadcast vertical and spend the requisite time to engage and understand potential clients?
“The broadcast incumbents have no facility to match the R&D budgets, and cloud expertise,” says Kingston. “Path dependency, the strength of historical relationships, and fear of new entrants’ business models – particularly with regard to data collection and processing – are, collectively, the broadcast industry’s friend.”
The tidal wave of change cannot be held back. The future of media as a whole does not belong to large-scale, broadcast incumbents. While these companies unquestionably have a future in the evolving media ecosystem, content-and-creative production is democratizing, and rapidly so.
“As global production shifts toward smaller agencies, and ‘into the hands of the many’, demand for a whole class of broadcast equipment will fall,” predicts IHS’ Kingston.
This shift in media production will inevitably challenge equipment manufacturers whose products start to compete with high-end consumer electronics products, and commoditised software.
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