Ericsson sticks on playout, metadata, throws in towel on encoding

Ericsson completed its move out of the media industries this week, if somewhat half-heartedly, selling 51% of its Media Solutions business to a private equity group and deciding after all that it was going to keep its Red Bee business – which is focused around broadcasters.

No money was mentioned, but the business it has sold 51% of, to One Equity Partners, conducted just SEK 3 billion of business in 2017, which amounts to around $380 million. The likelihood is that it sold this half of the business for a small amount now, with performance related upside to buy the rest of the company – we would suggest about one times revenue now, which would mean $190 million up front, and a multiplier of profits for the second half of the business, at some point in time during the next 3 years.

Typically, that is how Private Equity businesses handle loss making enterprises, and this falls way short of the $2 billion that Ericsson was hoping for. It could not sell Red Bee, which is a combination of the BBC metadata business, which has grown in metadata somewhat since it was acquired, and the Technicolor Broadcast acquisition, which manages playout for a host of TV broadcasters.

Ironically Ericsson has kept the half of the business which is most clearly disrupted, saying that it could not get enough for the asset, and so it refused to part with it.

It was back in 2012 when we featured the headline, “Feeding on the rotting corpse of a 7-year-old failed IPTV strategy,” which showed what we had always thought, that the name change from Microsoft TV to Mediaroom, was all about selling it off. It went to Ericsson for a rumored $100 million, almost the smallest of its IPTV purchases, with only Azuki, launched in 2008, bought for less. Again, this was an unstated price we took to be something below $50 million in 2014. The granddaddy of all Ericsson’s purchases was the $1.4 billion it paid in 2007 for Tandberg TV, a real time encoding platform headquartered in the UK. Since then it has added the Media First brand to these assets, and added Envivio, its latest acquisition which it bought for around $150 million in September 2015.

These are the assets which have gone – Mediaroom/MediaFirst, which includes all encoding and transcoding assets. This is still headquartered in Southampton UK where Tandberg TV was stationed, and the lead architect for the group remains there today. But it also includes all the UI and Middleware assets, the multiscreen system which came out of both Ericsson’s efforts and Azuki, and we would not be surprised to see managers out of Azuki emerge in charge in the US.

It is not clear what the branding of the new joint venture will be, but for sure it will not be Ericsson Media Solutions, perhaps it will become MediaFirst. However, it will be tough for any owner of MediaFirst to use that brand tarnished as it is with failure – it is depleted and the few majors who still use the software will be looking for a supplier with more certainty over its future.

What stays with Red Bee includes metadata management, media asset management, services like audio description, content discovery and sports graphics for TV, along with playout and the NUVU SVoD service manager. Right now, most TV stations are trying to work out if they have a future and if they do, whether or not their playout should move to the cloud through vendors like Imagine. So although these assets will continue to drive business for some time to come, they have no long term future.

What appears to have gone are the MediaFirst assets, which includes contribution encoders from Envivio, purely software, and content processing to the end user, along with Origin servers, cloud DVR, cloud storage and HEVC decode. Also the watermarking system it calls Overt, which is based on NexGuard technology, now owned by Nagra, and the nCompass encoder management system. Most of this stuff is software and it is a moving target – i.e. if you stop developing it for any length of time, you can’t catch up.

Ericsson has preached a DevOps software process, something which tasted sour coming out of the mouth of a business which has been slow to adopt software only systems, and this has the disadvantage of leaving different customers on different pages, as far as discrete packaged software is concerned. Run DevOps for 6 months and you have no idea of what you started with.

What has NOT been let go is the considerable CDN business which goes under the title Unified Delivery Network, whereby Ericsson has built a global CDN for delivery of video and music. It will live in another segment of the Ericsson business called Emerging Business. UDN has led to major contracts at DoCoMo, 20th Century Fox and Etisalat in recent years, and Ericsson has used it extensively to deliver the outputs of Media Solutions.

This deal was outlined as Ericsson reported a quarter down 12% to around $7.3 billion and ended 2017 down 10% on $25.6 billion with a loss of $2.4 billion, contributed to by a massive $1.8 billion write down and the company swore that this was its last – no more write offs are foreseen and all the bad news is behind it.

That said, it has cut 16,000 jobs so far and plans a further 14,300 as it tries to cut its run rate of costs by SEK 10 billion or $1.27 billion a year. It told analysts that its run rate was cut by SEK 6.5 million, but that won’t be entirely visible through the P&L until 12 months go by.

Networks is largely healthy now if you believe the Ericsson management and it has invested heavily in R&D for 5G and believes that it will have a greater share of 5G IPR than it had of 4G.

The issue now is what One Equity Partners does with its ragbag of mostly out of date media assets. Ericsson says that Media Solutions broke even in Q4, but prior to that had large losses, once again on write downs. Certainly there have been new MediaFirst deals at Japan’s J:COM, another at tiny Canada’s Movus Entertainment and one at Telstra in Australia, but Telstra was only for virtualized video processing – nothing more than cloud based workflow and encoding. These are good deals, but have been leveraged by Ericsson’s other relationships with these companies.

Sales within Media Solutions fell in the year by around 18% due to a slowdown in legacy products, for instance set tops and related services. Red Bee Media lost around $30 million on sales down 14% to about $317 million and is thought to have stable sales now which can bring in a profit, because all the losses were mostly due to writing down assets and it was cash break even.

Ericsson boasted that Red Bee Media delivers 2.7 million hours of programming in 60 languages for 600 TV channels, including 20,000 hours of live and 15,000 hours of catch-up content each week.

Overall, we are prepared to believe that Ericsson has high hopes for 5G and the management sounds like it has been savage in taking out all the bad news, but this will leave it no longer the largest provider of cellular networks in the world, substantially behind Huawei, and with Nokia similarly on the verge of turning its networks ship around.