Media Tech Industry Facing Tough Challenges

“Efficiency” may not be the sexiest word one could hear in Las Vegas this week, but it was the underlying theme at the NAB Show, for broadcasters and the technology vendors who supply them.

Both arms of the industry face increased competition and subsequent financial pressure, and both are looking to revamp the way they work to ensure long-term survival.

NAB is first and foremost a technology showcase, and to be sure, there were plenty of cool products at the show including the latest 4K cameras, photorealistic virtual sets and even dancing camera robots in the Nikon booth.

Of particular interest to stations, there were also prototype ATSC 3.0 consumer TV sets used to show the next-generation standard in action, along with much discussion of recent multi-station ATSC 3.0 deployments in Phoenix and Dallas. 

Overall, however, the emphasis at NAB was less on new models and more on business models. Both broadcasters and vendors said that the industry is moving away from products and toward services, with an emphasis on working smarter, faster and cheaper, whether in SDI or IP.

At the same time, sales for most broadcast vendors are basically flat while their R&D and marketing costs continue to run high, forcing some to reexamine how they sell to a traditionally demanding broadcast market.

Whether broadcasters embrace 4K production or ATSC 3.0 takes off remains uncertain. Safer technology trends to bet on today are remote, or “at-home,” production for both sports and news; cloud-based, pay-as-you-go services for content preparation, program playout and OTT streaming; and using artificial intelligence and machine learning to aid production, archiving and even content investment decisions.

Show attendance was down slightly, with NAB estimating attendance in the 95,000 range compared to 103,000 last year, according to NAB EVP Dennis Wharton.

There were just over 1,700 exhibitors, compared to more than 1,800 last year, while total exhibit space was comparable at just over 1 million square feet. Wharton said that in the last 15 years, the NAB Show has ranged from a low of 83,000 attendees to a peak of 113,000.

“Some customers are not sending anybody,” said Joe D’Amico, vice president of JVC Professional Video. He noted that while JVC has maintained the same size booth in the Central Hall, some large competitors have downsized.

“You’ve got to justify the cost [of the big booth],” said D’Amico.

From this reporter’s perspective, the South Lower and Upper Halls were the place to be, having substantially more traffic than the Central and North Halls.

Much of the North Hall was given over to broadcaster-funded technology demonstrations such as NHK’s demonstrations of 8K Ultra-HD, which is due for regular satellite distribution in Japan come December, and NAB’s demonstrations of ATSC 3.0 technology.

Revenues Flat Among Media Tech Firms

A dip in NAB attendance is understandable given the state of the market. Overall revenues for the media technology industry remain stagnant, with a compound annual growth rate of only 1.08% from 2009 to 2017 according to research from industry trade group IABM and analyst firm Devoncroft Partners.

While the market has stabilized somewhat after a steep drop in revenues in 2012 (when the long transition to HD finally wrapped up), the future remains unclear. 

Devoncroft founder Joe Zaller, speaking at the Devoncroft Summit on Sunday, noted that the last “pause in spending” coincided with a lot of M&A activity among broadcast customers.

That is happening again, at the same time that another technical shift, the industry’s adoption of file-based workflows, is almost complete. Zaller said that file-based operations had a 63% adoption rate in 2011 and are at 80% today.

“I don’t know if history is going to repeat itself,” he said.

Consolidation and reorganization among major vendors continues. Belden scooped up Snell Advanced Media from private equity firm LDC in February for $94.2 million and folded it into Grass Valley.

On Monday, privately-held Imagine Communications announced that it was separating into two divisions, one focused on advertising technology and the other on playout and networking.

Imagine CEO Tom Cotney said the company’s IP-based playout systems were showing some growth but described the overall market as “a race to zero on the margins” with too many vendors chasing too few dollars.

Several media technology CEOs speaking at the Devoncroft conference shared Cotney’s sentiment.

“The industry is in major disruption, from the customers to the technology suppliers,” said Avid CEO Jeff Rosica. “We all have to navigate a different path from the last few years, and there are going to be winners and losers.”

A Crowded Marketplace

Belden CEO John Stroup agreed that the broadcast technology market is still too crowded. “I think the market is relatively unhealthy right now,” he said. “Customers desperately need higher levels of productivity and efficiency, and the market has tremendous problems with capacity. It’s sized on an old business model, with a bunch of folks chasing too few projects.

“And everyone’s only one product release away from Nirvana. In this period of time, it’s difficult for the industry to attract enough capital. If I was a big media company, I would be extremely concerned whether technologies are going to be funded the way they need to be funded.”

Harmonic CEO Patrick Harshman was more upbeat. “There’s a lot of change, and that translates to opportunities that are huge,” he said. “I think there are pockets of the industry that are healthy, and pockets struggling with change.

“It’s a mixed picture, and very fragmented. There’s a huge opportunity for greater efficiency across the industry, and a huge amount of intellectual property. But a lot of that is still consumed in custom integration, reinventing the wheel around IT technologies.”

Vizrt, which is owned by private equity firm Nordic Capital, enjoyed good business in Asia and a lot of growth in the U.S. in the second half of 2017, said CEO Michael Hallen.

He has reorganized R&D to get “more bang for the buck” and invested in artificial intelligence and production automation.

“The focus of growth are customers looking for efficiencies,” said Hallen. “We’ve had the most growth in the [production] automation part of our business.”

Belden, which like Avid and Harmonic is publicly traded, does most of its business outside of media in the industrial space. Its success there has given it plenty of cash to pursue acquisitions like SAM.

Stroup said that when comparing performance metrics like commercial productivity and R&D effectiveness to Belden’s other businesses, Grass Valley has the lowest metrics of the entire company.

And based on his knowledge of other broadcast vendors from Belden’s frequent M&A activity, he believes Grass Valley’s performance metrics probably lead the industry.

Stroup said the gross margins of the broadcast technology business are still healthy, but that the market needs to make its R&D and sales and marketing efforts way more efficient.

“We need to substantially reduce all the cost between gross margin and EBITDA,” Stroup said. “It’s not a gross margin problem. It’s just a lot of cost we need to run our companies. It requires a lot of R&D, customers are not buying at the pace we need them to buy, and it takes a lot of sales and marketing to cover those accounts.”

Of course, exhibiting at NAB has traditionally been most vendors’ biggest single sales and marketing outlay each year. In that respect, Belden has already gotten way more efficient, according to Devoncroft principal analyst Josh Stinehour. He showed a slide depicting the 12 companies in 2005 that now make up Grass Valley, which then rented aggregate booth space of 41,950 square feet. This year, Grass Valley rented 9,900 square feet. At $47 a square foot, that equates to $1.5 million in savings.

Stinehour also had two bar-graph slides that were particularly illustrative of Stroup’s point.

One showed the annual revenues of IT giants Microsoft, Cisco, Oracle and Hewlett Packard compared to those of Avid, Harmonic, Evertz and EVS; the broadcast vendors’ revenue was too small by comparison to even be displayed.

In the next slide, he showed the same companies’ NAB booth sizes, and the bar graphs were almost completely reversed, with the broadcast vendors’ booths dwarfing all but Cisco’s.

The Emergence Of Cisco

Cisco, which makes IP switches and blade servers and has an annual R&D budget of more than $6 billion, has become a significant player in broadcast as stations look to use IP networks and “virtualize” by running several different broadcast functions on a single general-purpose computer, sometimes in a remote location.

Media customers include NBCUniversal, Fox, Viacom and the BBC and vendor partners include EVS, Avid and Sony. 

The company has steadily grown its NAB presence in the past three years. It had a sizable booth anchoring the “Connected Media/IP Pavilion” in the South Hall, and was involved in virtualization demos with ChyronHego, Vizrt, Newtek and Ross Video, among others. 

“I think the industry is realizing we’re not going away,” said Bryan Bedford, Cisco’s global business development lead for sports, media and retail.

The point of entry for Cisco with most broadcast customers is as an SDI-to-IP replacement for their core routing infrastructure, explained Bedford. After that it can branch into more functionality such as playout and content management. 

In the demonstration with ChyronHego, a Cisco data center in its booth was receiving three live camera feeds from ChyronHego’s booth over a 6.5-gigabit-per-second IP link [10-gig, SMPTE 2022-6 standard].

Cisco blade servers were doing the computing for ChyronHego’s Live Compositor software system in order to operate rundowns, cut cameras, do mix effects and generate graphics, then sending it all back for display in the ChyronHego booth as a live show. 

The demo was an example of remote, or at-home production, a popular theme at the show. ChyronHego and Cisco say German network SWR is using a similar architecture for live production daily. 

Customers are looking to break out of the “one studio to one control room, and all in one physical location” mentality, said ChyronHego CEO Marco Lopez.

He said a “big consideration” is the expense of dedicating floors of an office building to a data center in a real estate market like Manhattan, when via IP networking that data center could be somewhere else, within reason —  given latency and cost considerations Cisco distinguished engineer Peter Bosch said the practical limit is 300 kilometers, or 186 miles.

“The physical hardware doesn’t have to be in the engine room,” said Lopez. “It can be in a completely different operation from where their talent is.”

Bedford predicts virtualized live production isn’t going to happen soon for most broadcasters, but says they are definitely interested and many were checking out the demo.

“On the virtualization side, the customers are ahead of where the vendors are,” said Bedford.

Heads In The Cloud

Besides virtualization, another model that broadcasters and cable programmers seem to be readily embracing are cloud-based services, most of them sold on a subscription or pay-as-you-go basis. OTT services have been a big driver.

Harmonic has 2,500 channels playing today in a mix of private and public clouds, said Harshman, with the bulk running on cloud giant Amazon Web Services. 

Harmonic sells media processing and playout for these OTT channels in a Software-as-a-Service model. That initially created some challenges for Harmonic with Wall Street, as instead of selling point products and immediately recognizing revenue, the company wound up with a lot of deferred revenue that it had to explain to analysts.

That backlog is now coming in, and the stickiness of a recurring-revenue business is looking more attractive. It does represent a significant change in the customer relationship, he noted.

“When we have a recurring revenue business, it really is a partnership,” Harshman said. “When we have a brand-new partnership with an OTT company, we’re a partner, and we’ll get paid when they get paid. It aligns our interests like never before.”

A subscription model is also proving popular with Avid’s customers, said Rosica. After signing a 10-year enterprise-wide deal with Sinclair Broadcast Group in 2015 to sell its editing and content management services on a subscription basis, Avid has broadly extended that model.

Rosica said half its contracts last year were recurring in nature.

“You could stick with point-product purchases, but I don’t think that scales well,” said Rosica. “This gives [Sinclair] scale, commonality across the enterprise and it lowers their per-unit cost. Since then we’ve signed over 40 agreements like that. Subscription is our biggest growth engine in the software business.”

Richard Friedel, EVP and GM of Fox Networks engineering and operations, said at Devoncroft that broadcasters are in an “as-a-service world now, put whatever letter you want in front.”

“There’s no reason to build our own infrastructures like the old days,” said Friedel. “If you can rent it, you should rent it.”

AWS Elemental, which previously sold its encoding and transcoding technology on a licensed basis as Elemental Technologies, doubled its customer base in the first 60 days after being rolled into Amazon Web Services and adopting a pay-as-you-go model, said Chief Marketing Officer Keith Wymbs. Then it doubled its customer base in the next 60 days. 

The jump was directly related to eliminating the barrier to entry, Wymbs said. Instead of a two-month process of proposals, purchase orders and credit checks, now all a customer needs is an email address and a credit card to start processing and playing content through the AWS cloud. Wymbs said that AWS Elemental now handles everything from niche video players to live streaming Thursday Night Football to 180 countries.

“In general, most of media is lumpy, the activity goes up and down,” said Wymbs. “That’s perfect for clouds. Most traditional vendors will sell you islands of data centers, and in reality, that’s a lot of capacity that gets wasted. We virtualize across a million accounts a month.”

Read all of TVNewsCheck‘s NAB 2018 news here.