Tech Manufacturers Face Headwinds – Again

The media and entertainment technology manufacturing industry experienced compounded revenue growth of 1.5% in 2016, up slightly from 2015 but down significantly from the 4.9% growth generated in 2009, according to Devoncroft Partners’ annual state-of-the-industry report.

The industry, represented by most of the 1,700 companies populating the NAB exhibition floor in Las Vegas, grew slightly faster last year in part because of the Olympics, but has struggled to match the faster expansion seen earlier in the decade, when broadcasters, producers and other companies were upgrading their facilities to HD.

Tepid advertising growth, restrained by equally slow GDP growth, holds down growth at media companies, said Devoncroft analyst Josh Stinehour.

Along with that, subscription revenue growth, tempered by lackluster household formation and disposable income growth, has also been slow, he said. Likewise, public media anticipate cuts — rather than increases — in government funding.

Stinehour, along with firm founder Joe Zaller, presented the report at the NAB Show last week during Devoncroft’s Media Technology Business Summit.

The summit also featured a panel of vendor CEOs comprising David Ross of Ross Video, John Stroup of Belden and Johan Apel of ChyronHego. They addressed some of the challenges facing their industry.

Competition from IT giants is also having an impact, said Zaller. “Media company spending on technology grew 4.4% in 2016,” he said. “Media companies report they are buying less from traditional broadcast vendors and more from IT companies — and some are building their own solutions.”

The good news: ATSC 3.0 will draw investment from some media companies, Stinehour said, and the government will spend $2 billion funding TV stations’ move to new channels in the wake of the spectrum repack.

“The question is whether investment in the repack will add up to a giant sucking sound that will distract media companies from investing in other initiatives,” Stinehour said.

And while TV station groups work toward the government’s 39-month deadline for moving to new channels, they will also be consolidating, now that the FCC has relaxed the national ownership cap on station ownership.

“The toes are at the line for consolidation,” Stinehour said. “It will be the last gasp of consolidation in the U.S. TV industry, and will affect rental centers, integrators and playout centers.

“We could get to a world in which there are only 10 companies in the U.S. TV [station group] space.”

Big customer concentration adds up to more clout on the part of technology buyers, Stinehour said, noting that Comcast has been taking warrants to purchase Harmonic stock at a lower price when it acquires technology from the manufacturer. “Customers can buy your product and take a pound of flesh from your equity,” he said.

More not-so-terrific news: The IP transition has been moving but it hasn’t been booming. “We found 16 software-defined network installations in the world,” Stinehour said. “All of the IP standards — AIMS, Aspen, etc. — have less than a 5% adoption rate.”

Another sign of industry stress: Ericsson announced it’s exploring strategic opportunities for its media business.“That means they are for sale,” Stinehour said. “Media represents 5% of their business and their profit from it is negative low teens.”

One issue nagging at the edges of the IP transition lies in the expense of hiring more IT engineers. “The big issue people don’t want to talk about is the fact that an IT engineer is more expensive than an RF engineer,” Stinehour said. “There’s a 30% premium and that begs the question: If you teach a broadcast engineer IT skills you will need to pay him more, or you get a more expensive IT engineer and teach him broadcast.”

Still another challenge: media companies have been valued partly on depreciation and amortization for many years, but the IP transition will force them to shift to paying monthly fees for access to software platforms. “How will customers decouple themselves from [the model they’ve been using]?” Stinehour asked.

Manufacturers must adapt to the same model and it won’t be easy, Stinehour said. “Adobe went down 20% in revenue because of how it amortized revenue.”

The good news? The cloud is rising on the list of technologies drawing investment from media companies. “SMPTE 2110 and the cloud are the way to go,” Zaller said, but with a caveat: when will media companies invest in these in a big way? “That’s what’s hard to figure out.”

Manufacturers are responding to the challenges of vast technology shifts in a highly competitive, unconsolidated industry, in a variety of ways. As much as 70% of R&D investment at Ross Video goes into “existing products and customers,” said the company’s CEO, David Ross, “We’re investing in keeping customers happy.”

Belden’s John Stroup said it’s hard to know how much to invest. “Of all the industries we are in, this is the one where the economic capabilities of the vendors are the least developed,” he said. “That creates a lot of stress for us. We would prefer that all the vendors do a better job of investment.

“We are all searching for a level of scale that you need to generate the revenue that gives you the scale from and R&D point of view.”

At ChyronHego, on the other hand, 100% of R&D investment goes to the IP transition. “We are putting all our investment in software,” said CEO Johan Apel.

Asked whether manufacturers were getting creative with financing solutions for media companies struggling with the transition from capex to opex budgeting, Stroup replied: “We are exploring models like leasing, but we haven’t seen a lot of change in the way our customers want to do things. A financial model won’t entice them to invest if a product isn’t in demand this year.”

Ross appeared to agree. “This transition is so confused and unclear as to when all the vendors will have it together and it will work,” he said.

All three manufacturing company CEOs predicted more consolidation in their industry and indicated they’d be buyers rather than sellers — at least in the short term.

“We’ve bought 12 companies in the last seven years,” Ross said, noting that one of his rules is to acquire companies that are no more than 10% of the size of Ross Video. “It helps with integrating people and products and it ensures that I won’t kill the company.”

Asked if Belden, which owns Grass Valley, is “overweighted” in broadcast, Stroup said that Belden is positioned to ride out the market’s challenges. Half of Belden’s business lies in infrastructure, Stroup said. “Broadband is enormously predictable and has good margins. It’s a significant source for us to invest in the Grass Valley business.

“We view ourselves as good to consolidate. We prefer large companies and are interested in acquiring companies that are under-managed and not performing where we think they could be.”

Likewise ChyronHego’s Apel: “We are trying to be a smart consolidator in our space. Our heritage is software.”

Read all of TVNewsCheck‘s NAB 2017 news here.