Mergers and combining resources in the Digital Video market place..........................
digitaltelevision.com
Merger Mania Sweeps The Industry
Competitors Align While Digital Adoption Lags
By Deborah McAdams
Digital broadcasting arrived this year with all the fanfare of a snipe hunt, especially for manufacturers expecting a buying bonanza. Disappointing equipment sales and flagging revenues are driving several competitors to join forces, while others seek to obtain new technology through acquisitions.
"We're doing partnerships because we're forced to," said Tim Thorsteinson, president of Tektronix, Video and Networking Division, which formed alliances with FORE Systems, Mitsubishi and Avid Technology, all within the six months between NAB and IBC '98. "We're forced to by the economics of the business situation,"
Avid Technology, in turn, purchased Microsoft subsidiary Softimage in August, just before Autodesk announced its intention to acquire Discreet Logic in September.
Avid's president and chief executive officer, Bill Miller, considers the alliances more of a natural progression of the video industry than the economic necessity indicated by Thorsteinson.
"The media production process is moving from being a set of distinct steps--editing, special effects and audio--to a point in the not-too-distant future where it's done on the same system," Miller said. "If you're going to have that kind of collaboration, companies need to have their hands on more of the process."
Avid, based in Tewksbury, MA, thus expanded its position with the purchase of Canadian software maker Softimage from Microsoft, Inc. for $84 million plus stock options. Miller said the Softimage acquisition was based on three criteria.
"One... our view is that in the future, the production systems for media creation will have to smoothly integrate multiple media types, 2D, 3D types, etc. [3D] technology is one that we lacked," he said. "Second, non-linear systems are ready to take over the television market. Third, at Softimage, they've been working on an architecture we think we can build on."
Tektronix sought partnerships to gain customers and shed expenses, particularly after the Asian collapse, that hit just as the company's video division yielded its first profit in years. Company share prices fell from around $47 in mid-March to $14 in early October, while the much-heralded market for digital broadcast equipment failed to materialize. Video orders at Tektronix dropped between 20 and 25 percent in the company's first quarter of fiscal 1999, ending Aug. 31, Thorsteinson said.
"Broadcasters," who comprise the majority of Tektronix's video customers, "are in a difficult position. We have major customers trying to take $30 to $40 million a year out of their budget," while facing buyouts, escalating program fees and increasing satellite competition.
"When you look at the turmoil in the supplier base, you only have to look at what's going on in the end-customer base," he said.
Tektronix intends to reach beyond the unpredictable broadcast industry and gain customers in videoconferencing through an alliance with FORE, a Pittsburgh, PA company specializing in video communications.
Conversely, the partnerships with Mitsubishi and Avid were expense cutters, according to those involved. Tektronix joined Mitsubishi in making HDTV encoders because the market wouldn't support research and development at both companies, Thorsteinson said.
"At this time, the encoder market is not big enough for Tek to do the R&D on encoding," he said. "If there was enough of a market for me to sink my 12 to 15 percent of R&D into something, we'd do it."
Likewise, Tektronix agreed to support Avid's news editing systems instead of continuing to develop its own Lightworks line for similar reasons--the $25 million market doesn't justify both companies spending $3.5 million on engineering.
"Together, we could spend $5 million and come up with a better product to serve that market," he said.
Unlike Tektronix, the majority of Avid's video business is in postproduction--85 percent of it in non-linear editing--yet the sluggish broadcast market and the Asian plunge took a toll. Avid's share prices fell more than 73 percent, from $45 in mid-May to around $12 in early October, and revenues for the quarter ending Sept. 31 fell short of expectations.
Miller attributed the shortfall to delayed product releases related to Avid's business deals. "The Softimage acquisition and the Tek deal probably disrupted business somewhat," he said.
Conversely, an acquisition made by Pinnacle Systems in August, 1997 actually seemed to buffer the Mt. View, CA company from the economic chaos of '98. Pinnacle reported record sales this year, thanks in part to the company's $21 million acquisition of Miro Computer Products AG Digital Video Group.
(Sales rose from $37.4 million in 1997 to $105.2 million in Pinnacle's fiscal '98, ending June 30.)
Pinnacle is relatively small compared to Avid and Tektronix (with 323 employees compared to 1,600 and 7,800 respectively), yet this little company maintains a cash position comparable to both.
In fact, Marketguide.com indicates Tektronix held around $120 million in cash and securities at mid-year, with Avid reporting $114 million and Pinnacle reporting $91.3 million.
"If we see a technology in the market, we have the option to buy it," said Pinnacle President Mark Sanders.
"Now is the time to spend on technology, while marketshare is cheap," he said. "Later, branding and recognition will become more important. There used to be 10,000 customers around the world, and that's what video was. As the cost of these tools comes down, more people are getting involved.
"Right now, there are about 1,300 companies in video," he added. "About five are going to make a lot of money."
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