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Navigating Grass Valley through uncertain waters

Judging by two major announcements this year alone by vendors divesting their broadcast divisions, it’s clearly not easy running a successful broadcast equipment company in today’s highly competitive environment.

When Alain Andreoli took over the reins of Grass Valley as president and CEO some 18 months ago, the business was struggling under the weight of a bloated staff, mismanaged sales channels and a hodgepodge 2,500-item product portfolio. It was 2010 and Technicolor (a division of Thomson), clearly not willing to stick it out, had sold the underperforming Grass Valley business to venture capital firm Francisco Partners, in San Francisco.

Oh, and the broadcast industry was going through one of its most turbulent periods of change, ushering in a new era of file-based technology and resource consolidation. Equipment spending was stagnant.

At the time there was talk on the street that Francisco Partners was simply looking for an opportunity to hold onto Grass Valley for a few years and then flip it for a profit. Today, even with Grass Valley more profitable than it was under Thomson ownership, Andreoli is fighting this perception among suspicious customers and working hard to return Grass Valley to its once dominant status.

“We are at the beginning of a process to transform Grass Valley into a comprehensive, solutions-based company that you as a customer will want to do business with,” Andreoli said, adding—without getting specific—that using this strategy Grass Valley has been profitable for its last three quarters. “We’re now focused on offering less products that individually do more. Software is the link across the different product lines. Customers want a seamless connection to eliminate redundant processes and get more work done. That’s what we’re giving them.”

The U.S. station market is “looking good” this year due to the presidential elections and “promising” in Europe due to the Olympics, but Andreoli said next year would be a bit more difficult in both regions. In fact, he called it a “tough” outlook.

Indeed, the short-term economic forecast among U.S. broadcasters (which makes up about 25 percent of Grass Valley’s overall business) is not so rosy and Andreoli is the first to admit it. Andreoli recently convened a company Customer Advisory Board—that includes several major broadcast networks and station groups—that told him 2013 will be a challenge for them and spending will be flat as a result. That’s why he’s emphasizes that Grass Valley is and has always been a global company that, when times are tough in one region, can look to another for increased sales. Currently emerging markets like China, India, and Latin America are bolstering the company’s bottom line.

“There are markets where we are doing very well and others where we need to do a better job,” he said. “We are projecting our U.S. and European sales to be tough over the next year. In general, the broadcast market is not considered to be a growth market. Advertising revenue is not growing. So what you see, in general, is that U.S. station budgets are stable and will be for the time being.”

He said there’s a clear shift among customer spending, from more traditional hardware products to IT-centric solutions, and that’s exactly where he is positioning Grass Valley to be. Grass Valley is also spending less on physical manufacturing and trade shows (the company has reduced its exhibit space at the NAB and IBC conventions by 10 to 15 percent the past two years) and passing this savings on to customers. To ensure success, Andreoli said, he’s got to keep the cost of the technology competitive.

“Of course, we expect to make money at this as well,” Andreoli said. “Emerging markets remain the positive because they are investing in micro channels and leapfrogging technology to go digital and HD. Will it last? We’re not sure. But for the time being, these markets are quite appealing to us (and other vendors as well).”

He said Grass Valley’s reorganized management team has developed a long-term strategy to provide comprehensive solutions [versus point products] and software and services.

“Customers need a trusted adviser to help them design and implement overarching platforms, not a bunch of pieces of technology, to get the job done.”

Yet he admits that being a “trusted advisor” means Grass Valley spends more resources (time and support costs) on individual sales, perhaps leading to lower profit. Andreoli said he believes Grass Valley maintains the biggest single R&D budget in the whole industry. The company employs more than 400 product development engineers around the world (accounting for 15 percent of its annual budget) and owner Francisco Partners has committed $50 million in R&D spending this fiscal year alone.

“We’re trying to show the industry that we as a company are not going anywhere,” Andreoli said. “We can't expect customers to invest in our technology if they think we won’t be around very long. Sometimes long-term profitability is more important than the short term.”

The next step for Grass Valley, he said, is to continue to develop “very bold, new products” that rely heavily on software. It also must figure out a way to offer more economic pricing across its diverse product lines. That, according to Andreoli, means offering value and functionality at multiple price points. For example, a new production switcher could be purchased with a few features and then be upgraded via software to enhance its capability. The same could be said for its next-generation cameras, routers and servers.

In addition to improving the existing product line, Andreoli said Francisco Partners has earmarked $3 billion to acquire new companies to help quickly build out integrated solutions for its customers. They have even hired a full-time corporate development manager (Graham Sharp) to address this aspect of the company’s business strategy.

In light of recent news that Harris Broadcast was divesting its broadcast division and Belden has agreed to acquire Miranda Technologies, Andreoli said vendor consolidation is a natural part of the industry’s evolution.

“Consolidation makes sense,” he said, “because this is not a growth market and many technology suppliers are struggling to find a profitable path to the future. Therefore, it makes sense to have fewer vendors servicing this market. We are one of the companies that have decided to invest in this business and make it work.”

With today’s economic environment and price-sensitive buying habits, it’s tough for a broadcast equipment vendor to grow organically. The key is to consider adding new technology and new companies that are complimentary with Grass Valley’s existing products.

“This is critical to our growth strategy when looking at a market that is not growing so fast,” Andreoli said. “I would say acquisitions are at the core of our agenda.

“Grass Valley is fortunate because Francisco Partners is committed to the broadcast market, so it makes our job more rewarding,” Andreoli said. “They see a unique opportunity in that because this has been a tough market, the valuation of other companies is more attractive to them for acquisition. They also believe that customers in this industry are the future of new media delivery and consumption. That’s an area that will only grow in importance over time. Live events and broadband TV are key to the future for everyone involved. If Grass Valley can support these professionals and make them successful in their efforts to develop the next-generation of content and delivery, we will be successful ourselves.”

Having gone through five different owners since its founding in 1959, Grass Valley remains a strong brand that can reach the entire ecosystem of broadcasters and production professionals, now that its “house” is in order. However, some internal cost cutting continues and in order to “make the cost structure of the company very efficient.”

So, for Andreoli and the entire Grass Valley team, the long-term future of this industry appears bright. It’s the short term that the company must weather. He said his team did a very good job of understanding where the industry is going and planned accordingly.

“We had to start by making Grass Valley a healthy company,” Andreoli said. “We’re one of the few iconic companies that has supported the broadcast business for more than 50 years. Not many companies can say that. There’s a loyalty and commitment among our customers that we do not want to disturb. When you are an independent company it is a bit harder in some ways, but we are embracing our role in the industry and are confidant we are on the right track.”