Last week, Belden announced the divestiture of Grass Valley, one of the broadcast industry’s largest vendors. What does this mean for the industry and the outlook for media and entertainment as a whole?
TV Technology Editor in Chief Tom Butts talked with Grass Valley CEO Timothy Shoulders to find out.
TV Technology: Why is Belden selling Grass Valley?
Timothy Shoulders: There are really two reasons: The first reason is that every time Belden bought one of these businesses, whether it was SAM or Grass Valley, they came into it thinking and seeing ahead that there were going to be positive market tailwinds that would carry the business through growth. And they could bring the businesses together, lean out the back office functions, lean out the go to market and put it in a position where they could reap the growth upside with a combined stronger portfolio and follow the market trend upward.
Well the market hasn't really trended upward. As a matter of fact, it follows pretty typical patterns of bouncing up when we have these big international sporting events, and then falling back. The market has never been positive over the last six years. After six years of expecting the market to grow and it doesn't, you just eventually lose patience.
The other factor that's a little more difficult is that this business—outside of our support agreements—typically doesn't carry a deep backlog. So we put to revenue what we record, what we book from customers in a given quarter. And a lot of that activity compresses around the end of the quarter.
So it's always difficult to give Belden management a good perspective on where the business is going to land in any given quarter, good or bad. We live or die by by landing large projects and oftentimes we think we've got something in hand and in the last few days for one reason or the other, it'll slip out of a quarter. You saw that with Harmonic this quarter in a very public way.
Those types of things happen and that's really frustrating. And Belden has a track record—over the 10 years prior to Grass Valley—of being very good at forecasting the cycles of the business and what their businesses in industrial and enterprise are doing. And we were never able to figure out how to properly forecast Grass Valley. So those are the negatives and the reason that the board of directors of Belden decided it was time to divest, but ultimately one thing Belden did do well was to build a strong, diverse, profitable business with a global footprint.
And frankly a product portfolio that I would put against anybody in the industry. Typically, if we play in a category, we're number one or number two in that category, and we just need to live up to our promise to build solution value into our own products so that customers want to buy more Grass Valley, incorporate more Grass Valley into their workflows.
TVT: How are you positioning this as a positive for your customers?
TS: For the Grass Valley business, it’s the chance to go through the business transformation we need to go through from a technology side—from a business that is primarily proprietary hardware business to a business that eventually needs to become a software and commercial-off-the-shelf as well as cloud. We've gone through part of that transition and I think part of that's what's frustrated Belden. But to be able to take the revenue impact that comes with going through that transition without the burden of hitting quarterly revenue performance targets set—when you're part of a publicly traded company—I think it'll help us innovate faster.
TVT: So you think being a part of a publicly traded company hurt the business in the end?
TS: Belden's a publicly traded company with quarterly commitments to its shareholders, and there's a lot of pressure on Grass Valley to deliver those quarterly commitments, and a broadcast market that is really moved by things like... it's a very niche market. It's moved by things like major events, the Olympics, the FIFA World Cup. It's moved by major contract negotiations for sports rights and that creates a lot of volatility in the business.
That was stressful for Belden, which is why they're separating from the business. But as you can imagine, in order to mitigate the impact of that, they put a lot of pressure on the Grass Valley business, so to a certain extent, you get a bit wrapped up in “short term, quarter to quarter thinking.” Under private equity ownership, we’ll be able to execute our strategic plan, which is all around evolving the business from proprietary hardware to software COTS and cloud. That it will be a breath of fresh air and give us the cover we need to be able to continue to evolve to take advantage of the solutions portfolio we have.
One of the challenges we have is that the solutions portfolio has been assembled from many different companies over time. And we operate under various software stack and software architecture principles in the different parts of the portfolio. Now we can combine all of that without these quarterly revenue pressures and really live out our destiny, which is to provide integrated solutions to broadcasters and media companies that help them improve their workflows, find efficiencies in their workflows and frankly maximize the use of their creative inventory, their rights and other properties they own.
TVT: When we ran the initial story, one of our commenters mentioned that this sale is symbolic of what’s happening in our industry right now, mentioning that "what used to require specialized knowledge and lots of rack space now can be done on a laptop." Do you agree with that statement?
TS: In some cases, yeah, that's true, although I would still argue that doing complex things like switching video over IP, that's rare—the companies who've been able to do that successfully. [Grass Valley being one of those companies].
But I don't think it's quite as simple as just baking it down into, "Well anybody can do what the broadcast industry needs." Actually, I think it's quite different because frankly I think what broadcast companies are searching for are vendors who can help remove risks from their projects. They're dealing with smaller budgets, they can't afford overruns. They've got, in some cases, IT overlords now or IT people in charge of their businesses. And what they're looking for is more certainty in their projects. One way to think about it is “less moving parts”—fewer vendors with more solutions, value, more stable platforms using common software architecture. Those are things that I don't think startups are going to be able to provide as readily as a company like Grass Valley.
TVT: Do you think the industry is moving to IP too slowly? Is it basically our expectations not panning out, based on what we hear?
TS: I've been with Grass Valley for the past two years, but I've been with Belden since prior to when they purchased Grass Valley and I've been part of the Belden leadership and management team through that time. And we're a close knit management team. So I saw what it looked like when Belden owned Miranda and then purchased Grass Valley, and then I was part of the Belden broadcast cable business in 2016, so I worked really closely with Marco [Lopez] [the CEO at the time] and the Grass Valley team. And you could see that there was an excitement around IP growing significantly year over year. That was the expectation.
And the reality was if we would have really understood where we were on the hype curve, we would've seen we were actually at the point where it was challenging two or three years ago, hell even last year, in some cases we were wrapping up projects that were challenging. Now we've gotten to the point where IP is becoming more simple to install. It's still complicated, it's still a challenge but it's becoming more normal and sort of standard operating procedure, and now we're seeing a significant kick up in our IP sales. But I suspect it's about two years too late for Belden's appetite.
TVT: What would you say is the most revenue successful division within Grass Valley now? As far as looking at particular markets?
TS: Our switchers business has been fantastic this year—that's the one area that we're really excited about. We've got some significant wind in our sails in switchers and we're excited to be launching some new products at NAB that I think are going to continue that trend. And in North America we're headed into another rights negotiation window, which I think will even be better. I think the truck manufacturers will also increase their purchasing down the road.
And IP is the other one, our IP infrastructure has steadily increased. We're up almost 100% over the prior year and it looks like if I look at the backlog and the funnel I have for the next two quarters, our IP infrastructure business is likely to double again. So I think we're finally hitting that inflection point with IP.
TVT: How do you envision this divestiture playing out? Will pieces and parts be sold off individually? Will GV stay intact on the sale block?
TS: I'm glad you asked, this is a really important point. The process has been going on for some time now and we believe we're close to the end of the process. As a matter of fact, [Belden CEO] John Stroup expects to try to get something done within the quarter to sell off Grass Valley in its entirety—everything from the cameras all the way through the distribution—all together as one.
We think there's a lot of power in the platform we have, the geographical reach that our scale gives us as well as the product portfolio being connected to one another. What makes me excited about Grass Valley and interested in leading Grass Valley into the future? It's that I think we know so much about these various workflows that as we migrate them onto a common platform using new software architecture principles, and we present our customers with new models to “pay as you go” and things like that. I think we really have the opportunity to be drivers of innovation in the industry and we can solve a lot of problems for our customers.
TVT: Grass Valley has a long history of being acquired and sold. What do you think this latest development says about Grass's reputation in the industry?
TS: Yeah. I will tell you the one thing that I'm not met with when I talk to my customers is surprise. So most of them have been around for a while and have been through a couple turns of the screw when it comes to Grass Valley's ownership.
I think it's not atypical in this industry I think for companies to change ownership. I think it honestly says something about the resilience of Grass Valley, the brand and the products and the loyalty that customers have to Grass Valley, to transfer regardless of who owns the business. But one of the things that I'm looking forward to is the potential private equity sponsors we're talking to, have a deep interest in the media technology industry. They understand it's a cyclical industry, that requires a lot of R&D investment to make it run and keep the innovation engine going. And you really need some patience and a long-term view, and I think we found some potential sponsors that believe that way.
TVT: There's been a lot of consolidation in our industry, including in the OB mobile production side, which has been a strong part of the Grass Valley business. How has that affected your business?
TS: To be honest with you, I would say net, the consolidation on the live production side has been pretty good to us, because we have good relationships with some of the larger players in that space. So as they buy up the smaller players, they're really disciplined in their purchasing and they look to well established companies like Grass Valley to serve their needs.
So I think that consolidation's been a net positive. We're looking as a business at ways to help them with innovative workflows, so they can do new and different types of remote production and extend the use of their assets as well. So if I look at somebody like NEP, I see them as a key customer for us that we want to innovate with. And I think our scale and frankly the depth of our product portfolio helps us in our relationship with them, because it allows us to simplify some of their purchasing and simplify their broadcast workflows.
TVT: What about on the side of the broadcast industry? As far as the changes going on there?
TS: That's been more challenging for us. If you think about the three businesses that Grass Valley includes—Miranda, Grass Valley and SAM—the single biggest disrupting factor has been the advent of the online video platform, i.e. Netflix. For the broadcast industry it's increased the cost of content and it's pushed our customers to invest in other platforms outside of linear television. And so that's constrained their budgets. They've had to spend less on linear television, which has negatively impacted the business over the last few years—which is part of the problem that Belden had with the results the business was producing for them. So that consolidation in the short term is very impactful because while it's going on, customers won't spend at all.
But regarding consolidation, over the long term I think it'll wash out a bit. I think where we stand as Grass Valley, the bigger our customers get, the more disciplined they are about purchasing. When they get disciplined about purchasing, they look for companies that have size and scale and stability. And while we're changing ownership, that doesn't change the fact that we're one of the largest media technology businesses in the industry, and we are a well-run, profitable business. And you can see that in the financials Belden included with their press release today. So we're top tier in the industry and profitability and certainly one of the top tier and one of the top companies in terms of size.
Over the last three quarters, Grass Valley revenue has actually been pretty stable—around $88 million a quarter, and our EBIDTA contribution's around 13%, and we always see a spike in the fourth quarter because of how budgets work with our customers. We expect fourth quarter to be about 10-15% better than those other quarters, and we'd see a spike in our EBITDA as a result. So you can see a very stable profitable business that—even when you add the last 12 months—is considerable size, larger than most other media technology companies.
The only types of companies we've been engaged with seriously so far are private equity groups that are interested in the media tech space. So I expect we'll be finished with the process in a matter of months, not quarters, and the net result will be a Grass Valley as the largest media technology holding in the portfolio. And there won't be any other businesses in the portfolio that have a technology overlap with Grass Valley.