What Can Become of Ericsson’s Media Unit?

On March 28 (2017), Ericsson announced that it was looking at strategic options, including a partnership or divestment of its media business. This could not be considered a surprise after Ericsson’s revelation in early March that its media unit’s operating income showed a 25% revenue decrease in 2016, accelerating to 33% in the fourth quarter.

Ericsson retained the organization of its media business, which now comprises two segments, but it separated it from the “services” (OSS/BSS) organization in this period of transition.

• “Ericsson Media Solutions,” the media platform business, includes the encoding technology and middleware portfolio, including Mediaroom, acquired from Microsoft, and MediaFirst, the cloud-oriented solutions derivate. This business has more of an operator focus and is more technology-driven. This also includes the Ericsson encoding portfolio as well as the Envivio acquisition.
• The Ericsson Broadcast and Media Services unit includes the Technicolor Broadcast center and Red Bee acquisitions; it has much more of a broadcaster focus and is more service-driven. This focus includes broadcast playout, access services (captioning/transcription), metadata and graphics (Piero), and creative services

It helps to take a step back and consider the client requirements before thinking further about how value within the media solutions can be increased.

Network Service Providers have been primarily investing in scale—mergers and acquisitions (M&A)—to increase the efficiency of both content licensing costs as well as research costs. Ericsson Media Solutions’s sweet spot of telcos providing IPTV services has leveled off a bit more internationally than may have been expected. It has not been so much of a technology-related problem; a large number of consumers do not distinguish between technical features of a satellite, cable, or IPTV service (i.e., characteristics such as video quality (driven by constrained bitrate) are under-appreciated, fast channel change works well enough, etc.). Ultimately, however, a lot of the telcos have spent their CAPEX dollars on mobile networks rather than investing in large content libraries or expensive marketing campaigns, thus capping their market penetration a little earlier than may have been expected 3 to 5 years ago. From a technology perspective as well, IP distribution fits quite well within networking equipment, and some of the value of the Mediaroom solution (some of which was owned by Alcatel-Lucent, now part of Nokia, as the key Mediaroom system integrator) dissipated. Key elements of the middleware platform, including the set-top box architecture, dissipated in value with API-based architectures, Android and RDK initiatives, etc. Key elements of content management, subscriber management, and user experience remain critical, but these are areas in which Mediaroom has historically been a bit inflexible (and expensive) for operator needs. There is no doubt that this side of the business saw significant revenue declines in the presence of a wide variety of alternative options, from do-it-yourself to online video platforms and standalone content management systems.

Broadcasters are making a rapid shift from SDI-based broadcast infrastructure to IP-based broadcast infrastructure. Content producers, especially in Europe, continue to rely on outsourced services, especially on the production, services, and playout products. Major content owners and distributors are investing heavily in their own media distribution platforms; this likely wiped out some of the synergies Ericsson may have been able to leverage between the broadcast services and platform business. Major media brands investment in captive workflows such as that of Comcast Tech Solutions (CTS) as well as NBC’s recent tie-up of Turner’s iStreamPlanet with Playmaker Media, and new investments such as Disney and Discovery’s investment in BAMTech, are well known, and decrease the reliance on third parties such as Ericsson. In the UK, TVPlayer’s SimpleStream platform is one example of an OVP providing this type of broadcast service. The broadcast services side of the business likely has not seen the same revenue drop that the platform side of the business saw; however, it was never an adequate gross margin business for a technology player like Ericsson with large management, R&D, and network costs.

Many Ericsson personnel expressed a relatively positive and continuous story about the business unit, implying that a partnership to help in the go-to-market strategy could be useful. Certainly, a joint venture with a coalition of broadcast organizations taking between 30% to 50% ownership of the media unit, and bringing an implicit or contractual agreement with the investment to shift their broadcasting requirements to Ericsson, could help support continuity and planning in the broadcast services arm. While a number of operators brought middleware development in house (i.e., Comcast TVWorks), no operator stands out as a likely candidate, and the encoding platforms and other infrastructure wouldn’t be well served by this approach.

From a competitive standpoint, Huawei has been strong but is probably not the sole cause for Ericsson’s problems—the whole market is going through some difficult times. Several players that are interesting to comment on include:

• Huawei has been winning an increasing number of mobile-centric video projects, starting in Asia but extending into Eastern and then Western Europe. These projects, while representing small value-added components to larger mobile network buildouts, are just the sort of opportunity that Ericsson should have capitalized on better with the Mediaroom business but failed to.
• ARRIS has been consolidating the cable space with some good wins in the IPTV space and now (with the acquisition of Pace) some satellite solutions as well. ARRIS divested of middleware (partnering heavily with Espial but working with a number of other players), placing a heavy focus on broadband network and a secondary focus on integration services.
• Cisco’s service provider video business has had some similar problems to Ericsson, caught in the shift from classic middleware to more online services. However, Cisco’s key wins in the UCS computing platform for video applications (which, from a revenue standpoint, sit outside the service provider video group [SPVG]) allowed Cisco to stay the course a bit better than Ericsson. Cisco’s SPVG has seen revenue declines after accounting for the integration of NDS and the divestment of the set-top box lines, but the UCS platform, accounted for in the networking division, has likely seen increase in media customers.
• NAGRA remained a strong and independent competitor. NAGRA’s acquisition of Conax gave it an effective low-end and mid-range product line, allowing it to engage with a larger variety of operator. The software-only focus of NAGRA puts it in a strong winning position against other competitors who had integrated network and software components.
• Nokia took on Alcatel-Lucent, which had the hardware components of video but not the software components. Nokia continues to invest in and win deployments of media distribution technology. 

So, What Can Become of the Media Services Unit?

• Piksel or other private-equity backed services organizations could bulk up with the media solutions businesses. Again, this services business needs to be well managed with modest (40% to 50%) gross margins and net margins in the 9% to 13% range through careful platform development, cost management, and achievement of adequate scale and long-term broadcaster commitments to make investments pay off.
• UK-based Arqiva, French-based TDF, or similar companies that come from single-market broadcasting environments and are looking to extend to a pan-European footprint, could tap into these markets.

And the Media Platform?

• Nokia could extend from the core network solutions back into the software elements and attempt to offer a more complete solution; this would bring Mediaroom back together again.
• IBM has been amassing some video capability, including ClearLeap and Ustream. Despite some media customers, the go-to-market is targeted primarily to enterprise video applications. If IBM decides it wants to get more serious about the media space, it could take the media platform and offer a full content management system sooner.
• Customer services, billing, and analytics are growing to be more important in video services. Players such as Amdocs and Oracle are looking at media as a bigger growth area. Either one could grow back into distribution with a client-centric software stack, such as Mediaroom.
• Imagine Communications has grown from a broadcast-centric company (Harris Broadcast) and integrated a more full media stack. Imagine continues to push IP transformation in the broadcast environment (ABC/Disney is one significant public case study). In addition, based on the acquisition of the “little” Imagine Communications acquisition (prior to changing the parent company’s name), Imagine Communications started to gain some distribution-centric wins. Imagine Communications has the private equity backing and operational discipline to integrate and profit from the Ericsson Media Platform—although it would likely consider some of the portfolio to be too close to assets it already has.

Who Could Benefit from Both Parts of the Solution?

• Satellite companies such as SES or Eutelsat need to become less network-centric and could benefit in media services from moving closer to playout, as well as gaining a good multi-network distribution technology suite.
• In addition to Ericsson, Verimatrix is on the market. Most players (such as NAGRA-OpenTV, Viaccess-Orca, and legacy NDS, which was acquired by Cisco) invested in both the middleware and content protection (CAS/DRM) sides of the market. Bringing together the Ericsson middleware and Verimatrix CAS/DRM solutions will enhance the value of either piece on its own.

Let the bidding begin!