Comment: Think Locally, Grow Globally

During my nearly annual travels in South America this year I read Dan Rayburn’s recent breakdown of Brightcove's acquisition of Unicorn Media. His highlighting of the crazy valuations and the related daft expectations that are often being set about valuations in this industry was spot on in my opinion, and being away from home (the U.K.) and from the U.S. gave me some distance to reflect on the two markets with perhaps a little of an outsider's view.

It's also a view that, for a variety of reasons, is less data-based and more experiental-based than Dan’s focus on the U.S. territory. While, broadly speaking, Wall Street covers the entire U.S. market, we in Europe—which as a whole is far bigger than the U.S. market—end up with less empirical data for any given country territory than the consolidated U.S. market, and so we have to "go with our instinct" much more often than those U.S. market do.

In part this is due to the fragmentation in the European sector caused by our still relatively balkanised markets; despite the supposed economic union of the European Union, French companies still buy from French (speaking at least) suppliers, British companies still ape the Americans in the hope that they can "break the U.S. one day," the Germans tend to invest into markets to encourage them to buy German, and so on. Gathering trend data, market insight, and factual information across the EU involves taking into account so many variables specific for each territory that entering the U.S. and entering Belgium require potentially similar investments and depths of market research despite their dramatically differing market sizes.

This fragmentation of the market applies to many sectors of course, but in the case of streaming technology providers, where there are virtually no publicly listed streaming companies at all in Europe, published data is a rarity. Those European companies that have listed have (with few exceptions) burned bright on extremely overheated opening data and crazy forecast projections, buoyed up by the capitalisation of floatation, and then snuffed out like firework that has burned its fuel, leaving barely a warm ember. Sadly this then leaves investors with a bad impression of the European sector and makes them increasingly more risk averse, closing them off from making more regular, more sensible, smaller investments into more realistic and more modest projects. There is rarely a streaming company here in Europe that simply waits for good organic growth before it opts to accelerate using a market placement.

Meanwhile, U.S. companies treat the EU as if it is a single country and carpet bomb the markets here with a more simplistic "It worked at home, let's just rinse and repeat" approach, and since they are often the only game in town with a sustainable (significant) capital resource to develop the market, they once again become dominant in Europe, although with a real sense of forcing the local market to simply conform to the same service models and requirements that are offered to their local U.S. market—despite often significant cultural differences.

This lack of traction by European companies means that it appears that the U.S. is simply a more mature market.

Yes obviously the U.S. has had a culture of high tech for many years, and a less risk-averse VC market (often for the reasons above) to help accelerate the good ideas across the large consolidated U.S. populous. Obviously this means that the big names in our sector—such as Akamai, Amazon, Limelight, and Brightcove—have managed to attain tremendous momentum by the time they cross the Atlantic, and simply plow over the incumbent providers by sheer force of weight. Sometimes there has been consolidation and acquisition over here by such companies. But all too often that has not been the case. Small, bright startups in Europe, who really understand their client needs and sensitivities, do not often get partnered or bought. They simply get starved out by price wars from the larger, more commoditised U.S. players that only focus on rapidly increasing market share.

At best, as these local startups fail, the intellectual capital gets taken up by these U.S. companies to operate their European arms, and this doesn’t leave many European companies growing strongly and reaching a stage of maturity where they can float or seek second-round financing to then reach into the U.S. or Asia or other continental markets.

Often the best hope for these smaller homegrown startups to "stay local" is to find a close ally in one of the former incumbent public telecoms operators such as BT, Telefonica, or Deutsche Telecom. But despite the obvious alignment, these big telecoms companies are rarely able to deal with the micromanagement that companies addressing relatively small, complex and fast-moving niche sectors like streaming require, and so they falter and do silly impulsive things to get small tactical PR advantages over the larger U.S. companies, often led by "brown envelope deals" focused on the middle management’s private wealth and not the bigger picture of the telecom’s overall strategy in the growing sector. The wins are short lived and quickly buried—and this doesn’t represent a good thing for the streaming market at all.

I assume that by now there are many readers who are listing exceptions to what I am generalising about here, to flame me with in feedback. That's great; I write this to encourage discussion and debate.

And I'm not completely negative about the strategies that European startups are forced to emply. Even if the homegrown sector over here is rarely "mature" in terms of market capitalisation, it is worth noting that there is still a strong community of engineers who in fact have to work that much harder to innovate to stay in the game. While this may mean that there is often little to show when one looks at the London, Paris, Frankfurt, or other financial centers in terms of floated successful technology companies centered on streaming media, in fact the processes of innovation are quite mature. The startups that remain private are often sharp and very specialised, but have to focus on survival, without the luxury of easy access to capital and the bullish management experience to expand their market internationally. And so they remain local and hope that U.S. companies don’t consolidate the opportunities "above them" in their client relationships to their exclusion. There is no pretending: It is tough, and it makes Europe look like an immature emerging frontier market, where in fact is is simply a very fragmented mature market.

And so I am left reflecting on the fact that, despite abundant skill over here, we still find the companies selling the big contracts into the European Broadcasters are so frequently American.

The saying "you never got fired for buying from IBM" comes to mind here. I think all too often the due diligence process that big broadcasters go through is about as complex as "We've never heard of XYZ from Europe, despite their fantastic solution, but ABC is a big public American company we can sue if it all goes wrong, and we won’t be blamed for giving them the contract.’

And if ABC is saying it is a "big public American company," it is because it projects a market worth $10 gazillion and claims it has 30% of that market, so the prospect's perception of ABC is indeed that it is BIG. Contract won, and ABC gets a bit bigger, while XYZ starves into oblivion.

Its a good tactic for ABC, and perhaps XYZ just needs to be brazen and start making up some more numbers.

But before that happens, we need a reality check, and Dan’s comments come to mind strongly. Some of the market sizing claims we see are inching into the same level as we measure a country's gross domestic product (GDP): hundreds of millions of collars. And yet we see those companies actually earning barely double-digit million-dollar revenues after being in business for half a decade, meaning they have probably saturated their sales opportunities.

Those opportunities are not increasing in volume; growth is all too often simply by competitive attrition.

Their revenues usually come from the broadcast sector, and that is NOT a sector that is growing as it was a decade ago when access to audiences was pretty much the broadcasters’ monopoly. Indeed it is a sector that is gradually migrating to IP—it is becoming the streaming sector, and in essence it is downsizing its cost to increase its margins. There is little top line growth. So how today’s streaming vendors can themselves project such continued growth remains lost on me, when in fact they are commoditising their own clients' businesses. They are making it cheaper for broadcasters to operate, and those broadcasters in turn are bringing down their revenues to remain competitive (even in the U.S. Comcast has only just recently posted its first growth quarter in several years).

There are rarely new entrants to the cartel of national broadcasters; there are relatively few Comcasts, BBCs, SKYs, and ABCs, and it is rare that a new major player emerges in that group into which a new range of streaming contract opportunities can be sold. While rare in the U.S.’s relatively large consolidated English speaking market, such broadcasters entering the market are even rarer in a pan-European market where the addressable market is much more fragmented by language, making it less attractive to launch a large broadcast operation. This would be where overall significant sector growth would come from in my mind. (Yes, obviously social media, OTT, and other competitive aspects are out there, but few compare to these big broadcasters as revenue streams for the "big" streaming companies).

So, in my opinion, any notion that this market is going to grow significantly is likely incorrect, and that means that that the opportunities forecast today are those of a mature market: focusing on consolidating services into commoditised IP-based models. Yes this may show niche sector growth as, for example, a particular encoding for a specific trendy codec or pixel ratio emerges, but the underlying advertising opportunities and subscriber revenues at the top of the parent macro-sector of broadcast are much the same. And make no mistake, the broadcasters are good at what they do—the churn to OTT and chord-cut streaming is fairly controlled.

This alone makes any idea that any niche in the streaming sector as it is today will reach many hundreds of millions in valuation look fairly crazy. For that to happen, the broadcasters would have to stop doing what they are good at doing and migrate everyone to IP, writing off all thier existing infrastructure assets as they do. Why on earth would they do that?

Yes, every now and then a disruptor like Netflix or YouTube appears and creates a new market, and of course there will always be success stories. But we all need to be smart and not stupidly optimistic. Let's make 2014 a year of European companies exceeding realistic and moderated expectations, and let us educate our potential clients that we deliver real things to real markets. We have seen a hundred over hyped businesses boom and bust on both sides of the Atlantic. Let’s try something a little more down-to-earth this year, and prepare the ground properly, plant some solid seeds, and set ourselves up with a stable industry sector, where we educate broadcasters to buy local and build a solid homegrown market, where we can get some great European companies onto the public markets, and get some real market data flowing. With that core, we finally should be able to make a strong impact on the global market in the face of strong competition from the U.S. and explosive emerging competition from Asia.

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