Late last month well-known global measurement company Nielsen acquired Sorenson Media for a cash price of $11.25 million. Sorenson Media’s sale was conducted through the bankruptcy courts of the state of Utah. The transaction is a reminder of the continued challenges plaguing the advertising technology segment of the market, and at the same time a statement on how many of those challenges are business model issues, rather than technology obstacles.
Sorenson Media was founded in 1995 and was until recent years focused on providing transcoding and encoding tools within the media production environment. The Company’s well-known software encoding tool Squeeze was widely deployed in the media and broadcasting industry. A 2011 Sorenson Media press release boasts 60 percent of the 2011 TVNewsCheck Top 30 broadcast television station groups as customers of Squeeze for online and broadcast distribution. Beginning in 2013 Sorenson Media began to invest in alternative uses for its technology to solve the ongoing challenges in the advertising technology vertical of the media industry.
In 2016 Sorenson Media received an investment from the Sinclair Broadcasting Group as part of its pivot to becoming a provider of advertising technology. The recent Nielsen press release describes Sorenson Media as “a leading addressable TV technology provider that will help transform TV from a one-to-many to a one-to-one medium by powering addressable ad delivery and measurement.” Sinclair’s then 2016 Annual Report lauded Sorenson Media’s access to 21 million connected Smart TVs in the United States. “Sorenson’s technology will allow us to track real-time viewer behavior and trends on a second-by-second basis, will permit us to incorporate dynamic ad insertion, and address viewers with demographic-specific ads” continued the Sinclair Annual Report.
(The reader should note we are focusing on the Sinclair relationship because it was the largest and most impactful. Sorenson Media had publicly announced other clients, including Hearst Television and AMC Networks.)
Sinclair’s 2017 Annual Report made reference to a “landmark” commercial deal with Sorenson Media “to sell addressable advertising via smart TVs, a first-ever for any broadcaster.” The deal was signed on December 27, 2017. It would cause the bankruptcy filing of Sorenson Media in less than 12 months.
At the time of the agreement, however, optimism was the order of the day. The optimism was best captured in an October 2017 KSL.com article titled ‘Will tech company Sorenson Media become a Utah unicorn?’ A technology unicorn is a jargon term used by technology investors and onlookers to describe a private company valued at $1 billion. The article indicates then Sorenson Media CEO Marcus Liassides expected Sorenson Media to reach a $1 billion valuation within the next 6 – 12 months. “We’ve had numerous approaches to acquire the company over the years…(but) we believe this is a multi-billion dollar opportunity” said Liassides in the KSL.com article.
Within six months of those statements Sorenson Media appointed a new CEO, and – as already noted – within 12 months of those statements Sorenson Media would file bankruptcy to seek protection from its creditors. Total liabilities indicated in the bankruptcy filing were $155 million; total assets were $2.2 million.
The KSL.com article also referenced an Inc 5000 profile of Sorenson Media. The listing (pictured below) cites a revenue level in 2016 of $20.8 million and a three-year growth rate of 426%.
Standing in stark contrast to the Inc 5000 profile, the state of Utah bankruptcy filing lists Sorenson Media’s 2016 revenue at $1.5 million. We are inclined to believe the bankruptcy filing.
The pivot to advertising technology was undertaken at truly remarkable cost by Sorenson Media. Shareholder investment cited in court documents was $136 million, consisting of $40 million of initial shareholder investment and over $96 million in the form of a Series A note.
Those investments resulted in revenue growth to a level of $4.5 million in 2017 and $3.5 million through the late October bankruptcy filing in 2018 (translating to an equivalent annual rate of revenue of $4.5 million). The revenue levels don’t tell the whole picture.
Returning to the Sinclair agreement, the bankruptcy filings cite Sinclair as a creditor, owed $12.25 million based on the agreement. There is limited context available in the filings about the business model of the Sorenson Media advertising platform, but the outline is unmistakable. Court documents indicate the agreement with Sinclair provided for guaranteed minimum payments to Sinclair in compensation for advertising impressions made available on Sinclair’s media properties to Sorenson Media’s advertising platform. To restate in simpler terms: in form Sorenson Media was buying the ad space from Sinclair and then attempting to sell the ad space to an interested party. The presumption then of the model is you can sell for more than you buy. This did not happen. “…the impressions provided through the Sinclair Agreement can only provide a fraction of the revenue needed to meet the minimum payments specified creating a significant drain on Sorenson’s business – in excess of over $100 million over life of the agreement” reads the court filing. The Sinclair agreement had a term running through 2023, though again it did not make it through the first year.
For the avoidance of misunderstanding, there is nothing in the filings to suggest Sinclair nor any other customer was a bad actor. Remember this is a commercial transaction where a media company (Sinclair) is selling a valuable asset (adverting inventory). Minimum guarantees are a wise precaution.
But, as already noted, the resulting disconnect between the payments owed to Sinclair and Sorenson Media’s ability to monetize the associate impression was utterly untenable. While the Sinclair agreement was the catalyst for the bankruptcy, the filings don’t suggest the other partner relationships were much more sustainable. Samsung is listed as a $26.2 million creditor, Vizio as a $735K creditor, and Amazon Web Services almost a $3 million creditor.
We suspect the reader is left with just as many unanswered questions about Sorenson Media’s expectations for the agreement. For instance, if seemingly every transaction on the platform lost money, how was this to be overcome? The only explanation offered (that we could find) in the court documents is that Sorenson Media’s “business has not commercialized as original anticipated.”
A full accounting of the circumstances suggests two takeaways: first, the technology platform was not the problem; second, the business model was the problem.
Strong evidence for the first takeaway is the Nielsen acquisition of Sorenson Media’s assets. Recall Nielsen paid $11.25 million for the assets. The bidding commenced with an initial offer by Sorenson Media’s largest shareholder/creditor of a little over $3 million. The final price was then bid up almost 4x from its starting position.
Nielsen’s talking points about the acquisition add further emphasis to the potential value of the technology acquired from Sorenson Media. “And the most recent acquisition of Sorenson Media completes Nielsen’s go-to-market technology stack with an end-to-end ad delivery solution enabling addressable advertising for TV at scale” states the Nielsen release. Nielsen’s CEO David Kenny amplified on the strategic importance of Sorenson Media’s technology during the Company’s Q4 2018 earning call. “…you saw us acquire Sorenson Media, which I approved because combining that with Gracenote’s automatic content recognition technology means Nielsen has far and aware the best IP portfolio in the world and the best tech platform in the world to make addressable TV a reality” said Kenny.
If further evidence was needed to ascribe blame to the business model, consider that court filings indicate Nielsen declined to purchase the Sinclair contract as part of the asset purchase.
We conclude with the observation that ad-tech continues to promise much on the basis of emerging technologies. The aforementioned Nielsen release mentions the terms end-to-end, AI-optimized, data-driven targeting, real-time optimization, and unified campaign management – and all in a single sentence. As third-party observers we look forward to following the business model developments and agreements that will ensure the success of all constituents in the market.
Should you have an interest in a more detail exploration of technology business models and customer purchase models, then we hope you will join us at the upcoming eighth annual Devoncroft Executive Summit.
Press Release: Nielsen Acquisition of Sorenson Media
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