Telestream announced the acquisition of EcoDigital, the provider of the well-known DIVA archiving solution (the former Front Porch Digital business). The deal has closed.
This is the eighth acquisition Telestream has completed (Popwire – 2006, Vara Software – 2008, Anystream – 2010, Pandastream – 2015, VidCheck – 2016, Tektronix Video – 2019), the fourth since being acquired by private equity firm Genstar Capital, and the first since the return of Telestream’s founder Dan Castle to the CEO position this past February.
Consistent with prior acquisitions, EcoDigital (DIVA) is an adjacent technology supplier, expanding Telestream’s product portfolio in the media sector. The strategy has served the Company well, as Telestream has enjoyed double-digit growth every year since 2001.
DIVA’s long journey to Telestream is yet another reminder of the folly of large technology providers owning specialized technologies in the media vertical.
In a high-profile transaction announced during the 2014 IBC Show, Oracle acquired Front Porch Digital. We will return to the deal later. We mention it here to allow for some foreshadowing.
EcoDigital was formed in June 2019 to acquire the remnants of the former Front Porch Digital business, consisting principally of the DIVA product line, out of Oracle. The resulting EcoDigital business launched at the 2019 IBC Show. The span of time then from acquisition, commercial launch, initiation of corporate sale, to conclusion of corporate sale was approximately one calendar year. EcoDigital owned DIVA just long enough to sell it. There is no stated explanation for the motivation of the sale by the sellers.
In the press release announcing EcoDigital’s acquisition of DIVA indicated the new executive team would retain the operational groups in Denver, France, and Asia. In addition, the executive team stated a plan to triple EcoDigital’s salesforce by the end of September 2019. Not counting the release announcing the business launch, the EcoDigital website contains a total of three press releases – two announcing new product versions and one announcing a new service tier.
Telestream’s press release cites EcoDigital as having “hundreds of customers and installations worldwide.” This is a testament to either continued product support of the DIVA platform, the value of DIVA, or the stickiness of workflow solutions in the global media sector.
DIVA has been the market leader for archive management software for a long time. Referencing Devoncroft’s 2014 Big Broadcast Survey results, Front Porch Digital had a customer base as large as all its direct competitors combined.
Front Porch Digital was founded in February 2000 and then promptly reversed into a public shell company in May 2000. In 2002, Front Porch acquired the “DIVArchive operations” of ManagedStorage International (based in Toulouse, France), a recent spin-off from StorageTek. Front Porch would subsequently merge with ManagedStorage International in 2004 and change its name to Incentra Solutions.
A couple of interesting points for any media technology industry history buffs. StorageTek was acquired by Oracle in 2005 and would become part of the Oracle division Front Porch would join a decade a later. (The Storage industry is a small world). Also, DIVA originally stood for “Distributed Intelligent Versatile Archive.” A phrase we had never heard before reading Incentra’s filings.
The Incentra 2005 annual report is decorated with analogous statements about the ‘massive’ growth of storage that Oracle would make a decade later to justify its acquisition of Front Porch.
“IT departments are faced with the challenges of rapidly expanding amounts of data to manage, increasing demands for availability for day-to-day business and to meet regulatory requirements, and increasing and more stringent compliance and governmental regulations regarding data storage, integrity and recoverability (Source: Incentra 2005 Annual Report)”
Incentra also used a similar complementary solution rationale for its ownership of Front Porch Digital.
Through the sale of our complete digital archive solutions, we intend to capture an increasing portion of the total IT spending of our broadcast customers and position ourselves for follow on sales and services…We believe by leveraging Front Porch’s longstanding customer relationships, the dominant market position of Front Porch’s DIVArchive solutions, Front Porch’s world-class customer list of broadcast entities and its reputation for superior service and support, Front Porch will continue to capture an increasingly larger portion of our customers’ total IT budget.
For the 2005 year, Incentra recorded a $14 million loss on revenues of $50.8 million. Front Porch was divested from Incentra on July 31, 2006 to Toronto-based private equity firm Genuity Capital Partners. Incentra declared bankruptcy in 2009.
Incentra’s press release announcing the transaction with Genuity quotes then CEO Thomas Sweeney as follows:
“We believe this is a win-win situation for Incentra and its shareholders, for Front Porch Digital and its entire team and for Genuity Equity Partners”
From the July 2019 edition of Content+Technology, below is a part of the statement issued regarding the divestiture to EcoDigital by Ajay Srivastava, SVP Oracle Operating Systems and Virtualization.
“We see this new development as a positive improvement for the two organizations, our mutual clients, and the industry”
More than decade apart, the same rationale is clear: we are not the appropriate owners for this business.
Genuity Capital (bought by Canaccord in 2010) paid $38 million for Front Porch in 2006, consisting of $33 million in front cash and a $5 million earn out. For the 2005 financial year Front Porch generated revenue of $12.8 million, gross margin of $8.1 million (63%), and $1.7 million of EBITDA. As a function of 2005 full year results Genuity paid 2.9x revenue and 22.3x EBITDA, though Front Porch was growing fast. Its run-rate revenue profile for 2007 was closer to $16 million.
Front Porch would augment its organic growth with the acquisition of SAMMA Systems in late 2008. After the acquisition Front Porch had an employee count of 80.
Those financial and employee count disclosures are the last public references available for Front Porch Digital or DIVA. There was nothing disclosed as part of either the recent Telestream transaction or the 2014 Oracle transaction.
Telestream is a private business with no incentive to disclose specifics of the deal. While Oracle is a public company, the sheer size of its business left it little incentive to disclose any specifics of Front Porch.
Oracle’s relevant quarterly filing indicates during the nine months ending February 2015 (covering Front Porch deal), the Company spent $6.2 billion cash on acquisitions. $4.5 billion of that cash amount was on one deal (not Front Porch). The closest to a disclosure by Oracle is the following: “During the first nine months of fiscal 2015, we acquired certain other companies primarily to expand our products and services offerings. These acquisitions were not individually significant.”
The deal was not significant to Oracle in a financial context, which makes it difficult to be significant in any other context to a public company. Notwithstanding the well-intentioned rhetoric for storage growth or complementary solutions expressed by Oracle in late 2014, the inescapable, unalterable reality was Front Porch, and its market segments, were just too small for Oracle.
And there was lots of attention devoted to an expectation of storage growth in the late 2014 transaction communications. “The explosive growth of today’s rich media has created immense challenges for companies in media and entertainment and across various industries with large-scale digital content” reads the Oracle letter to Front Porch customers. “The combination of Oracle with Front Porch Digital is expected to create the most comprehensive enterprise-grade content storage management solution” continues the customer letter.
Oracle’s 2014 presentation on the transaction is replete with an exponential storage growth chart on a slide titled ‘Explosion in Rich Media Creates Massive Content Storage Management Challenges.’ The usual storage hobgoblins of increased demand, higher resolution, format proliferation are cited among the bullet points. Naturally, the presentation notes all the opportunities outside of the media use case in new, untapped market verticals.
No hindsight is needed to revisit the wisdom of the original acquisition. How could an archive management software company in the media vertical possibly integrate into a $5.1 billion division of a $38.2 billion company?
Despite all the rhetoric of storage growth, there was no counting of the archive management software market (then, now, or soon) within the media technology sector that would ever matter to Oracle’s investors. Parties interested in size and growth of archive management should review the latest edition of the IABM DC Global Market Valuation Report.
Economics always outlast enthusiasm.
Oracle exhibited the combined Oracle / Front Porch businesses at the 2015 NAB Show in a 3,500 square foot booth outside the entrance to the South Upper Hall. Visitors to the Oracle / Front Porch booth at the 2016 NAB Show would have returned to the same booth in the same location. To visit the Oracle booth at the 2017 NAB Show a visitor had to walk past the escalator on the first floor. A party interested in meeting with the Front Porch team during the 2018 exhibition would have visited a small meeting room in the back of the South Hall, as Oracle did not have a booth in 2018.
More acute, the below is a picture we took of the intended location of the Oracle / Front Porch booth at the 2017 IBC Show.
As you can see, there was no booth, just an empty floor space. Just weeks ahead of the 2017 IBC Show, Oracle / Front Porch cancelled its participation at the exhibition. This followed a series of layoffs by Oracle as part a broader restructuring (link to San Jose Mercury News article about layoffs).
At the start of Oracle’s fiscal 2017-year (in July 2016) management announced a plan “to restructure and further improve efficiencies in our operations due to our recent acquisitions and certain other operational activities.” The immediate result was the recognition of $486 million in restructuring expense in Oracle’s fiscal 2017 (ending May 2017). In early 2017, Oracle supplemented the earlier announcement with an additional planned $403 million in restructuring expenses through fiscal 2018. The second amount would grow to $601 million by the conclusion of 2018. $122 million of the cash outlays associated with those payments were recorded within the Oracle Hardware division.
The scene of an empty booth, without any public explanation, was a visibly embodiment of the then Front Porch Digital customer experience.
To illustrate the scope of the Front Porch customer base, consider the below slide from Oracle’s transaction presentation. 550 customers in 80+ countries, and lots of tier1 media names.
The customer base was no accident of history. DIVA, by all accounts, was a great product, and Front Porch Digital had exceptionally strong brand scores as measured in Devoncroft’s annual Big Broadcast Survey.
As part of the outreach to Front Porch customers around the acquisition, Oracle circulated a frequently asked question document. Below is a relevant excerpt.
At the time of the Oracle acquisition, Front Porch Digital had a category -leading (for Archive Management) Net Promoter Score, a measure of customer loyalty tracked in Devoncroft’s annual Big Broadcast Survey. Post-acquisition Front Porch’s NPS would quickly turn negative (i.e. more detractors than promoters) in 2016 and 2017 results from the Big Broadcast Survey. The results are telling. Customer perspectives on Front Porch Digital’s solutions radically changed (to the negative) after the Oracle acquisition.
We do not want to come across as overly negative on the management of Oracle’s storage group. Corporate decisions at Oracle made at levels far removed from the media sector were responsible for the developments at Front Porch. It is the phenomena that interests us, not the culprit.
During the 2018 Devoncroft Executive Summit in Las Vegas, we presented the below slide to make the point we have used 2,000+ words in this post to make. The quip accompanying slide was “we file these developments in a file-cabinet in the Devoncroft office, labeled ‘things big IT companies always do in the media technology sector’.”
Any rendition of the technology architecture of the media industry should include a horizontal line dividing the general-purpose technology layer and the specialized layer. We refer to this as the ‘blue’ line. A term coined by then Chief Architect at Cisco, Dave Ward. Reasonable parties can argue about the location of the blue line or the movement of the blue line, but the import of the blue line is clear. Those providing technology below the blue line should not venture to areas above the blue line.
Press release on Telestream Acquisition of EcoDigital
© Devoncroft Partners 2009-2020. All Rights Reserved.