Analysis: The Lessons of Verizon Digital Media Services (Edgecast)

On September 1, 2021, private equity firm Apollo closed on its acquisition of Yahoo (formerly Verizon Media) from Verizon. At precisely the same time, the Verizon Media Platform business rebranded (back) to Edgecast.

The rebranding was necessary for several reasons, beginning with establishing Verizon was in fact selling the media technology services group as part of the Yahoo divestiture, and Apollo was buying it. Apollo’s press release kind of alludes to the inclusion of the Media Platform assets whereas Verizon’s press release offers more clarity, “Verizon Media is comprised of iconic brands such as Yahoo and AOL, as well as leading ad tech and media platform businesses.”

Overlooked in the multiple billion-dollar acquisitions and divestitures is the saga of the Verizon Media Platform business. In some order a digital distribution utility, media transformation factory, media distribution fabric, video lifecycle solution, white label media supply chain service, cloud-based video service, and content delivery network.

At times branded Verizon Digital Media Services, VDMS, Edgecast, Verizon Media, Verizon Media Platform, and now again Edgecast (we will use “VDMS” and Edgecast interchangeably). In various corporate alignments, VDMS reported into Verizon, AOL, Oath, and now Yahoo. Occasional inscrutable, short-lived media services, like Go90, would message VDMS as a critical backend infrastructure. All the while, inside the massive $100 billion plus income statement of Verizon, there was never any public disclosure of financial figures or mentions in investor communications – ever.

What is now Edgecast is a modern-day Odysseus of the global media technology sector.

And just as if you took the journey from Odysseus, you would leave future generations bereft of an entertaining story and life lessons; taking the adventure from Edgecast, would leave us – as an industry – the poorer.

The journey is not over. Though the ownership rationale of the business by various parts of Verizon was dubious, it is really a stretch to suspect that same ownership rationale will remain unquestioned as part of Yahoo and its financial sponsor Apollo.

In no way is this criticism of the rank-and-file VDMS team. The hours worked were real; the customers served real; the briefings with analysts appreciated. This is instead a remainder for posterity of the bizarre tendency of large technology companies to expend hideous amounts of money chasing a flawed thesis in the global media technology sector. This is just the latest stand-in.

Also, to be clear, Verizon has not left the media industry. The things Verizon should do in the media industry, it will continue doing. Here are a few, recent examples (note: there is a common theme):

The Origins of VDMS

“Listen, here’s the thing. If you can’t spot the sucker in your first half-hour at the table, then you are the sucker.” – Rounders

At some point in 2009 – 2010, a series of someones somewhere inside Verizon decided it was a good idea to custom build a technology platform for the media industry. One would presume this was undertaken on the speculation media customers would want this service from a single supplier.

Interviews and speaking appearances by VDMS management in advance of the launch would indicate Verizon had upwards of 200 developers spend the better part of two years building the platform and constructed two dedicated data centers. In a January 2012 interview with MediaPost, a member of the Verizon Digital Media Services (“VDMS”) gave an investment figure of $370 million. To put this figure in context, at the time this represented more cumulative research and development than spent by Miranda Technologies during its 20 years of existence.

There has never been a full public accounting of the funds invested in the various iterations of VDMS. If you find a former team member at a bar in your travels, pay for the beer. Oh, the stories they could likely relate.

Regarding the launch, the observation is the criticism: VDMS was launched as a powerpoint of an idea. Below is an excerpt from an April 2011 Light Reading article.

The above was an accurate portrayal of a problem in the media industry. The solution, and really the solver, were incorrectly identified.

Had there been a voice of reason at the first meeting deciding to move forward with the VDMS initiate or every instance of deciding to maintain the initiative, they would have asked questions like the below.

How large is the addressable market for global media technology solutions?
What are the trends in the media industry toward outsourcing core production operations to third parties?
How likely is it for global media organizations to outsource core production operations to a US-based telecom business with various alliances throughout the US media industry?
In the context of Verizon, what does success look like? Is that achievable selling specialized technology services in the media industry?
Is having two distinct service groups – both branded Verizon – in the same industry, targeting the same customers, a productive go-to-market strategy?

Remember, the moral of the tale is not specific to Verizon. You can replace Verizon with ‘large technology company.’ All the questions remain valid, and the lessons from not answering these questions are as painful.

Whatever museum memorializes misguided business ventures should include the April 2011 press releases unveiling VDMS to the NAB Show community. Flavored with phrases that are fun to say like “first-of-its-kind,” “individualized video streams,” “explosion in digital media demand,” and “deliver on the promise of digital entertainment,” the press release lines up a Murderers’ Row of large technology partners (Alcatel-Lucent, HP, Motorola, Technicolor) who would find themselves on the wrong-side of media technology industry developments over the ensuing decade. The capstone for the launch was the apparent third-party validation from customers and analysts.

One universal law of the technology sector is flush marketing budgets in search of third-party validation, find it. But it appears the validations were of promises rather than deployed technology and services. Two analyst quotes in the press release use flabby, lawyerly language such as “to be offered” and “will stimulate.” The stated customers are characterized as “among the first to explore.” Explore does not strictly mean use, certainly does not mean pay, and was never going to matter to Verizon shareholders.

It is important to cede to the VDMS organizers that the overarching market observation was accurate. The press release records observations we expected to become true, and which have subsequently been validated. It was true to anticipate “consumers’ growing appetite for live, on-demand, personalized video content on their smartphones, tablets, and other devices.” There was market demand to “automate previously manual workflow processes associated with formatting, managing and delivering digital media to virtually any device or platform on a large scale.”

Again, the issue was not the market need, but the solution. The blind spots would have been revealed by talking to customers, not people working at media companies, but rather the actual engineers making the media industry work.

Benefiting from hindsight, we now understand 2010 – 2011 was something of a local maximum for outsourcing in the media industry. No less than John Malone would give up on the media technology outsourcing investment narrative. Media outsource service provider Ascent Media (in which Malone held a 30% ownership position) would sell off all its media technology assets in a series of transactions of 2010, including its creative services business to Deluxe and its content distribution business to Encompass. Ascent Media would then transition into the home security monitoring business (that actually happened).

Consistent with the bulk of his investment career, Malone was early and correct. It was all downhill for outsourcing. Below is the 2019 Big Broadcast Survey Trend Index. Highlighted in the chart is the position of the trend for outsourcing: last. Superimposed is the ranking every prior year since 2010: approximately last.

A large booth at the 2011 NAB Show followed the press communication and continued thru the 2012 NAB Show. Sometime in mid-2012, VDMS sort of disappeared. No booth at NAB Show 2013; President replaced.

During this time frame, if you ever wandered by the large VDMS booths at trade shows and wondered what the group provided. You were not alone. The original website specific to VDMS never managed to get around to press releases or customer case studies.

Here is a website excerpt in early 2013, under the header of “What functions does Digital Media Services Platform enable?”

Media Platform enables video content management with turnkey efficiency and end-to-end transparency. Our robust video platform provides automated media workflows from acquisition and ingest to publish and delivery. Additionally, our Media Platform offers extensive transformation capabilities, quality control monitoring, and digital rights management.

The above could simplify to we do “everything for everyone.”

In this earlier instance, the temporary disappearance of VDMS from the 2013 NAB Show was also not representative of Verizon leaving the media industry. This divide was punctuated at the 2013 NAB Show when a keynote was delivered by Verizon’s chairman and CEO Lowel McAdam. Session topics were the future of wireless broadband, broadcasting, and competition in a multiplatform world.

Version 1.0 of VDMS has been mostly scrubbed from the Internet and even subsequent Verizon Media communications. By late 2015 the ‘Our History’ portion of the Verizon Media website started its narrative of the past in late 2013.

This next narrative started with acquisitions and ended with a divestiture.

VDMS Acquisitions

What was not accomplished through organic initiatives was then attempted through a series of acquisitions.

In November 2013, VDMS announced the acquisition of upLynk, a three-year old technology company with a stated value proposition of streamlining the process of uploading and encoding TV Everywhere content. The rationale expressed in the press release was “continuing to expand its [VDMS] capabilities to efficiently and quickly deliver live events, linear television and video on demand.” As important as the technology acquired, the acquisition of upLynk brought Disney as a customer. UpLynk was managing the Watch Disney apps at the time.

Verizon’s 2013 annual report would indicate the acquisition was for cash consideration that was not significant. AllThingsDigital speculated a price of $75 million.

A month later in December 2013 VDMS would acquire Edgecast, a content delivery network, for $400 million. Based on a December 2013 Wall Street Journal article, Edgecast had about $100 million in revenue at the time of the acquisition.

Trumpeted in a January 2014 Verizon press release, the completion of the EdgeCast and upLynk acquisitions positioned VDMS to “redefine its role in the digital media marketplace.”

Around the same time, much more press was given to Verizon’s acquisition of Intel’s OnCue Cloud TV Platform, yet another short-lived initiative by a technology business trying to disrupt the cable industry. The 350-person team and associated intellectual property were combined into VDMS.

The concluding three paragraphs of the press release announcing the acquisition from Intel are excerpted below. The lack of any transitional sentence or paragraph in the Intel OnCue acquisition to the VDMS assets is consistent with how unclear the relationship was between the respective businesses. Note the curious quote sandwiched on each side by some vague allusions to alignment with VDMS.

… … …

“Combined with Verizon’s current and recently announced new video-delivery capabilities, the transaction also provides the platform and skill sets for Verizon to continue to expand the depth, breadth and scope of its video offerings, including mobile, in the future.

“Erik Huggers, corporate vice president and general manager of Intel Media, said: “We’re incredibly proud of what we’ve achieved. Intel provided us with the technological know-how and resources to develop products and services that will fundamentally change the way we experience TV, and now Verizon gives us access to the marketplace and the ability to scale. It’s the next logical step, and we’re excited about the road ahead.”

“In December, Verizon announced a definitive agreement to acquire EdgeCast, an industry leader in content delivery networks. Also in fourth-quarter 2013, Verizon announced the acquisition of upLynk’s exclusive technology that streamlines the process of uploading and encoding of video for live, linear and video-on-demand content.”

Referring to the above, the assets set to “fundamentally change the way we experience TV” came for the bargain price of around $157 million. Described in more humble terms in Verizon’s SEC filings as “a business dedicated to the development of IP television.” That same filing lists only one acquisition during the first quarter of 2014 and cites the above $157 million figure as the net cash expenditure for acquisitions during the period.

Again, referring to the quote above, unshackled from the scale restraints posed by the paltry $50+ billion revenue streams of Intel, OnCue would nevertheless fail to unlock scale inside the $100+ billion revenue streams of Verizon.

If part of the justification for OnCue/VDMS was supporting Verizon’s FiOS offering, the scoreboard is unkind. Verizon ended 2014 with 5.6 million FiOS customers and ended 2020 with 4 million. If part of the justification was to support the Go90 service launched in late 2015, then the score is even worse. Go90 did not last to see its third birthday. In 2018 Verizon would take a $700 million charge “primarily related to the discontinuation of the go90 platform.”

The more the plans fail, the more the planner’s plan. So, the acquisitions just kept coming.

Verizon would acquire AOL in June 2015 for cash consideration of $4.1 billion. Two years later, Verizon would acquire Yahoo for $4.5 billion. Verizon merged the businesses to form a subsidiary branded Oath. 18 months later Verizon would write-down the goodwill associated with Oath (from both deals) by $4.6 billion. Some credit is deserved. Once the disaster was clear, Verizon owned it and acted. A little over two years from the write-down, Verizon announced the divestiture to Apollo.

Most unfortunate investment sagas in the media industry end when a new actor enters the story without the knowledge or interest in the legacy of past decisions. Hans Vestberg became CEO of Verizon in August 2018.

Untrammeled from the burden of past convention, new management had a much more sober view of the prospects of Oath. Here is the relevant excerpt from the Verizon annual report:

“In connection with Verizon’s annual budget process in the fourth quarter of 2018, the new leadership at both Oath and Verizon completed a comprehensive five-year strategic planning review of Oath’s business prospects resulting in unfavorable adjustments to Oath’s financial projections. These revised projections were used as a key input into Oath’s annual goodwill impairment test performed in the fourth quarter.”

For its part, VDMS would report into AOL after its acquisition in 2015 and then Oath with its formation in 2017. While it is obscured within the broader write-down, some amount of the goodwill impairment of the Oath subsidiary was likely attributable to VDMS. Post write-down $200 million of goodwill remained with the Oath division. $300 million of goodwill was created in the Edgecast deal alone.

The final accounting lists cash expenditures of $8.6 billion for Yahoo and AOL, plus the expenditures building VDMS. Cash proceeds received from Apollo were $4.25 billion…which is less.

The (Missed?) Opportunity

One acquisition not mentioned above is a good set up for a discussion of a circumstances representing either – depending on one’s perspectives – a tremendous, missed opportunity or the folly of the business case for VDMS.

In April 2015, VDMS would acquire the ‘Translate’ software package from the Disney|ABC Television Group. Translate was used to repurpose linear content for digital platforms by replacing the linear ads with targeted digital ads. More interesting, the Translate press release speaks to the depth and duration of the customer relationship VDMS enjoyed with Disney. “Since 2012, the Verizon Digital Media Services platform has managed the video encoding and delivery of content for Web, mobile and tablet streaming apps, including WATCH ABC, WATCH ABC Family, WATCH Disney Channel, WATCH Disney Junior and WATCH Disney XD.”

The mention is notable because even Verizon struggles to get Disney to discuss its technology operations in public.

A 2014 VDMS blog post offers additional background on the Disney relationship. Albert Cheng, then EVP and Chief Product Officer for the Disney|ABC Television Group, provided a customer testimonial. The relevant excerpt reads (we have added emphasis):

“For one thing, Verizon helps us navigate the complexity of various devices, codes, and methods necessary to deliver our content. It streamlines the process tremendously and allows us to push our streams to all of the platforms viewers use.

The other piece Verizon helps with is creating a truly end-to-end solution. Connecting a traditional broadcast infrastructure to the digital ecosystem and enabling on-demand formats is a significant undertaking. Verizon plugs us in to a cloud-based system that recognizes our infrastructure and lets us dynamically distribute content via the Web. We’re in a world of transition, and Verizon is helping us bridge the gap remarkably quickly.”

Some readers may sense the direction of this line of inquiry. In a time not long ago and in a galaxy not far away, Disney executives were planning to reshape their media operations towards a direct-to-consumer model. An existing supplier, solving the problems noted above, may have had some advantages to participate in Disney’s transition.

More specific, in August 2015 during Disney’s Q2 2015 earnings call Chairman and CEO Bob Iger would famously question the future of the multi-channel ecosystem. As Iger would reveal in subsequent interviews, this was the first public intimation of a dialogue within Disney about transitioning to a direct-to-consumer model.

Those executive discussions would lead to a series of actions culminating in the April 2020 launch of Disney+. Actions leading up to the launch included the acquisition of 21^st Century Fox and before it, BAMTech.

“So that desire to get into a direct-to-consumer relationship, combined with what we’re seeing in the ecosystem, led us to make an initial investment in BAMTech because we thought if we’re eventually going to do this, we’re going to need the technology to do it” stated Iger at the 2019 Moffett Nathanson Media & Communications Summit.

Disney took an initial minority stake in BAMTech in August 2016. “As part of the transaction, BAMTech will become a key partner for Disney in the delivery and support of streaming video and other digital products from Disney|ABC Television Group and ESPN, as well as future digital initiatives across the Company” reads the press release.

A year later Disney would acquire majority ownership of BAMTech, valuing the business at $3.9 billion. A valuation level decried by then CEO of CBS Les Moonves as a “zillion dollars.”

Bob Iger offered the following commentary for the acquisition, ““The media landscape is increasingly defined by direct relationships between content creators and consumers, and our control of BAMTech’s full array of innovative technology will give us the power to forge those connections, along with the flexibility to quickly adapt to shifts in the market.”

We added emphasis to the phrase including the terms ‘control’ and ‘innovative technology.’ One of those two considerations is likely the reason this announcement did not include VDMS.

VDMS’s Intractable Problem

Another acquisition not covered above returns to the central criticism of the entire VDMS enterprise.

A month ahead of the 2016 NAB Show VDMS announced the acquisition of Volicon, a provider of compliance monitoring solutions to broadcasters.

No other way to say to it: the acquisition had limited chance of working.

Those products Volicon actually sold and customers actually bought amounted to an annual addressable market in the neighborhood of $50 million; no level of imagination got the figure to $100 million. The bottom of the acquisition press release gives the punchline: “Verizon Communications Inc. (NYSE, Nasdaq: VZ) employs a diverse workforce of 177,700 and generated nearly $132 billion in 2015 revenues.”

To recast the typical M&A trope of trying to make 2 + 2 = 5, this was the equivalent of trying to make $132 billion + 2 = 5.

The stated rationale was to have Volicon’s technology rise above the limitations of its addressable market through its integration into VDMS. “Volicon’s technology, combined with Verizon Digital Media Services’ Video Lifecycle Solution, will provide customers with a seamless option to take existing broadcast feeds and channels directly to OTT cloud-based delivery models.”

VDMS’s inevitable letter communicating the end-of-life of Volicon arrived in customer inboxes less than three years after the acquisition was announced. The business rationale cited was “an effort to shift resources and focus continued development on future solutions that better align with industry trends and market needs.” Unless VDMS viewed its original cited trends of OTT and cloud-based delivery models as passing fads, it would seem other factors were responsible for the discontinuation.

The dollar figures involved are immaterial to Verizon, but not the customers impacted. Below is an anonymous comment captured in the 2019 Big Broadcast Survey, from a broadcaster.

“We were planning for a refresh to our Volicon Observer platform and had issued the purchase order in early 2016. At the 2016 NAB Show we were told of the acquisition by VDMS. With the entity change, we had to reinitiate the payment paperwork. Because of the delays of the acquisition integration, our internal budget cycles, and internal processes, we were only able to re-issue the purchase order in early 2019. Shortly after issuing the new purchase order, we received the end-of-life notice from VDMS. Please extend my regards to the team.”

While buying assets had advantages over building, this again ignored the fundamental questions raised earlier in this post. The same answers to these questions would have talked Verizon out of this approach.

To name the culprit explicitly, the blind spot in the entire VDMS strategy is explained by a phenomenon we have labeled the ‘blue line.’ Dave Ward, then CTO Engineering & Chief Architect at Cisco (now CEO of PacketFabric) in the mid-2010s began labeling the divide in the media technology architecture between general-purpose technologies and specialized media-specific technologies. The division was made with a blue line. Then, as now, the blue line separates the portion of the media technology stack where large, general-purpose technology providers should participate (from where they should partner) and in a beautiful symmetry where specialized media suppliers should participate (from where they should partner).

Though the concept is technical, the reason is rooted in economics. Above the blue line the solutions are specialized to the media use case and therefore the market opportunity too limited to justify the sustained attention of large, general-purpose technology suppliers. Mirroring this economic reality, below the blue the line, specialized suppliers do not have the research and development budgets to ever hope to keep pace with large, general-purpose technology suppliers.

The unique proposition of VDMS was that Verizon was its parent and it could draw on Verizon’s resources. The inherent problem with this picture was Verizon’s resources were incompatible with the size of the market VDMS was addressing; much like a wrench too big for a nut, the problem was not the strength of the hands.

An observer might point out that VDMS was attempting to provide above the blue line services by partnering with big daddy Verizon below the line. The flaw was the distinction of VDMS and Verizon was artificial to customers and to broader stakeholders. VDMS and Verizon were both in the same income statement having dollar figures with nine figures. Within the context of those economics, the fruits of VDMS would never, ever matter.

Even if an organization does not value monies lost, it should still hold dear its brand. The asymmetry of outcomes is easily articulated. VDMS was never, ever going to make a material financial contribution to Verizon. Consider then, though it would never matter to Verizon, it was using Verizon brand in the commission of never mattering. Said differently reward was never present, whereas risk was always.

Concluding Thoughts

Once you begin acquiring assets that do not produce meaningful financial results, you need to articulate some rationale to support the expenditure of financial resources. Like many industry participants Verizon led with the observation of the amount of internet traffic devoted to video content:

“Experts predict that video will comprise almost 70 percent of all consumer internet traffic by 2017, with much of that carried by wireless networks. Providers of digital content – including movie studios, cable systems and broadcasters, and online video publishers – face complex technical challenges in moving their content over broadband and wireless networks to a rapidly proliferating number of screens and end users.” Verizon’s 2013 Annual Report then continues, “At Verizon, we are building a one-stop shop to solve this problem for content providers – including our own FiOS Video service – who want to mobilize video across all platforms and devices. The core of this business is Verizon Digital Media Services…”

Based on the experiences of VDMS over the past decade, it would appear there are more factors at work in the media sector than are dreamt of in an estimate of video traffic on the internet.

The divestiture is the correct decision. Verizon is better off; Edgecast/VDMS is better off; and we are all the wiser.

Devoncroft Blog

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