Market Insight

Ericsson relinquishes a majority share of its TV software holdings

February 02, 2018

Merrick Kingston Merrick Kingston Associate Director, Research & Analysis, Digital Media & Video Technology

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Subsequent to a yearlong review of its media and video-technology assets, Ericsson is divesting its Media Solutions business, and choosing to retain Red Bee Media (née Ericsson Broadcast and Media Services) in full. 

51 percent of Ericsson Media Solutions – comprising Mediaroom, Envivio, Azuki, Fabrix, and Tandberg assets – will be transferred to private equity firm One Equity. Ericsson’s 49 percent stake will continue to be reported under the company’s Other business segment. Red Bee Media – comprising Ericsson’s playout, content discovery, managed media services, and creative assets – will continue to operate as an independent, fully-owned subsidiary. 
Subject to regulatory approval, the Media Solutions deal is expected to close in Q3; financial terms have not been disclosed. 

Our analysis

Ericsson's decision to divest Media Solutions, and critically re-evaluate the value of its entire video technology holdings, reflects the firm’s failure to defend and profitably grow these holdings. IHS Markit believes that combined Red Bee Media and Media Solutions revenues decreased by 7.6 percent YoY between 2015 and 2016.

Ericsson’s video technology holdings have been plagued by three overarching problems. First and foremost, many of the assets have struggled to secure new customers. Over the past two years, the firm’s flagship TV platform – formed chiefly through the acquisition of Microsoft Mediaroom – has succeeded primarily in deriving incremental new value from existing clients. With the exception of a major J:COM deployment, the next-gen MediaFirst TV platform has been sold across Ericsson’s longstanding Telus, Bell, and Sasktel footprint in Canada. The difficulties encountered in broadening the customer base have contributed materially to a second problem: TV platform revenues have stagnated, and by our estimation, have contracted by 1.5 percent YoY between 2014 and 2017.

The video businesses’ third problem relates to over-extension. Ericsson Media Solutions is a composite of STB software and TV platform assets (Mediaroom, 2013), multiscreen distribution assets (Azuki, 2014), cloud DVR assets (Fabrix, 2014), traditional video compression assets (Tandberg, 2007), and cloud, software-defined media processing assets (Envivio, 2015). The integration of these assets, coupled with in-house development of a targeted advertising proposition, speaks to a diversification strategy that was clear and aggressive. All the same, assembling an end-to-end Media Solutions portfolio likely hindered Ericsson’s ability to iterate any one component quickly and decisively. In 2013, Mediaroom clients were beginning to stage a soft revolt; Ericsson employed two years to launch a Mediaroom successor, and relative to its peers, was slower to embrace micro-services and DevOps processes.  

The Red Bee business, by contrast, is more narrowly defined. Formed through the acquisition of Technicolor’s broadcast (services), Red Bee Media (2013), and metadata vendor FYI Television (2016), Ericsson has built a subsidiary that caters, in a focused manner, to channels’ playout, media management, and creative needs.

Ericsson’s new strategy

The divestment of Ericsson’s media and video-technology assets is part of the wider, corporate level strategic re-consideration. Across the board, Ericsson is shifting away from the services-centric business model, refocusing on pure technology hardware and reducing time-to-market for core network product, in order to prioritise group’s profitability over growth. Majority of Ericsson’s R&D investment will be placed on the network product portfolio, Internet of Things (IoT) and Cloud infrastructure hardware business. 

Implications for the video software industry

In a post Ericsson Mediaroom world, Cisco and Huawei alone remain the only network infrastructure giants in possession of sprawling, video technology businesses. Regardless of whether Cisco ultimately sells its NDS assets – claims that Cisco is seeking a buyer have not publicly been substantiated – the implication of Ericsson’s divestiture is unchanged. The frontend video software market is exceedingly competitive, and against the backdrop of a pay TV industry that is rethinking its approach to channel bundling, audience retention, and audience creation, it is arduous – and arguably nigh impossible – to competitive effectively across end-to-end holdings.

The MediaFirst platform is in every respect a state-of-the-art TV proposition, and the engineering talent regrouped within Ericsson Media Solutions is unassailable. Product breadth and quality is not, however, uniquely sufficient to offset two, powerful market forces: product velocity and iteration is essential; demand for end-to-end video solutions, across many parts of the pay TV value chain, is contracting demonstrably.

One Equity now faces the difficult task of returning the business to profitability, and identifying the areas of the Media Solutions portfolio that have the greatest potential to create value, and that will benefit from focused R&D.

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