Fighting Commoditization of the Encoder Business

By November 9, 2005

In October 2005, Tandberg announced its intent to acquire Goldpocket Interactive. Goldpocket had been in play for at least two years, so this acquisition brings to an end much speculation regarding possible suitors.

More importantly, this acquisition offers two interesting insights about the technology market in general and the encoding market in particular.

Mission Objective: Acquisition, Not IPO

First, the venture capital community is still “in recovery” from the hangover caused by years of Internet-related IPO euphoria. Despite positive signs that the IPO market is gaining momentum, it has yet to experience (and sustain) the volume and return that makes VCs more comfortable with investing heavily in new technologies. Instead, VC funds are now eyeing corporate acquisitions to find the liquidity events they will need in the coming two to three years to bring back to their Limited Partners.

Many start-ups in the digital media space (most notably IPTV/broadbandTV space, Internet and video peer-to-peer) are no doubt getting funded. For example, Akimbo, Veoh Networks, YouTube, Brightcove, and PacketVision have found investors. But let’s be clear: this is a race to acquisition and not the Holy Grail of an IPO.

News Corp’s recent acquisitions of Internet properties Myspace.com and Scoutmedia.com have signaled that media conglomerates have a sustainable appetite for the innovative Internet and online-based companies, technologies and platforms that will help them deliver new (and hopefully more sticky) media to consumer audiences – audiences that will be more accurately targeted via advertising “optimization” that allows for greater measurability of the results.

Consolidation of the Encoder Business

Second, the Tandberg acquisition of GoldPocket tells a story about the market environment for video compression, encoding and multiplexing solutions. This first chapter of this story was written about 12 years ago, as the first digital television delivery network was launched: DirecTV. For the first few years of its broadcast history, DirecTV used encoders from Compression Labs. These machines were expensive, complex, and required a good two years of integration and testing with the MPEG2 decompression chipsets of then C-Cube Microsystems (later acquired by LSILogic).

Over time, new vendors entered this emerging space, and today a variety of companies such as Tandberg, Harmonic, Motorola, Modulus Video, SKYStream, and TUT Systems offer encoding systems for MPEG2/4 platforms. Of course, Microsoft’s WM9 systems are also competing in this market.

As is the case for any environment marked by standardization, the encoder and multiplexer market has experienced its share of price erosion, feature competition, and open standards evolutions (from DVB-asi to GigE, to cite but one example).

Motorola’s early 2005 decision to distribute Modulus Video’s encoders was more telling than many were aware. It hinted to the market that the entire encoder product line was rapidly becoming a commodity – a market where margins are squeezed and market shares are under tremendous pressure. It also indicated, frankly, that pure “compression” capability becomes a race to higher performance and lower cost, hardly a “strategic” product line for a powerful vendor such as Motorola.

Tandberg’s recent announcement to acquire GoldPocket only confirms this trend. The value and feature competition has moved to new terrains such as:

Asset management;
Stream management – to allow, for example, “switched broadcast video” and serve to the consumer set top box only a subset of the broadcast line;
Image and pixel manipulation – to allow, for example, for the insertion of logos and banners into the network (directly from the head-end and at the broadcaster’s control); and
Insertion of assets into the MPEG stream – including carousel objects such as MHP, OCAP or other interactive applications (the space where GoldPocket now brings Tandberg a whole slew of deployed and proven capability).

It will be interesting to see how others respond to this move, in particular, and the trend toward commoditization, in general. How should Harmonic position itself in this space? How will OpenTV react, and what impact will this have on the development its back-end broadcast system product line as middleware continues to be commoditized? How will (or should) smaller players and private companies play the game?

We have only started to embark on the new digital media and “broadbandcastTV” wave. While little is known about where this story will end, we can be assured that the ride will be fun!

About The Diffusion Group (TDG) –
The Diffusion Group is a strategic research and consulting firm focused on new media and digital home markets. Using a unique blend of research expertise, executive-level consultants, and hands-ontechnical experts, we create more than just research – we generate Intelligence in Action? . TDG is committed to providing market research and strategic consulting services based on conservative,real-world analysis and market forecasts grounded in consumer research.

For more information about The Diffusion Group, visit our website at http://www.thediffusiongroup.com/.

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