Archives

Episode 28: Extending Video Delivery To Rural ISPs; Snap and Twitter See Declining Ad Growth; Verizon Cord Cutting Accelerates

Podcast Episode 28 is live! This week we discuss the latest advertising numbers from Twitter and Snap’s Q2 earnings, which saw slowing demand for their platforms and had declining revenue. We also highlight the rate of Verizon’s cord-cutting numbers, with the company losing 86,000 pay TV subscribers in Q2 and have now lost 8.1% of all their pay TV subs in the last 12-months. Also discussed, Qwilt’s deal with the NCTC to deploy CDN caches inside 100+ rural ISPs that combined, reach 34 million households. Thanks to this week’s podcast sponsor, Agora.

Companies, and services mentioned: Disney, ESPN+, Apple TV, fuboTV, Verizon, Twitter, Snap, MLB, ESPN+, HBO Max, Amazon Prime Video, Qwilt, Vimeo.

Sponsored by

Edgecast Valued at $120M (0.5x 2021 Revenue) in Closing Transaction with Limelight Networks

In June, Edgio closed on the acquisition of Edgecast from Yahoo (Apollo Global Management) and it was widely reported that the deal for the company valued Edgecast at close to $300 million, which is incorrect. While the initial value for Edgecast was $185 million, Apollo gave Edgio $30 million in cash as part of the deal. They also gave Edgio a second $35 million cash payment for customary working capital adjustments, in exchange for 8 million shares in Edgio, the newly combined entity consisting of Limelight, Layer0 and Edgecast. One could argue that if you subtract the $65 million in cash Apollo gave Edgio, Edgecast was really valued at $120 million, or less than half of Edgecast’s 2021 revenue of $285 million. Here’s a breakdown on the deal terms.

Yahoo received 72 million shares from Edgio for the acquisition based on a locked in 30-day trailing VWAP (Volume-Weighted Average Price) of $4.12 a share. But the effective price of Limelight shares (Limelight has since changed its ticker symbol and now trades under EGIO) at closing was approximately $2.30, so the net price Edgio paid based on shares issued and their market value was approximately $165 million.

As happens in every M&A situation, there are customary working capital adjustments at close, which amounted to approximately $35 million. In essence Edgecast was coming over with about $35 million more of assets. So Apollo, who was bullish on Edgio’s new strategy, decided to take 8 million shares in exchange for the assets. Apollo only got 8 million shares for that investment because it was based on the deal locked in VWAP price of $4.12. So in effect, Edgio issued another 8 million shares to Apollo in return for $35 million more of cash at closing indexed to Edgio’s locked-in VWAP price of $4.12. A 68% premium to the current price.

Yahoo (Apollo) can also receive up to an additional 12.7 million shares of Edgio, representing up to $100 million of additional deal consideration, over the period ending on the third anniversary of the closing of the transaction, subject to the achievement of share-price targets. Edgio stockholders now own approximately 65% of the combined company, while Yahoo will own approximately 35% respectively.

The final outcome of the deal is that Limelight more than doubled their revenue for $185 million and also got an additional $65 million of cash to go with it. So arguably Limelight’s final net price for Edgecast was approximately $120 million for the transaction. This is by far the best deal we have ever seen negotiated by a CDN vendor in acquiring a rival CDN, where the company wasn’t going under.

Note: I have never bought, sold or traded stock in any company that offers content delivery services – ever. Even in my managed accounts, no CDN vendor is included. I do not make money in any way, based on the share price of any CDN vendor.

Episode 27: Netflix Q2 Earnings Recap: Sub Counts; Balance Sheet; Ad-Supported Tier Opportunity

Podcast Episode 27 is live! This week we discuss the key takeaways from Netflix’s Q2 earnings report including subscriber losses for two-quarters in a row, what Netflix expects for growth going forward and the current state of Netflix’s balance sheet. We also detail what we’ve learned about their plans to offer an ad-supported tier and why we believe this is a real opportunity for Netflix, rather than a challenge as some are suggesting. Thanks to this week’s podcast sponsor, Agora.

Netflix Isn’t “Desperate For Cash”, These Are Their Financial Numbers You Need To Know

Some are saying that when it comes to Netflix’s finances they are “bleeding cash”, “desperate for cash”, or their finances are in trouble. This is not true. Numbers don’t lie. Here’s a breakdown of Netflix’s finances.

At the end of March, Netflix had $6 billion in cash. Their total debt stood at $14.6 billion and they paid $188 million in interest during the first quarter, which annualizes to $752 million. They have plenty of cash to pay their interest. Netflix expects to remain free cash flow (FCF) positive and has guided to 19-20% operating margins for the year. In Q1, net income was $1.6 billion, down 6.4% from the year-ago quarter. Revenue for the quarter grew 9.8% year over year to $7.9 billion. Netflix’s ARPU in Q4 2021 in the US/Canada was $14.78 and grew $0.13 to $14.92 at the end of Q2.

Net cash generated by operating activities in Q1 was $923 million vs. $777 million in the prior year period. Free cash flow amounted to $802 million vs. $692 million. Revenue from the United States and Canada grew 5.6%. Revenue from Netflix’s Europe, Middle East, and Africa region grew 9.3%. Latin America revenue rose 19.4%. Revenue from the Asia-Pacific region increased 20.3%. (all year-over-year)

Starting in 2025, Netflix will have nearly $7 billion in debt mature within a three-year span and one could argue that as Netflix replaces its bonds with new debt as they mature, the company “might” pay higher rates. But that’s not a problem today.

These are the numbers. They are definitive. There should be no debate or argument over what Netflix’s current financial resources are.

Episode 26: Previewing Netflix’s Earnings; Why Disney Passed on IPL Cricket Rights

Podcast Episode 26 is live! This week we breakdown a preview of what to look for in Netflix’s Q2 2021 earnings including subscriber losses/gains, ARPU and an expected update on their advertising strategy. We also discuss what the impact of Stranger Things Season 4 might be on churn and retention being Netflix split the release of the series across two financial quarters. We also detail the IPL Media streaming rights (2023-2027) auction won by Viacom18 and why Disney said they didn’t compete on the rights, at the priced needed to win the auction, based on the content not offering enough long-term value to their Disney+ Hotstar service. Thanks to this week’s podcast sponsor, Agora. 

Companies, and services mentioned: Netflix, Disney, Viacom18, Disney+ Hotstar, Amazon Fire TV.

The Seriousness of Device Fragmentation and How It Impacts Streaming Services

Device fragmentation has become an escalating challenge for streaming services, as launching, managing, and ensuring QoE for viewers across growing devices eventually becomes overwhelming. From multiple operating systems and platforms to the constant software updates, offering a consistent experience on all devices places a heavy burden on development teams, requiring a broad, yet specialized skill set.

It also affects every company’s bottom line as supporting more devices will ultimately expand their addressable viewer base, especially for FAST services where it will increase the number of possible ad views. Generally, audience reach is the first piece analyzed when evaluating devices but technical challenges also need to be considered, particularly the challenge of testing playback on each and every device viewers use.

With more video options than ever, viewers are demanding the highest QoE, particularly one that will give them continuity in playback when transitioning from device to device. Streaming services tell me that putting the systems in place to test and provide and maintain that level of service can become a very costly, time-consuming, and formidable challenge.

The number of devices in the market that streaming services have to support is pretty deep, especially when you account for both new models and older hardware still in use. The competitiveness between device manufacturers is fueling this increase as they need to consistently upgrade or introduce new products for users to adopt, which can result in a new or updated OS, wifi technology, and even codebases that need to be supported. With many streaming services now being offered globally, and no industry standardization across them like we see with STBs, the difficult decisions and work to support and/or add new devices into existing offerings falls on the streaming services themselves.

A great example of the difficulties streaming services face when wanting to add new devices is how each manufacturer is pushing out a different operating system which can be seen in smart TVs, such as Samsung Tizen OS, LG webOS and Vizio SmartCast. This is good for device manufactures when it comes to how they position themselves with consumers, but for streaming services, it means they need to consider the differences when trying to offer a consistent video experience across platforms. Having their own OS has become a source of revenue (See Vizio’s Q2 Earnings), meaning this trend will continue, and new and existing vendors will look to develop their own. From browsers, phones, and TV suppliers to USB devices and gaming consoles, it seems like there is no end to the ever-expanding device growth, which has become the norm.

A great example of streaming device fragmentation can be seen in Bitmovin’s video developer report from 2021, which surveys developers across the industry. It shows how leading streaming services are now supporting at least 24 devices across 12 different platforms and will be looking to support additional ones with their offerings.

When streaming services and their development teams decide which devices they want to support playback on, player testing processes will need to be defined via either manual testing or automated testing. Just like everything, there are pros and cons to both approaches. There is a high cost in terms of having to find and maintain the supported devices, especially with manual testing as it requires the in-house or external dev team to build out a testing regimen that they must physically do and observe with every release. Automated testing comes at a high expense as well, as it’s built either from scratch in-house or is a SaaS barebones solution that dev teams will have to implement use cases into. In the long term, this option tends to become more cost-effective and stable as video services don’t constantly have to have their teams dedicated to doing manual work.

The timeline to implement testing structures is extremely relevant as different factors go into it such as procurement and maintenance of devices and the development of player use cases that could differ depending on the model of the device supported. For example, LG TVs from 2016 aren’t able to be tested with all of the same use cases as later models such as period switches during playback, where the encrypted video is changed to an unencrypted client-side ad and then back to the encrypted stream. Use cases are also not one and the same as they depend on the experience streaming services are trying to provide, whether it be testing for video qualities or ad transitions. Going back to device procurement, as viewers don’t change devices often and for smart TVs that could be over 5 years, obtaining older models is another process that can limit your team’s ability to guarantee consistent quality playback from device to device.

Choices are already being made as to which platforms and versions of devices to officially support by every streaming service. Unless someone discovers an endless supply of video-centric developers (wishful thinking of many out there), it could become too costly and unmanageable for some streaming services to maintain their same QoE on every platform and they’ll need to seek other solutions that offer effective ways to combat this issue. This is the very reason why Bitmovin recently released Stream Lab, a cloud based platform that enables development teams to easily test their streams in real environments on physical devices and receive transparent reporting with clear performance feedback. With the complexity of testing across so many devices and platforms, I suspect we will continue to see more third-party solutions streaming services can rely on.

Episode 25: Deltatre To Get Acquired; Pixelot Raises $161M; Free Peacock for Comcast Subs Will Expire; Latest Sports Viewership Numbers

Podcast Episode 25 is live! This week we breakdown some financial news including the proposed sale of Deltatre, which is expected to generate $180 million of revenue in 2022 and Pixelot’s raise of $161 million in funding. We also discuss Limelight’s final sale price for Edgecast, which ended up valuing the company at $135 million. Mark and I also breakdown Netflix’s confirmation that it is not buying Roku, details on how the Apple and MLS deal will work for viewers, and we highlight what NBCUniversal’s CEO said about Peacock no longer being free for Comcast customers in the future. Thanks to this week’s podcast sponsor, Agora. 

Companies, and services mentioned: Netflix, Roku, Peacock, Deltatre, Endeavor Streaming, Firstlight Media, Edgio, Pixelot, Apple, MLS, Bally Sports Plus, NBC Sports, ESPN+, Amazon Fire TV, YouTube TV, Sling TV, Adobe.