Online video platform provider Ooyala announced that Australia based telco provider Telstra (OTCPK:TLSYY) will acquire the company, which will become a subsidiary of Telstra, and will operate as an independent business under the leadership of its existing management team. Telstra, which already owned 23% of Ooyala via a previous $61M investment, is paying $270M to have a 98% ownership in the company. To date, Ooyala had raised $122M in funding from Telstra and other investors and the company is projected to do $65M in revenue this year, which puts Ooyala’s valuation at just above 5x projected 2014 revenue. That’s a nice multiple considering that Ooyala’s largest competitor in the space, Brightcove (NASDAQ:BCOV), has a market cap of just under $200M, but is expected to do around $122M this year, or double Ooyala’s revenue.
This is a smart deal for Ooyala and the right time to do it as the company has been experiencing growing pains with their business that has negatively impacted some of their customers. Any small company can only manage growth so well with the resources they have and Ooyala simply needs more resources from a larger company to continue to grow. Now with Telstra’s backing, Ooyala should be able to scale their business much faster and avoid some of the headaches they have experienced, hopefully enabling them to provide a much more consistent quality service to every customer. As Ooyala’s CEO mentioned in a letter to employees, scale is the key to their business, and that’s what Telstra gives them. Ooyala couldn’t get there by simply taking more money; they needed a partner and backing of a much larger company that can take their cloud offering and integrate it into a much larger platform.
Vendors that want to compete in the MSO space have to have deep pockets and spend a lot of money on people, infrastructure, R&D and all the accompanying costs that go along with a cloud based service. To put it in perspective, OVP providers Ooyala, Brightcove and Kaltura have raised more than $400M in funding combined, but are on track to just over half that in 2014 revenue. Their business models require a lot of cash and more importantly, scale. To win in this market, they have to build a much larger platform, like what Cisco (NASDAQ:CSCO) did when it acquired Inlet Technologies, Extend Media and BNI Video to create their Videoscape TV everywhere solution. When the major players in any market are companies like Cisco, which to date has invested half a billion dollars into their TV everywhere platform, the writing is on the wall for smaller companies to become part of a larger ecosystem.
While I believe this deal is good for Ooyala and their customers, as an industry, we have to set the proper expectations on the size and growth of the different markets that vendors sell into. Companies are always so quick to throw out huge numbers on how big a market will grow to in a few years, but they are always wrong. Brightcove made this mistake when in their S-1 filing they said the “total potential market opportunity was approximately $2.3 billion in 2011, growing to approximately $5.8 billion in 2015.” This set wrong expectations with not just those on Wall Street, but also with those who track the industry. In an open letter to Ooyala’s employees, their CEO said, “The market for the technologies and services we provide is will be worth tens of billions in the next few years.” Those are not realistic market sizing numbers.
If you combine the revenue of all the companies in this space that are selling cloud based services similar to Ooyala, it is somewhere in the ballpark of $500M. And that number includes a large percentage of revenue from reselling bandwidth, not platform license fees. [See: OVPs Still Getting Too Much Of Their Revenue From The Re-Sale Of Bandwidth] So even if the industry as a whole grows 30% a year, for the next three years, that’s combined revenue of about $1.3B globally. That’s a long way away from Brightcove’s “$5.8B” number or Ooyala’s “tens of billions” estimate.
While Ooyala still has to execute properly in the market, Telstra’s backing gives Ooyala everything they need to scale their business to a level that most other competitors won’t be able to get to. They can hire more employees, spend more on R&D, have a true global presence, create very large and meaningful partnerships and drive faster adoption for their services. I would argue they have more work to do now than before the acquisition, but with the new backing and new resources, Ooyala should be able to grow and scale their business at a level they simply would not have accomplished on their own.
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