Analysis: Is Ooyala Worthless?

Stating that he “believe(s) it is appropriate to impair all of the goodwill associated with the business,” Telstra’s Stephen Elop announced last week his company is taking a $273 million Australian Dollar (AUD) impairment (or, in U.S. terms, a $214 million write-down) on Ooyala, which operates as a wholly owned subsidiary of the Australian telecommunications giant.

Elop’s announcement comes less than two years after Telstra CEO Andy Penn announced its first write-down against Ooyala’s valuation, a staggering-at-the-time $246 million AUD impairment.

The purchase price for Ooyala was approximately $380 million AUD ($331 million USD), based on several investments over the years, including a 23% investment stake for approximately $68 million AUD ($61 million USD) between 2012-2014, and an additional August 2014 investment of approximately $300 million AUD ($270 million USD) to net Telstra a total 98% ownership stake in Ooyala. That last investment was based on a 5x revenue valuation at the time.

In other words, Ooyala is, in financial terms, worthless. That’s a hard fall for a scrappy startup with Google alumni as founders that had touted its analytics platforms at a number of Streaming Media shows, and also the one that Telstra had declared would be “bigger than YouTube” in 2014.

Telstra claims that the true value it has to write down against Ooyala is much higher than the purchase price. Combined, the two Telstra impairments over the past two years add up to approximately $519 million AUD.

This extended impairment could be due, in part, to additional acquisitions and financial shoring up of Ooyala at the time of purchase. One such acquisition occurred just two months after Telstra acquired Ooyala, with Ooyala in turn purchasing Videoplaza, allowing Ooyala to rapidly get into the video advertising game.

Penn, who was CFO for Telstra at the time Ooyala was purchased, hired Elop in April 2016 to serve both as Ooyala’s chairman and also as Telstra’s Group executive of technology, innovation, and strategy.

If Elop’s name sounds familiar, you might remember him from early days at Adobe and Microsoft, or from a later stint at Nokia, where he served as the first non-Finnish CEO of the once-great handset maker. Microsoft acquired Nokia in 2013, bringing Elop back into the Microsoft fold, where he then served as an executive vice president of Microsoft’s devices group, integrating Nokia into the Windows Phone platform. During the 2013-2015 timeframe, Elop was rumored to be in line to replace Microsoft CEO Steve Ballmer. However, in April 2015, after Satya Nadella succeeded Ballmer, Elop left Microsoft.

What’s left for Ooyala, and more importantly Telstra? During the most recent impairment announcement, Elop noted that Ooyala has two more key components beyond the advertising technology that was specifically noted in the impairment announcement.

“Ad tech has not performed well and we will therefore seek ways to exit that part of the business,” said Elop. “Importantly we do see a future in the other core parts of the Ooyala business—video player and the workflow management system.”

“The new Ooyala management team is making positive progress,” said Elop, noting that improvements could come “through improved booking trends, product quality, and reduced customer churn.”

Working the fundamentals will be key, but Ooyala has seemed to have trouble with even those things in recent years.

In an August 21 2016, Financial Review article titled “How Telstra Blew its First Silicon Valley Deal,” the responsiveness of other online video platform (OVPs) in the Asia Pacific (APAC) and Australian markets was praised and Ooyala’s failure to respond in a timely manner was panned.

“Brightcove promised to respond to any glitches within two hours,” the article noted, citing an interview with Fairfax Media video manager David McMillan. “In emergencies, someone would be available immediately. Its competitor, Ooyala, which was owned by Telstra, wasn’t so reliable. Emails sent to its Silicon Valley headquarters wouldn’t be returned for days, if at all.”

In the same article, after announcing the 246 million AUD impairment, Penn noted that “Ooyala’s video business isn’t succeeding and it is switching to a different way of making money.”

Apparently that way also didn’t work, which is more than a shame: Telstra’s dominance in the Australian market, coupled with Ooyala’s foresight to enter the APAC market early on—at a time when many other online video platforms (OVPs) were focused on North American and European customers—gave the Telstra-Ooyala combination a seemingly invincible one-two combination.

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Telstra writes off Ooyala subsidiary; announces exit of adtech business

Telstra is writing off investment in fledging video adtech and platform player, Ooyala, and will exit the adtech side of the business after it failed to meet performance expectations.

In a statement to the ASX today, the telco said it would take a one-off impairment charge of $273 million and write down the value of the US-based business to zero after failing to turn around its performance over the past 18 months.

Telstra initially took a 5 per cent stake in Ooyala back in 2012, and gain 98 per cent ownership of the company in 2014 in a deal valued at US$270 million. Prior to that, Telstra had previously invested US$61 million over two years.

By 2016, Telstra had already impaired the business, announcing plans aimed at trying to turn Ooyala around in the face of changing market dynamics. Ooyala was founded in 2007 and had a customer base including Dell, News Corp, The Washington Post, ESPN and Univision.

Telstra group executive of technology, innovation and strategy, Stephen Elop, who is also the chairman of the Ooyala board, said the group had purchased the business at a time “when the market dynamics were very different”. Ooyala has three components to its business: An adtech offering, an OVP, or video player, and a workflow management system.

“We believed Ooyala remained a young and exciting company with leading offerings in intelligent video, which were continuing to evolve and scale,” he said. “While some of these initiatives have been successful, the market has continued to change.

“Adtech has not performed well and we will therefore seek ways to exit that part of the business. Importantly, we do see a future in other core parts of the Ooyala business – video player and the workflow management system.”

Elop claimed the new Ooyala management team was making progress around improving booking trends, product quality and reduced customer churn but admitted the company had yet to achieve sufficient scale.

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Mobile video consumption flattens

According to the Q2 2017 Global Video Index from video software and services provider Ooyala, video consumption on mobile devices stayed essentially flat in the second quarter of 2017. The quarter’s report also tracks global variances in video consumption including greater Q/Q growth for tablet viewing, mobile growth in global markets, as well as emerging trends in online video advertising.

For the second consecutive quarter, long-form content — greater than 20 minutes in length — now represents the majority of time spent watching video across all screen sizes, with mobile devices being the platform of choice between 2.4 to 3.3 times more than personal computers.

Much of that is due to the increasing amount of premium content that services are now making available to all devices. As longer content becomes more prevalent, an increasing number of users — across all demographics — are as comfortable watching longer form content on smaller screens as they are watching it on big screens. And they’re simply watching more content in general.

By device, data finds long-form content now represents:

– 96 per cent of all time spent watching video on connected TVs, down marginally from 98 per cent the quarter before;
– 82 per cent on tablets, also up slightly from 81 per cent in Q1;
– 53 per cent on computers, down from 65 per cent in Q1;
– 53 per cent on smartphones, marginally down from 55 per cent in Q1

Global video consumption

Mobile viewing continues to be a major driver of OTT growth, despite the plateau in growth in Q2 2017. Although mobile plays were dominant in every region, Ooyala found that mobile plays in Asia pacific made up nearly three quarters of all plays at 72 per cent, the highest in the world, a 21.9 percent variance in consumption over North American viewers. EMEA at 12.6 per cent and Asia Pacific at 14.1 per cent saw the highest percentage of tablet plays.

Regionally, the study finds:

– In EMEA, mobile plays represent 57.7 per cent of all video plays, up from just 54.1 per cent in Q1;
– In North America, mobile represents slightly more than half of all video plays; for the fourth consecutive quarter;
– In APAC, 72 per cent of all video plays are on mobile, up from 61 per cent in Q1;
– In LatAm, mobile plays topped 56 per cent. After consecutive quarters of mobile play share increasing 7.5 per cent in Q4 2016 and 8.4 per cent in Q1 2017, mobile this quarter grew just 0.1 per cent

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