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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Telstra Joins YouTube Advertising Boycott

Australia’s largest telecommunications company Telstra have joined ranks with companies across the world by dropping advertising on YouTube in response to an investigation by The Times last week, which found that ads from the BBC, the UK government and UK retailer Argos were appearing alongside extremist and offensive content.

The telecommunications giant says it is working with Google to ensure its strict advertising guidelines were upheld, but in the meantime has suspended its ads from the video platform.

“We have made the decision to pause our advertising on YouTube until we are satisfied there is an appropriate level of protection for our brand,” a Telstra spokesman told the Sydney Morning Herald.

Bunnings, Foxtel and Caltex have also suspended their ads.

It’s been estimated by analysts that the global backlash could cost Google $750 million in ad-spend.

Google’s Chief Business Officer Philipp Schindler said in a blog post last week that the company would make changes to improve ad placement.

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