8th October 2021
The Media and Entertainment (M&E) industry continues to go through a period of unprecedented change, which has provided a huge opportunity for smaller technology providers to win against their larger competitors. Having successfully exited Sohonet and Masstech within a month of each other earlier this year, we have been reflecting on why the industry is attracting attention and will continue to do so for a long time to come, and recently held a roundtable discussion for 10 CEOs of growth stage M&E tech providers to discuss further. Here are our five takeaways:
1. Episodic content production will continue to surge in volume through at least 2023, driven by Netflix, Amazon, Disney+, Warner Bros, etc.
The end market continues to grow, driven largely by OTT platforms fighting for eyeballs on the small screen – and they are currently showing no signs of slowing down in their pursuit of subscribers. In 2020, the gross cash amount spent globally producing and licensing new content rocketed by 16% to an all time high of $220bn, with the top four companies accounting for $76.3bn alone. Industry consensus suggests that the positive trends are set to continue with demand for content still significantly outstripping supply. For example, in September 2021 Netflix announced that their annual content spend rose 26% to $13.1bn with S&P’s Kagan media research unit forecasting 14% annual growth rate for Netflix alone through to 2025.
2. The industry is experiencing an accelerated adoption of “cloud-first” workflows as public cloud becomes more attractive
Historically, the M&E industry pushed the limits of technology given its unique requirement to manage large volumes of content. However, this ultimately led to the development of highly specialised applications and hardware that needed to be installed on-premise. As a result, capex intensive technology outlays became entrenched within the industry, which has led to slow adoption of public cloud platforms; when the rest of the world started moving their technology estate to Azure and AWS, CFOs of large media companies were reluctant to write off “sunk capital”. But as capital assets have depreciated and the tangible benefits of public cloud - such as flexibility, security and computing power - have become more widely acknowledged, the internal debate has started to shift to public cloud infrastructure and cloud optimised software and workflows.
We experienced the transition first-hand through our investment in Masstech, a leading provider of storage software to broadcasters, where the team, led by George Kilpatrick, did an excellent job of transitioning two legacy on-premise products into one cloud-optimised platform. As a result of its repositioning Masstech was acquired by Telestream, a leading provider of software to M&E companies, in March 2021, as per their ambition to develop end-to-end workflows.
3. Improving connectivity speeds combined with affordable tools will yield a revolution in distributed workforce
Prior to Covid-19, less than 5% of staff worked remotely. However, government mandated lockdowns combined with modern communications and technology infrastructure have accelerated attitudes towards remote working, with a significant proportion of the 800k freelancers powering the production and post-production industry benefitting from the shift.
When the pandemic struck, we were invested in Sohonet, a leading provider of networking services and collaboration tools to film, TV and media companies, and had been since 2012. Chuck Parker and his team had foreseen the inevitable shift towards remote collaboration, and had invested into building Clearview, a software product that provides creatives with secure remote live streaming and collaboration capability on top of Sohonet’s core networking service. In 2020 Clearview was perfectly positioned to enable the industry to work from home and gained significant sales momentum. This, alongside Sohonet continuing to power ahead as the market leader in M&E networking services, enabled all the business’ shareholders to achieve a premium valuation when we sold our stakes to a mid-market private equity firm in March 2021.
4. Virtual production will accelerate, reducing on-location costs
Season One of Disney’s Mandalorian put virtual production to the front and centre of the M&E industry agenda due to its promise of big budget looks without the cost and complexity of on-location shooting, and Season Two demonstrated that the model was also Covid-19 resilient. A large number of studios have announced plans to deploy virtual production sounds stage for their customers and VFX companies like Pixomondo and gaming companies like Epic and Unity are investing in technological innovation that will provide scalable, cost-effective solutions for TV and film.
There are a number of benefits to virtual production; it reduces creative boundaries, increases shooting efficiency, reduces overall cost, and reduces the waste of one-off set production, but also increases the technical requirements to producing content effectively. Again, we saw this trend build momentum at Sohonet, where demand for secure networking and post-production collaboration tools increased as production shifted to virtual facilities.
5. M&A and investment activity is being accelerated by underlying disruption
The sale of both Masstech and Sohonet within a month of each other is indicative of the underlying industry disruption described above, as well as broader interest from both strategic acquirers and financial investors who have identified opportunity in the sector.
The most notable recent transaction in the sector is Adobe’s acquisition of Frame.io for $1.2bn; a price that many struggle to justify, but clearly Adobe was attracted by the opportunity to expand its proposition further into cloud collaboration and upsell Frame’s functionality into its 22m strong subscriber base. Other significant moves include Prysm being acquired by NEP and HP’s acquisition of Teradici.
At FPE, we are also on the lookout for opportunities to invest behind software and services providers that are taking advantage of this market disruption, where we can bring our experience of working with Sohonet and Masstech to bear. If you are interested in a conversation please reach out!