We recently referenced some apparent casualties on the solution side of the digital signage space. Meanwhile, there has certainly been no shortage of action on the network side of the digital signage space lately. Amidst mergers, the occasional new network and expansion of existing networks, come rumors that both Ripple TV and CBS Outernet’s Grocery Network (formerly known as SignStorey) are potential casualties in the near future.
Whether the rumors are true or not, the notion that industry consolidation and rationalization would accelerate during a recession should not be counterintuitive. If the rumored situations of Ripple and SignStorey are reality, then they offer separate but somewhat parallel scenarios to discuss, and are part of an important financial trend in our industry.
If in fact Ripple TV is foundering in July after a $4M venture capital injection in late March, then they are burning cash at a rate worthy of a masterless samurai. Further, if their very well known and deep-pocketed financial partners are not stepping up to another round, then they have likely assessed the situation, and must see a further investment as good money after bad. Without passing judgment on Ripple’s strategy or execution, it would seem that someone has determined that the chance to achieve a positive ROI may have gone by the wayside. What else can one infer if two VCs appear willing to turn off the funding spigot?
As for SignStorey, the ROI monster had to rear its ugly head at some point. CBS’ willingness to pay over $70 million for SignStorey a couple of years back was without doubt a watershed event from any perspective. But given the size of their network at the time (1,400 locations), and their reported lack of profitability, it is hard to come up with a rational basis for valuation approaching half the price paid. No subsequent network deal that I am aware of has even approached that level of over-valuation, and it is doubtful any will for the foreseeable future. If one accepts that CBS paid a huge premium above fair market value for SignStorey, it is not a great leap to imagine the suits in New York calculating the IRR on that deal in best, worst and most likely case scenarios. It sounds like the numbers were not encouraging, which is unfortunate.
It is ironic that CBS’ grocery network is often co-located with PRN’s Checkout TV, with CBS on the perimeter, and PRN in the checkout lanes. The fact that PRN, acquired by Thomson 2005 for a princely sum, has been on the block for quite some time is not a secret. The executive brain drain is ongoing, and there doesn’t appear to be many takers for a company that was once the darling of the industry. The fact is that the people who got ROI on PRN were the sellers in 2005, and did they ever cash in! Thomson, on the other hand, has already done the math and made it clear that they just want to recover whatever they can on their purchase. Regardless of the cause for the decline, at the root of it all is the fact that Thomson (like CBS) overpaid, perhaps based on the unmet expectation that WalMartTV would be a cash cow for them, or that synergy with Technicolor would unleash even more value. Again, buyers and investors demanding ROI appear ready to cut their losses.
The brutally over-analyzed Danoo/IdeaCast/NCM deal spawned debates and comparisons to the PRN and SignStorey deals in terms of their significance to the industry. All three are significant, but the comparison ends there. Because the SignStorey and PRN deals were behind the ROI eight-ball before they started, the current chain of events was a high probability event. Where the difference lies is in how the Danoo deal was done. I commented on a post-mortem written by Dave Weinfeld on his blog:
“By comparison, NCM bought into IdeaCast by assuming debt and wiping out the equity holders, according to reports. They subsequently leveraged that position into a 20% stake in Danoo, becoming partners with Danoo’s deep pocketed backers, Kleiner Perkins. The cost was manageable, risk shared with savvy investors, and an exit strategy appears obvious, at least to observers like us. The variable, of course, is the subsequent performance of the new company. So it is not a slam dunk, but RISK has been managed by both NCM and Kleiner. The terms and the shared risk and vision make this deal very different than the others.”
There are two clear trends, the veracity of the rumors notwithstanding, to be observed here. First, that every deal must eventually demonstrate a clear path to ROI to investors in order to have access to continued funding; and second, that the experienced institutions are looking harder at both valuation and risk management on every deal. Combined, they portend more realistic valuations in funding and M&A deals, and more creative partnering to mitigate risk. If more realistic valuations also come with a commitment to see the investment through, then perhaps that is not a bad tradeoff.
Ken: Thanks for your excellent piece.
Yes, it's impossible to know for sure what's happening with CBS Outernet/SignStorey and Ripple TV. But, I liked your point about the effect that three transactions — the big VC investment in Ripple, the overpayment by CBS for SignStorey, and the overpayment by Thomson for PRN — have had on market perceptions of the Digital OOH industry in the USA.
In his blog entry yesterday (cited by your above), Michael Quinn, former executive at PRN said, "I think it means that we (soon to be 'you') need to look outside (far outside) of the current industry to learn what is working in emerging media and to understand the needs that are being met by winning solutions."
Michael is right. What I gleaned from what you wrote and Michael wrote is this: our somewhat narrow view of Digital OOH (hanging networked plasmas and large-format LCD screens in public venues, and expecting people to pay attention) needs to be broadened, in spades.
As mobile-phone technologies deliver more and more media value outside the home and as other forms of OOH Digital Media beyond the plasma/LCD networks grow (I'm thinking cinema-advertising and networked LED billboards), I think we are seeing a broader, richer out-of-home digital media scene emerging. In the midst of this change, it's easy to understand why Tesco Stores in the UK stepped back recently from the circa 2004 Tesco TV network configuration and why, maybe, the old SignStorey grocery network could disappear.
Here I also feel a need to point out that Kroger is remaining silent about its small in-store network that, as far as I am aware, is not growing at the rate that was predicted a few years back. Also, in that context, it's easy to see why National CineMedia (again, a digital OOH company that lies outside the plasma/LCD hang-and-bang scene) was able to play the White Knight role with IdeaCast and a big-brother role with Danoo.
In many ways, this is a repeat of 2001-2003. At that time, in the middle of the last recession after Y2K and 9/11, we saw many Digital OOH neworks disappear in the USA. These included Next Generation Network, Interlinq, Skytron, ScreenZone, Transvision, Ten Square, i-Open, BitFatWow and Vuetopia. These advertising-funded Digital OOH networks, and others dropped away because:
• investors grew tired (this was true across high-tech at that time) of throwing good money after bad,
• advertising revenues did not flow in fast enough to offset all the infrastructure costs, and
• as per the infrastructure cost issue, the industry was, in effect, waiting for a new cost breakthroughs to emerge. [This breakthrough came 2-3 years later when large-format LCDs dramatically drove down network-deployment costs.]
So, again back to the present: What will it take to satisfy the VC firms and the big media companies that our industry does not waste their money, that deployment costs can be reduced and that ad revenue will flow in at a higher rate. We’re back to the same questions that we faced in 2002-2003. But, this time the answers will be different.
Bill Collins
DecisionPoint Media Insights
[…] Networks has purchased Ripple TV. We had speculated that the plug would be pulled back in July. Yesterday the rumor went from coast to coast that the consideration was one dollar. I am not sure […]