Tag: RealNetworks

Intel: the latest tech giant to buy patents

Contact: Thejeswi Venkatesh

Intel has announced the acquisition of 190 patents, 170 patent applications and video codec software from RealNetworks for $120m. The transaction comes just eight months after Intel bought SiPort, a Santa Clara, California-based company that made audio-processing semiconductors. We see these moves as an indication that Intel wants to integrate more media and graphics capabilities into its chips, which these purchases should help with.

Barely three days ago, Intel inked a deal with QLogic to buy its InfiniBand business for $125m. That already makes Intel’s M&A spending for 2012 more than 60% of its full-year 2011 spending. What’s more, Intel was reportedly one of the bidders for InterDigital Communications, whose patent sale was called off earlier this week due to a gap in valuation expectations (InterDigital was reportedly looking for $3bn).

Patent sales have become one of the overarching themes of recent M&A activity, and one that we expect to continue throughout the year (see our 2012 M&A Outlook – Introduction for a full report). The reason for this is partly for offense (to expand a vendor’s existing product portfolio, like this Intel transaction) and partly for defense (as a hedge against a lawsuit, as is the case in Google’s reach for Motorola Mobility). The importance of these deals also registers on the other side of the transaction, the seller of the IP. Consider the contrast: Wall Street sent shares of RealNetworks soaring (up about 34%) on word that it had struck its deal with Intel, while it punished shares of InterDigital for not getting a sale done. InterDigital is currently trading at just half the level it was last summer.

Intel’s M&A activity

Fiscal year Deal volume Deal value
2011 11 $377m
2010 7 $9120m
2009 3 $884m
2008 3 $8m
2007 1 $110m

Source: The 451 M&A KnowledgeBase

Online video: boom and bust

-Contact Thomas Rasmussen

The over-hyped world of online video is going through massive turmoil at the moment. While most investors and companies agree that online video is likely the future of broadcasting, no one has been able to make any money from it so far. And it’s likely to get even harder due to tighter venture funding, the closed IPO window and next-generation Web 2.0 entrants such as Hulu and even Apple’s iTunes. These factors have left the online video players scrambling toward any exit, no matter how cheap.

Consider the case of CinemaNow, which was picked up by Sonic Solutions for a mere $3m last month. The portal never managed to turn a profit and had estimated revenue of less than $4m. Yet it secured five rounds of funding (totaling more than $40m) and brokered partnerships with major studios, VCs and strategic investors. When CinemaNow went to investors begging for another round a few months ago, it found that there was no money to be had and a quick exit became the only alternative. That’s a common occurrence these days, and may well have driven rival MovieLink to sell for a paltry $6.6m to Blockbuster last year. (Expect more of these types of deals next year. According to corporate development executives who completed our annual M&A outlook survey, lack of access to VC will be the major catalyst for deal flow in 2009.)

If this sounds eerily familiar, it’s because a similar situation played out during the music industry’s awkward and reluctant switch to digital a few years ago. Several startups, even major ones backed by large studios, tried to become the distributor of choice. Yet, many of those went away in scrap sales or had the plug pulled on them (Viacom’s Urge, Napster and Yahoo’s music service, to name just a few high-profile failures). We’re now left with just a handful of dominant distributors: iTunes, RealNetworks’ Rhapsody, Amazon and, to an increasing extent, MySpace’s heavily funded music effort. Many of these companies are likely to also dominate online video. In fact, add in Google and Microsoft, and you have a list of the companies that are likely to be buyers for the few remaining online video startups.

Recent online video M&A

Year Number of deals
2008 12
2007 10
2006 5

Source: The 451 M&A KnowledgeBase

Betting on casual gaming

-by Thomas Rasmussen

Casual gaming is a serious business. Amid a decline in M&A across the overall gaming industry, casual gaming acquisitions are trending up slightly. So far this year there have been 28 social and casual gaming deals inked, which compares to 25 for all of last year. This is in stark contrast to a sharp decline of more than 30% in tech and gaming M&A in general. What might the reason be for this and what does it portend for the year to come?

The past month has authoritatively invalidated a long-held belief by those in the gaming industry: It is not a recession-proof sector. In fact, lackluster earnings from Electronic Arts (EA) and others have the industry anxious. EA posted a negative EBITDA of $310m, provided dire forecasts and announced across-the-board job cuts for the most recent quarter ended September 30. The bright spot, however, is the continuing growth in casual gaming among not only the big videogame companies such as EA, but other companies, as well. For instance, RealNetworks’ recent third-quarter earnings report boasts another 20% increase in its gaming business compared to last quarter. As the casual gaming industry continues to be seen more as a viable business model, we expect the shopping to continue for not only the gaming conglomerates, but also for large media companies looking to get in the game. Amazon’s recent acquisition of Reflexive Entertainment is an example of new acquirers shopping in the space.

Not that it is a hard trend to spot, but for what it’s worth, VCs, angels and serial entrepreneurs have been touting this development to us all year, and are putting their money where their mouths are. Among some of the startups to receive sizable funding recently are Playfish, which raised a $17m series B round last month for a total of $21m to date; Social Gaming Network Inc, which has won about $20m in funding so far; and Zynga Game Network, which has taken in $39m. That is a lot of money for companies in an industry previously regarded as a niche. And given the heavy consolidation experienced in the traditional gaming industry, all of these vendors are likely to be part of the many names mentioned in M&A chatter in the near future.

Napster sings the blues

Napster, once hailed as the king of digital music, has fallen on hard times. Its stock is down 35% this year alone, and 55% from its 52-week high set in October 2007. Resulting shareholder ire forced the company to announce last week that it is seeking strategic alternatives to boost value, and it has hired UBS Investment Bank to lead the effort. Who might acquire the house that Shawn Fanning built?

Since relaunching as a legal music service in late 2003, Napster has been unable to turn a profit. The company pulled in $125m in revenue for the trailing 12 months ended June 30 from about 708,000 paid subscribers. Despite increasing revenue 15% year-over-year, the company had a negative EBITDA of $12.3m and subscriber count decreased from last quarter’s total of 761,000. The switch from stagnation to a drop in subscribers for the first time means that Napster will be unable to keep growing revenue. Consequently, that makes it doubtful that it will be able to achieve profitability. Nevertheless, with $36.9m in cash and $30.7m in short-term investments, Napster is an attractive target at its current valuation of $62.25m.

We previously speculated that SanDisk would attempt to acquire a proprietary music service of its own. But given its financial woes, as well as reported takeover negotiations with Samsung, we do not think it will bite. We believe Napster’s fierce competitor RealNetworks, the majority owner of the Rhapsody music service, is the most likely acquirer. Amid growing competition from Apple, which unveiled its iTunes 8 and a new line of iPods this week, and with digital music newcomers Amazon, Nokia and a few promising startups making waves, this is a much more plausible proposition. Last year Rhapsody picked up Viacom’s Urge, which had been struggling despite its high-profile association with MTV and Microsoft. RealNetworks has the cash, and has repeatedly told us it is bullish on acquisitions that spur growth. Given Napster’s current valuation and similar deals, we estimate that it will fetch around $80-100m in a sale.

SanDisk amps up its music player offerings

With its $6.5m tuck-in acquisition of MusicGremlin last week, SanDisk is bulking up its digital music player business. MusicGremlin, with just eight employees and about $5m in revenue, will obviously not have a material effect on SanDisk’s business. Nonetheless, the importance is not so much the size or scope of the company, but more the technology it has developed during its four years in operation. Specifically, MusicGremlin gives SanDisk the ability to effectively stream music wirelessly to its products. We have learned that SanDisk was very eager to acquire the startup, with the large company initiating talks and sealing a deal within a few weeks. Given SanDisk’s recent effort to build its product offerings through strategic acquisitions, what other acquisitions might the company be considering?

From our perspective, SanDisk needs to do some shopping. It currently ranks a distant second place to Apple in the digital music player market, but also faces stiff competition from the likes of Microsoft, Sony and Panasonic. Perhaps the biggest hole in SanDisk’s offerings is the lack of an in-house music and video content provider, like Apple has with its iTunes and Microsoft has with its Zune Marketplace. To date, SanDisk has relied exclusively on partnerships, but learned the downside of that strategy the hard way in February, when Yahoo suddenly shuttered its Music Unlimited service. The disappearance of the service, which was the very foundation of SanDisk’s Sansa Connect player, left users understandably sour.

As to where SanDisk might look for a music service, two names come to mind: Rhapsody (owned by RealNetworks) and Napster. Despite taking in about $150m and $130m last year, respectively, both are consistently running at a loss. Clearly they could be had for a steal. More importantly, they are both proven and established music services with mobile offerings that would make integrating MusicGremlin’s technology an easy task. Using Napster as a comparable, we believe either company can be had for just under $100m, representing a 40% premium over Napster’s current price on Nasdaq. With $1.22bn in cash and a market cap of $5.2bn, SanDisk could certainly afford a few deals to shore up its defenses for the inevitable battle of the titans.