Telstra Plans To Spin Out Ooyala In Public IPO, Setting Unrealistic Expectations

ooyala-logo-dark-gradientNews site The Australian is reporting that Telstra plans to spin of Ooyala, the online video platform provider they purchased in August of last year, with an IPO on the NYSE or NASDAQ. I’ve been hearing these rumors for a few weeks now and while it would be good to see another online video platform provider join Brightcove as a public company, Ooyala’s not setting realistic expectations on the size of the market they are in, or how quickly they can grow.

Based on what some at Telstra have told me, Ooyala is predicting they will do $100M in revenue for 2015. At the same time, Ooyala keeps talking about how they think their business can grow to do $1B in revenue in a few years, which isn’t realistic. Last year, Ooyala said the market for the technologies and services they provide “will be worth tens of billions in the next few years,” a number not even close to reality. Vendors do this all the time where they take every single product or service in the video ecosystem, even if they don’t offer parts of it, and round it up to one big number. But the only number that is relevant is the direct market you sell into, for a specific service.

The market that Ooyala provides services to is around half a billion dollars today. That’s the real revenue being generated in 2015 by vendors selling similar solutions to Ooyala. I know some vendors will say the market “opportunity” is more, but that’s not a real number. What you book in revenue, what your competitors book in contracts, that’s what’s real. That’s the size of the market. Also, a good percentage of the revenue coming from these services moves from one vendor to another with contract renewals. So a shift in wallet share impacts revenue, but it does not impact the market size the way some count it.

Brightcove made this same mistake when they went public in 2012, by using market sizing numbers that simply weren’t real. Their S-1 filing said the market opportunity was “approximately $2.3 billion in 2011, growing to approximately $5.8 billion in 2015,” when they had revenue of $64M. Since Brightcove went public in 2012, their revenue growth has declined each year. In 2013, Brightcove’s year-over-year revenue growth was 20%. In 2014, it dropped to 12% and based on Brightcove’s projected revenue of $133M for 2015 that would put their revenue growth this year at 6%. Based on Brightcove’s market sizing projections, the company will capture 0.000002% 2.9% of the market this year. These market sizing numbers are just silly. They aren’t real.

While Brightcove and Ooyala offer similar products, Ooyala does sell into operators, which Brightcove doesn’t. But that alone is not enough to justify their market or revenue projections. Even if Ooyala grew revenue 50% each year, it would take them six years to get to $1B. If they execute everything in their business perfectly, the market simply isn’t as big as they suggest it is, which doesn’t support their growth expectations.

Ooyala does have a major advantage over Brightcove, which is the fact that Telstra is pumping a lot of money into the company. Ooyala is due to move into their new 65,000 sq ft headquarters in Santa Clara later this year, and the company has been on a huge hiring spree. Ooyala currently has 63 job openings on their website and has been hiring 50 employees per quarter. So Telstra is doubling down on this business and betting big, which is great to see. But we also haven’t seen a single OVP prove to the market that they can become a profitable business based on their current business model. Ooyala doesn’t have to worry about profitability for a while since Telstra is clearly sacrificing profitability for growth, but at some point, the P&L of any vendor’s business is going to matter.

Ooyala has a lot going on with their current hiring spree, moving into a new HQ and potentially going public sometime soon. The company is also looking to hire a COO for the company, along with some other executive positions. They have all the tools to needed to grow this business, but one of the hardest things to do for any company is manage such fast expansion. This is something that has hindered many vendors in the online video industry. Just as they start to get big, we’ve seen QoS issues, problems with scaling the business and keeping up with demand. Ooyala had this problem in the past as their business started to grow, hence why it made sense for them to be acquired by Telstra and have the resources of a bigger company behind them.

I want to make it clear; I’m not knocking Ooyala, Brightcove or any other video platform provider. These vendors provide a valuable service in the market, making the complex video ecosystem easy to use and deploy. I’m just as excited about the market opportunity as they are. But setting false expectations simply sets companies up for failure and is bad for the entire industry. I want companies to grow, but the growth has to be tempered with expectations that companies can actually achieve. Be excited, but be realistic.

  • Yoel

    very true analysis Dan. I think Ooyala and some of the other OVP companies are indeed great companies and they shouldn’t have to over-sell their market CAP

  • Tim Napoleon

    If either BrightCove with Once or Ooyala with Video Plaza can start booking media spend at meaningful levels that could be a huge boost to their business in terms of revenue. There are dozens of publicly traded companies in “the space” all of them would like to see BrightCove’s stock get on a roll. If you look at Facebook and Google video is starting to play a increasingly important component to their revenue. MLB.com is another company going after digital dollars dollars. Bowman had hinted at revenue approaching $850 million. The TAM for online video is massive and factors larger than $500 Million. The $500 number would be appropriate for the video CMS marketing targeting traditional playback on desktop. Ooyala is much more than that. If the HBO Go OTT models work there are billions in servicing that model. Looking at Aspera it was able to get a large premium for their revenue in a sale to IBM. It would be fantastic for our industry keep commanding those premiums reflecting the innovation our platforms provide. As a publication that directly benefits from our success and a key mouth piece to the financial community it is critical we keep letting folks know BrightCove is not a bellwether stock for an entire industry. Many of the public stocks that you can invest in that tie to the rising tides of online video are now inside massive organizations making it difficult to put pure play money to work in a growth stock. Adobe, Amazon via AWS, Netflix and Akamai have all delivered huge returns to their investors with online video as a central theme. As excited as investors are about online video it is difficult to buy Telstra stock today to “play” in online video.The Ooyala revenue is such a small piece of the overall revenue mix there. It would be fantastic as an investor if I could buy Verizon Media Services with out owning the parent Verizon stock or Level 3 CDN without Level 3 parent. I would argue that Limelight and BrightCove are the exceptions and not the rule and should not be boat anchors to the Ooyala IPO. This goes well I could several companies unlocking value by allowing their digital businesses to escape the mothership and do big things in the public markets.

  • Jeremy Hartley

    Dan, I don’t disagree with your main argument about Ooyala, but please explain to me how: ….. growing to approximately $5.8 billion in 2015,”…. and
    based on Brightcove’s projected revenue of $133M for 2015 that would put
    their revenue growth this year at 6%. Based on Brightcove’s market
    sizing projections, the company will capture 0.000002%

    According to my maths Brightcove will capture 2,2% of this market

    • danrayburn

      Brightcove’s revenue in 2013 was $110M. In 2014 it was $125M. So from 2013 to 2014 they grew revenue 12%. If revenue is $133M for 2015, they will have grown revenue 6% in 2015, when compared year-over-year.

      Yes, you are correct on the % numbers, it’s 2.9%, thanks for noticing.