Avid buys Pinnacle – the fallout

The acquisition of Pinnacle will greatly strengthen Avid’s Broadcast video offerings, the area of their business that has been strongest in recent years but will create challenges in integrating product lines and cultures. It is a move that brings further consolidation to the post production business.

Pinnacle has been in acquisition mode for most of the last five years acquiring, among others, Miro, Targa, Dazzle, Fast and Steinberg (sold on to Yamaha recently). It has a diverse line of products in major product lines:

• Broadcast Tools – Deko On Air graphics products (Character Generators) and MediaStream playout servers;
• Consumer editing software and hardware – with 10 million customers;
• Professional Editing – The Liquid product line acquired from Fast; and
• Editing Hardware – Cinewave and T300 based on the Targa acquisition.

Pinnacle has achieved nine Emmy Awards for its Broadcast product lines.

There will be conflicts and opportunities for Avid. It presents Avid with a new opportunity to create a consumer brand and Avid CEO David Krall has announced that a new consumer division will be formed analogous to the M-Audio consumer audio division acquired last year. M-Audio is the consumer parallel to Avid’s Digidesign professional division. The acquisition also consolidates Avid’s position supplying the Broadcast markets, making the company more of a "one stop shop" for a broadcast facility. There is definitely engineering work to be done on integrating the two technology lines, but there are no particular challenges there, and savings are to be made in streamlining sales and marketing. In broadcast there are only pluses for Avid.

Consumer

Bringing the Avid brand into the consumer market has a slight risk of diluting the Avid editing brand – if consumers edit on "Avid" what’s special about professional editors? However, by carefully managing product brands over company brand, as has been done with M-Audio, there should be an opportunity to bring some of those retail customers up to Xpress or Adrenaline products as their need grows, similar to the way Apple have a path for their iMovie customers to move up to Final Cut Express or Final Cut Pro.

Hardware

Avid and Pinnacle have had a long relationship on the hardware side – Targa supplied the first boards Avid used for video acquisition and the Meridien hardware was designed to Avid’s specifications but manufactured by Pinnacle as an OEM. Whether Avid has any use for the aging T3000 hardware product line (like Cinewave based on the Hub3 programmable architecture that was the primary driver of the Targa purchase) is debatable: Avid have embraced the CPU/GPU future for their products and are unlikely to change course again.

Cinewave

It almost certainly spells the end of Pinnacle’s only Mac product – Cinewave. Rumors were spreading independently of the Avid purchase that Cinewave was at the end of its product life, possibly spurred by changes coming in a future version of Final Cut Pro that no longer supported direct hardware effects. Regardless of whether or not there was any foundation in that rumor, Cinewave is an isolated product in that product group and based on relatively old technology. It is a tribute to the design flexibility and engineering team that essentially the same hardware is still in active production four years after release. Whether the product dies because it’s reached the end of its natural life, or because Avid could not be seen to be supporting the competing Final Cut Pro, it’s definitely at an end.

Liquid

There is, however, one part of the integration that simply does not fit: Pinnacle’s Liquid NLE software. Avid are acquiring an excellent engineering team – the former FAST team out of Germany – but the two NLEs have no commonality. Integrating features from one NLE into another is not trivial as code-bases are unlikely to have any compatibilities, and attempting to move Avid’s customer base toward any Liquid editor is unlikely to have any success at all.

Avid could simply let the product line die. The Liquid range has not exactly sold like hotcakes. This scenario would bring the best of the features and engineers into the Avid family and we’d see the results in 2-3 years as engineering teams merged.

They could, of course, leave Liquid alone – set it up as a division within the company and leave it be. Avid have done that with Digidesign, Softimage and M-Audio. No radical changes and slow integration of technologies where it makes sense. Liquid have probably taken few customers from Avid to date – few Composer customers have moved to Liquid. Instead, Liquid has acquired new NLE customers or people moving "up" from other NLEs. Liquid’s strongest customer bases are in small studios and in broadcast markets.

Even though Avid have let Digidesign and M-Audio compete, even although there is some overlap, it’s hard to imagine keeping a full product line that directly competes with the flagship products – on cheaper hardware at lower cost. Hard to imagine, but not impossible. It would be the most consistent behavior based on past acquisitions but one that would require a delicate balancing act to retain the new customers Pinnacle are bringing to the fold, without risking cutting into the more profitable Xpress, Media Composer and DS products.

Transaction

The transaction values Pinnacle at $462 million based on Avid’s closing price yesterday and will be handled by a combination of cash and shares. Avid will pay about $71 million in cash and issue 6.2 million new shares to the holders of Pinnacle stock, who will then make up about 15% of Avid’s shareholders. The transaction has been approved by the Boards of both companies but must still be approved by regulators and shareholders and is not expected to close until the 2nd or 3rd quarter of 2005.

The companies expect savings in regulatory costs, marketing and sales. We can expect little to change in the short term except probably, some volatility in Avid’s stock price as people try and work out what it all means.

NAB is going to be interesting this year.