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Head in the Cloud: Investing in an Agile Future (Part 1)

In the first of a two-part blog series, Grass Valley CEO and President Tim Shoulders looks at how an OpEx-driven approach to broadcast media workflows makes sense for the future

By Timothy Shoulders II, CEO & President at Grass Valley

I love television and the people that work tirelessly to bring the creativity and passion that make it so compelling. But the industry I love finds itself at a crossroads. And the challenge the industry faces is daunting. Broadcasters are facing increasing competition from Netflix, Amazon, and other streaming services, along with substantial declines in traditional advertising revenues. To adapt to this changing market, our media customers have to rethink the economics of their business or risk becoming obsolete.

The hallmark of any successful business is an optimal return on investment. With declining revenues (the return part of the equation), it becomes important to shrink the investment part to keep the ratio in balance. As the CEO of a large supplier in this business, this is where I come in. Grass Valley supplies product to nearly 90% of the industry's large media companies. We are an integral part of the media supply chain that forms the "investment" side. As our customers are required to make bold choices about their investment strategy, we on the investment side of the equation need to provide them with new options — and sometimes, those new options have to be just as bold. Fortunately, technology is evolving across both content acquisition and production — and new technology, like cloud-based solutions, enable us to support a reduction in investment. It's simple math, really, but it's shrouded in mystery and obscured by fear and doubt. Let's take a closer look at what we know.

CapEx versus OpEx

As they look at their investment strategy, many TV business leaders face a major hurdle: the way their investors view their financial statements. Many investors favor EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) as a way to measure the health of a business. This is because EBITDA is a rough substitute for a business' cash generation without financing activities. Companies that generate cash are good (more is better!) and companies that burn cash are bad. This means many investors in our industry see OpEx (Operational Expense - paying for services or solutions, like software, as they are used) as the bad guy and CapEx (purchasing capital assets that are depreciated over time) as the good guy.

CapEx has been traditionally relied upon to build broadcast-caliber media workflows. OpEx models that enable media companies to pay for services and solutions based on actual usage, over time, offer many advantages. So, what's standing in the way?

CapEx goes on the balance sheet and never impacts EBITDA as the depreciation portion is excluded from EBITDA. OpEx, on the other hand, reduces earnings, making EBITDA smaller. The negative perception of OpEx is exacerbated by the fact that many companies use EBITDA to calculate bonuses. Who is going to outfit their production workflow with solutions paid for with OpEx if it's going to reduce their personal income?

OpEx is villainized because of the loose correlation between EBITDA and cash flow. In reality this reputation is unearned. Imagine that you have the choice between a capital investment or a lease. With a capital investment, you pay for the solution at the beginning of your investment. All the cash is paid to your vendors immediately. With a lease you can spread my payments over the life of the solution, matching the cash outflow with the cash inflow from putting the solution to productive use. Voila! You have immediately improved your cash flow (despite lower EBITDA). OpEx-based workflow solutions can improve cash flow in the same way. For example, many of our products are only used when there is an event to cover, like a sporting event or breaking news. If you could pay for these products ONLY during the time they were in use, in some applications, pay-per-use could reduce the overall cash outflow by more than 80%!

Another advantage of OpEx models to consider is decreasing risk and barriers to entry. If a TV exec makes a bet on a new, innovative product and spends CapEx and it doesn't work out, that decision may have cost the business millions of dollars in idle assets. On the other-hand, if the exec used a pay-per-use model and the product is cancelled, the business is only out a fraction of the cost. Maybe the idea didn't work out, but it wasn't a career killer.

A new approach for the next generation

I see an emerging generation of TV industry executives from IT-based backgrounds. These may be the folks who lead the industry transition away from big CapEx. The promise of innovation, creativity and more productive use of resources is already spurring industry trailblazers, like video-gaming brands who broadcast e-sports, to focus on OpEx-centric workflows — using cloud-based technologies and elastic compute to reduce the cost of production.

The real economic advantages of OpEx models are just too good to pass up. Eventually, perception will merge with reality and drive the adoption of OpEx models. Increasingly, I expect to see a pronounced shift towards trading dollars of CapEx for cents of OpEx because it makes sense for broadcast businesses to do that. One final point about pay-per-use models, is that typically, these solutions "refresh" in real time. New features and options are being added on a regular basis. In a CapEx model, often the solutions are static and an additional investment is required to add new features. Those that refrain from embracing OpEx may discover that waiting to join the party will only end up costing them more in the long run.

I'm working on part two, which will be available on May 11, 2021.