October 25, 2019
Transforming a Troubled Legacy Company into a Leader for the New Digital Era.
A digital tsunami is transforming industries and challenging both established and new players.
One such established player, Avid Technology, dominated the market for video editing and music mixing. Early on, every movie studio had “the Avid.”
But Avid, which is still beloved by creative professionals, saw its relevance questioned as digitization created an entirely new business ecosystem. This new ecosystem shifted the industry’s strategic issues and generated problems beyond Avid’s capacity.
Under the leadership of Chairman and CEO Louis Hernandez Jr., Founder, Managing Director and CEO Black Dragon Capital℠, of which Avid was a portfolio company, Avid transformed into a radically new kind of company laser-focused on the industry’s new pain points.
The film, video and music industries are struck by the digital tsunami.
What happened to Avid? Simply put, it was a victim of a new kind of digital disruption, which might be called Disruption 2.0. We call it the digital tsunami, a massive force that’s radically transforming industry landscapes.
We’re all used to the idea of tech-driven disruption – brick-and-mortar retailers having their lunch eaten by Amazon, traditional studios threatened by Netflix and other streaming upstarts, or digital direct payment providers replacing traditional banks.
In that first wave of disruption, innovation destroyed the barriers between industries. But now, the pace of innovation has accelerated so radically that it’s destroying the barriers within industries. Technologies themselves, and the companies founded on them are being disrupted. The barriers between industry silos, and between tasks, are removed. Middlemen are eliminated, and the core business comes into direct contact with the customer. An entirely new business ecosystem is the result.
Avid was significantly affected by such an ecosystem shift, the new economic realities and the new shape of the industry.
The tsunami & Avid
The tsunami swamped Avid and undermined its core business.
Avid had built its business and its reputation before the digital tsunami hit.
Avid’s signature product was a digital editing suite. It was ubiquitous in Hollywood – so much so that studios called it simply “The Avid.” Nearly every studio had one, at a cost of $150,000 per seat. “The Avid” digitized and streamlined the editing and post-production process for music, film and video producers. Thanks to Avid, studios could adjust and optimize scenes without labor-intensive physical splicing or the need for costly reshoots. The cost savings associated with Avid’s digital editing were so significant that, thanks simply to Avid, each studio that used it was able to greenlight an additional 2-3 films per year. This benefit more than offset the substantial cost of Avid hardware and software.
Avid’s core offering was perfectly suited to a world in which studios focused on creating quality productions for release in well-defined single channels. Feature films were made for theater release, with subsequent distribution on premium cable. Long-form television productions were created for premium cable. Episodic shows were built for networks. The focus was on creating the best quality production at the lowest overall cost.
But then the industry changed. New technologies, such as high-capacity broadband and the explosion of entertainment on mobile devices, led to an explosion in the number of channels, which in turn drove an explosion of content as creators rushed to fill the enormous new “capacity hole.” Between hundreds of new cable channels, the advent of over-the-top internet and the arrival in force of mobile entertainment, there was a 400 percent increase in available content per capita.
And that, in turn, changed the business problem for studio executives. Suddenly, their main concern was no longer simply reducing the cost of an individual production. It was, instead, how to produce the best content in higher quantity and make it available through more channels, at a lower cost. The business model fundamentally changed. Yield per asset went down, and the new pain point was how to maximize the yield by other means.
Studios shifted their focus. While they still wanted quality shows, they had less to spend on creation and were forced to spend more on distribution, monetizing assets and increasing the lifetime value of the viewer. Budget priorities shifted to new imperatives, including distribution and access to new revenue streams, such as dynamic product placement or ad insertion, to offset the loss of traditional advertising or box office revenue. The focus was now on the quality and lifetime value of the audience.
And that, in turn, changed priorities on the production side. In an environment where ad revenue is growing in single digits, and distribution cost is up by 80 percent, a studio head looks to cut costs wherever possible. The $150,000 Avid editing suite was no longer a necessity; it was a burden. What creators needed and wanted were solutions that would maximize their asset value, including analytics, digital rights management, digital asset management, and distribution tools. None of those were available in Avid’s offering. And less expensive solutions emerged from competitors such as Adobe, Black Magic and Apple.
The Avid suite, and Avid as a company was also a victim of its own success. The hardware and software, once sold, was functional without major updates for a period of five to eight years. Pricing and delivery models were suddenly out of step with industry trends. And the inflexible, hardware-centric nature of the product became a severe limitation.
So, for Avid, demand cratered, and revenue along with it. New sales fell victim to the new marketplace realities, and the installed base did not generate additional sales. Avid reacted by going on an acquisition spree that buoyed its performance and stock price. But, ultimately, it succumbed to the inevitable, and slowly sank in a swamp of disconnected acquisitions, the promise of which was never realized. While binging on acquisitions, Avid avoided addressing the core market issues it faced.
The problem was reflected in Avid’s results
Enter Black Dragon Capital℠.
Black Dragon Capital℠ became more active in Avid when its founder Louis Hernandez Jr. became Chairman and CEO. By that moment in time, Avid was clearly struggling. Despite its status as a proud heritage player with significant distribution, Avid had undergone a three-year double-digit sales decline immediately preceding Black Dragon’s entry. In the year that Black Dragon took control, Avid lost $45 million.
Because of the product mix, which was hardware-centric, focused on single-seat licenses, and with a long replacement cycle, recurring revenue was low, and cash flow was declining. The company’s focus was on slow-growth, low-margin businesses such as storage solutions. There was little if any exposure to emerging high-growth applications for digital asset management and distribution. Avid’s prior CEO had done his best to divest nonperforming, nonstrategic assets. He had reduced expenses by $150 million. But those moves weren’t enough to address the core issue: Avid’s failure to shift focus to address new marketplace realities.
The capital markets had given Avid a vote of no confidence. Market capitalization had declined to the point where the market ascribed zero value to the Avid R&D investment. In fact, the cumulative R&D investment in the prior five years was estimated to be almost twice the total enterprise value of the company, a dismal outcome by any measure.
And then additional problems emerged. Before Black Dragon and Hernandez stepped in, Avid had made a series of cost cuts, as noted, and had also attempted to launch new products. But these never took hold. Service began to suffer and the old hardware model was showing signs of significant weakness. Many of the best performers at the company had left and those that remained were being paid above market rates just to stay on. Other problems emerged. Avid had failed to assign costs such as bug fixes and updates to revenue in the appropriate time period. The accounting issues led to the need to restate nine years of financials. As a result, Avid was delisted from NASDAQ, and shareholder litigation followed.
Cultural issues compounded the situation. An entrenched board of directors (some directors had been in place for 20 years) had been in conflict with two previous CEOs and with investors. Activist investors emerged. But the board took no action, overseeing a significant decline in value while collecting millions in compensation. Both the board and the senior leadership team seemed ill-equipped to adjust quickly enough. Many of the senior leadership team seemed emotionally attached to Avid’s past greatness and were not ready to make the drastic changes that the current circumstances required.
It was under these massively challenging conditions that Black Dragon began its turnaround efforts.
The first step
Develop a marketplace thesis.
Black Dragon is thesis-driven. All actions and decisions proceed from an informed understanding of the industry and the marketplace. In the case of Avid, Hernandez and his Avid and Black Dragon colleagues began by meeting with studio executives and content creators to learn more about their pain points, and how Avid might provide solutions.
The exploration showed that the industry’s economics had changed in a fundamental way. By the numbers, executives were trying to cope with a content creation rate two to four times what it had been, a greater-than-tenfold growth in distribution platforms, a greater-than-50% increase in content consumption, all within the constraints of media technology budgets that were growing at a rate of 3-4%. Simply put, it was impossible to keep pace using current technologies. There was suddenly no budget for Avid’s solutions, which, still focused on video editing and music mixing, did not address the greater need for analytics, distribution and rights management solutions. They were costly and did not provide support for new revenue generation strategies such as product placement.
Avid’s need for stable, predictable revenue and the industry’s need to maximize the value of each creative asset, taken together, provided the initial path forward. What was clear was that Avid needed to become less dependent on the older hardware model, shift to a subscription-based, recurring revenue model and deliver products that addressed the industry’s new pain points. A full-scale reorganization of Avid would be necessary.
Applying a framework for the turnaround
To manage its portfolio companies, and to plan turnarounds of the scale required at Avid, Black Dragon applied The Black Dragon Playbook℠™, an analytic framework for managing downside risk and fully realizing upside possibility.
The Playbook begins with a strategic assessment to define the initial strategy and success definitions and develop the Annual Operating Plan (AOP) with the management team. The first step is a deep dive into the industry’s pain points. There are interviews and surveys with dozens of clients (in the case of Avid, 100 interviews in all), combined with industry research (in this case including a PwC marketplace analysis). This deep dive generates an assessment of the state of the industry, the major pain points the industry is facing and their impact on technology spending. Then there is an internal review of how well the product suite matches marketplace realities, where the company is best anchored to deliver higher value and where it makes money (including a detailed exploration of product line profitability). There is also a look at operational and personnel questions, such as which employees should be near the customer, in what regions and how they should be aligned with overall revenue.
There are internal interviews and surveys as well, focused on both operational issues and the internal culture. This track leads to the decisions about staffing and hiring, as well as the creation of performance monitoring systems, internal controls, dashboards, and cash management tools.
Once these steps are complete, a clear strategy begins to emerge on how to navigate forward. Initiatives are then established. Finally, employee incentives are put in place, and a comprehensive effort is made to align individual and company goals and performance. The endgame is nothing less than a fundamental change in culture.
That’s the structural overview. But what actually happened in practice?
Implementing the Avid transformation
The Playbook assessment showed clearly that Avid was grossly misaligned with the industry’s product needs and pain points, and was poorly positioned to serve the market cost-effectively.
At the same time, there was deep inertia that crippled operations and limited leadership’s appreciation of new technologies such as the cloud and new delivery modalities such as subscriptions. The team and board were totally disconnected from the needs of the community.
But thanks to the Playbook, a series of key actions emerged. Leadership acted quickly and decisively to remake Avid for the modern marketplace, radically remaking the product suite, the pricing strategy and the company itself. It then took long term steps, focusing on the company and its culture, to make sure that those critical changes were sustainable.
The most important realization was this: Avid’s product offerings had to be rebuilt from the ground up. Both the solutions and business model supporting them, were transformed.
Hernandez and the team identified 11 product categories to exit, and a new range of products that would have to be developed. Avid’s focus shifted to high growth areas that addressed industry pain points and reallocated resources to drive existing products that needed to be higher priority. Forty-four new high-growth products were introduced, supported by 37 new patents. In a wave of innovation, Avid’s patent portfolio grew by 22% in less than 5 years.
In the process, Avid changed to the core. Instead of focusing on standalone products, Avid in effect became an operating system. The main offering, Avid Media Central, was a solutions platform into which customers could fit highly targeted Avid applications focused on their particular asset-maximization needs.
The strategy was informed by renewed contact with the marketplace. The launch of the Avid Customer Association put the company in regular contact with an enormous community of users, who served as an invaluable source of marketplace insight. The association grew to comprise 40,000 members.
The new solutions strategy went hand-in-hand with a new pricing strategy. Avid stopped being a product company and instead became a cloud-based, software-as-a-service (SaaS) provider. A full cloud offering in partnership with Microsoft Azure was at the heart of the offering. Hardware was outsourced and focus shifted to new, expanded integrated solutions such as the S4 and S1 line of mixing consoles. Subscriptions became the norm, and enterprise pricing was established. Software-only bundles were introduced.
New structures were put in place to drive and support change. A project management office was created to oversee new product strategies and drive behavioral change. A deal desk was established to manage the new pricing and delivery models.
As a result of the new strategy, and the resulting predictable revenue stream, Avid was able to stabilize its finances. Between 2013 and 2018, there was a greater than $90 million increase in operational EBIDTA. Recurring revenue grew from 13% in 2012, essentially an afterthought, to 56% in 2018. The contractually committed backlog rose from $92 million in 2013 to $357 million in 2020, providing unprecedented forward visibility.
The accounting problems also needed to be addressed. An 18-month process led to the restatement of five million transactions comprising $100 million in revenue, at a cost of $45 million.
In spite of those headwinds, growth was reestablished and continued apace. A program to optimize $76 million in strategic costs eventually over-delivered. $110 million in strategic cost optimization was the result. Avid now had more employees closer to the markets it served, and product quality and service levels rose.
Fundamentally, the result of the changes was an entirely new Avid, one that served an expanded market with scalable, flexible solutions, supported by new revenue streams (the result of renewals, support and service add-ons) in a lower-cost environment thanks to the common platform, which lowered costs and accelerated speed to market. Avid became a recurring revenue software business, leveraging its anchor clients to drive sales into higher growth and more predictable software sales over time.
Reorganizing Avid and remaking the culture
The changes at Avid were drastic and far-reaching. Clearly, nothing on this scale could be implemented unless Avid’s organization and culture were also transformed.
On the organizational level, Avid had been somewhat misaligned for its new mission and focus. Leadership closed or relocated 70% of Avid’s offices, in order to ensure that leaders, managers, and sales force were close to Avid’s new markets.
The lack of alignment extended to Avid’s personnel as well. It was unsurprising, given the extent of the reorganization, that a large percentage of Avid’s legacy staff would not fit well with the new reality. A simple illustration – the percentage of hardware in Avid’s product mix shrank significantly from the 78% level it had reached before the reorganization. Staffing had to change accordingly.
To align Avid’s personnel with the market, Hernandez and his Avid team began by conducting multiple town meetings with Avid employees, engaging in group and one-on-one discussions. Internal surveys were conducted, product line profitability was measured by multiple variables and Black Dragon assessed Avid’s culture and organization. Among the metrics and monitoring tools put in place were a new performance measurement system and new internal controls, dashboards and cash management tools.
New compensation, incentive, and bonus programs were put in place, roles were clarified and a bonus program was established.
In the six years of the reorganization, 70% of the staff turned over and was upgraded.
As with many transformations, the board of directors presented a hurdle. A number of entrenched, holdout directors opposed many of the actions that the transformation required. This opposition could only be met head-on, and in the end, 40% of the board was replaced, albeit at a steep political cost. The board issues persisted. Conflicts between shareholders and the board of directors continue today.
Another goal was to diversify Avid’s employee base, both in ethnic and gender terms and in terms of professional background and skill set. What had been a hardware-centric firm had to be rebalanced with a combination of good legacy people and critical new hires with software experience. As for ethnic and gender diversity, both are worthwhile societal goals but also an essential component of business success. That was certainly the case with Avid, which needed to sell to a diverse creative community. With guidance from Black Dragon, itself minority-led and 75% ethnically diverse, Avid’s ethnic diversity improved by 50% and its gender diversity improved by 13%. Diversity is not just about statistics, it requires a deep commitment to long term development. By 2018, Avid had increased its management positions led by women by more than 40%; these women were key drivers of Avid’s future development. Diversity also encompassed the senior leadership team, including the chief technology officer responsible for the new product architecture, the VP for finance and head of the deal desk responsible for pricing and bundling to meet strategic targets, the head of what became the largest new global office and the head of the 40,000-member Avid Customer Association. Overall, taking both the skill set and diversity imperatives into account, critical hires were made in a number of leadership roles, including those just mentioned and also the chief financial officer, chief accounting officer and director of global procurement and operations.
Creating and sustaining the new Avid culture was possible thanks to the application of several methodologies. We’ve already noted the elements of The Black Dragon Playbook℠ that focus on the creation of employee incentives and goal-oriented performance metrics. In addition, The Black Dragon Leadership Index℠™ quickly identified and evaluated current and future leaders on a range of criteria, both hard (track record in hitting performance targets) and soft (emotional intelligence). The Black Dragon Way℠™ helped define elements of a high-performance culture.
The results of the turnaround
Avid is transformed into a long-term value creator.
By the time the turnaround was complete in 2018, Avid had been transformed. No longer a struggling legacy player, Avid reemerged as an innovator with a strong product suite aimed squarely at the industry’s pain point, the problem of maximizing value per asset that was keeping C-level movie, TV and music executives up at night. Avid’s digital cloud strategy served the marketplace; subscription-based pricing generated stable and predictable revenue. A largely new workforce drove the company toward lower costs and higher revenue.
For customers, Avid was the provider of an agile, customizable platform solution that addressed major challenges. It provided an end-to-end solution backed by superior service and straightforward deployability. The deep engagement with clients created many lifelong friendships.
For investors, predictable revenue went hand-in-hand with transparency as the restatement concluded and Avid was re-listed on NASDAQ. Cost efficiencies arrived ahead of the plan. Avid re-emerged as a strong growth platform.
A way forward in the new era of digital disruption.
While Avid’s challenges were severe, they were by no means unique. The digital tsunami continues to roll. The impact of digital disruption and the collapse of business ecosystems will continue to transform industries and individual companies. Hernandez’ and Black Dragon’s approach, driven by an understanding of the industry’s strategic pain points and supported by a system for transforming the business at the most fundamental level, suggests a way forward.