Avid (AVID): how to lose money when you’re the market leader

Avid develops the software used to make the majority of Hollywood movies, TV shows, and other high-end film/TV productions.  In professional high-end markets, they are the #1 leader.  Yet this company manages to lose money.

Here are some of the crazy things that they have done.

#1- Bad acquisitions

Avid has consistently bought other companies only to resell them for a tiny fraction of the original price.  Many of the bad acquisitions (the companies that have been resold) were done by David Krall, Avid’s CEO from 2000-2007.  A few of these acquisitions have been by Gary Greenfield, who was the CEO from 2007 to Feb 2013.

Many of these acquisitions had no synergies.  In a post production studio, there are many elements that are interchangeable: computers, monitors, hard drives/storage, consoles/control surfaces, etc. etc.  With many of these acquisitions, there is virtually nothing to be gained from the integration between these parts.  Yet Avid has consistently bought other companies, rebranded them, and then sold them off.  Greenfield has repeated Krall’s mistakes through his acquisitions of Euphonix (consoles/control surfaces) and Maximum Throughput (storage).

At the same time, Avid has also been pursuing the opposite of its integration strategy.  It has allowed other vendors (e.g. Aja, Blackmagic) to compete with its own video input/output hardware.

#2- Fire your development team

Avid fired the development team behind its Sibelius software as it was trying to save costs by outsourcing labour to Ukraine.  This is a mind-boggling move.  The most valuable assets of a software company are:

A- The source code.
B- The programmers who created the source code.

Duplicating the development team is extremely difficult to do.  If it was easy, much of our software would be outsourced to China/India.  You can’t simply hire another set of programmers to churn out X lines of source code.  If it were that simple, clone versions of existing software would have significantly higher market share than they do today.  Making great software is really, really hard.  Hiring good programmers is hard as they differ wildly in productivity and it’s hard to figure out how good somebody is.  Motivating and keeping your developers is hard.  Knowing which features to work on is hard.  The intangibles are important and Avid has basically thrown that value away.

Now, Steinberg has rehired the original development team to work on a new, competing piece of software.  The new team has a blog here and they are clearly very passionate about what they do.

Where Avid stands now

Gary Greenfield has resigned to make way for Louis Hernandez, Jr. who has been on Avid’s board since 2008.  Greenfield will stay on the board of directors.  I don’t see Greenfield remaining on the board as a good sign since Greenfield has been a failure.  Avid did not make money under his tenure even though Avid has great products, dominant market share, and a dangerous competitor (Final Cut) that exited the high-end professional market.  Avid’s board is complicit in this by (A) not firing Greenfield earlier and (B) allowing Greenfield to make dubious acquisitions and to repeat the mistakes of his predecessor.

As far as the new CEO goes, he seems quite out of touch with reality.  Here is an interview excerpt:

There are many Sibelius users who also are concerned about Sibelius’ status as a priority at Avid. How do you see their concerns, and what would you like to tell them about the future of Sibelius under Avid?

We’re going to stick with our strategy. We have no intention of changing anything – we’re going to stick with Sibelius and the other products in the professional end of the market.

I’m very familiar with the feedback on the changes made at Sibelius. We made changes because we love that product and category. We made changes to have a sustainable long-term model. A critical component of our strategy is to deliver what our clients want. I’m very anxious to work with that group. I’ve learned that if we work together good things can happen, and that’s what we hope to do.

Sibelius customers have put on a vocal campaign to “Save Sibelius”.  See their Facebook about page; they feel so strongly about a piece of software that they are calling for a boycott of Avid products.  What they wanted was for Avid to rehire the original development team.  What Hernandez is saying about ‘delivering what our clients want’ doesn’t make any sense at all.  He has basically completed ignored what Avid’s customers are saying and gone off and done his own thing.

Stuff I can’t easily prove

-Avid is probably grossly overspending on sales and marketing.

-The CEO is probably surrounding himself in some type of reality distortion field.  The Save Sibelius customers have apparently made themselves into a huge pain in the ass for Avid.  From Facebook:

Word is that our constant emails to senior Avid executives have been causing high irritation, not least because they can’t easily filter them out apparently. They can’t understand why the protest hasn’t gone away.

Another article suggests that the CEO is out of touch:

So observation number one, creative people are not stupid – but the majority of us are simply not interested in the language of the stock market, so please try and keep that kind of stuff to a minimum, it only reinforces the view of Avid being a corporate machine.

Is Avid a short?

Probably.  It is possible for management to be so terrible that they run a wonderful company into the ground (e.g. Fannie/Freddie).  However, there is risk here because somebody might take Avid over.  I could picture another company paying $100-200M+ for the core Avid video editing software and Pro Tools.  A turnaround acquisition could make sense for Autodesk (ADSK), perhaps Adobe, Sony Broadcast, and Black Magic Design (BMD would have trouble raising large sums of cash though).  Autodesk competes with Avid directly in online editing with its Smoke product.  It should know how to run Avid’s business profitably.

I might short Avid if it hits $10.

*Disclosure:  I used to be short this stock but covered early because there is a great company here (customers really like their products even if they dislike the corporation and the greed).  In hindsight, I suppose I should have held onto the short position.

And yes, I have feelings about Avid.  While I have mainly used Vegas and Final Cut, I have a lot of respect for Avid’s video editing software and for Pro Tools.  It saddens me to see this company being run into the ground.