Mercator Capital is a privately-held investment bank focused on mergers & acquisitions, private placements, and strategic advisory services. Mercator's IP Communications Newsletter is a monthly analysis and commentary on the major business stories impacting the convergence of voice, video, data, and wireless communications.

1. Brightcove Network Launch – Clarifying the Picture

On November 1, Brightcove Inc. launched the Brightcove Network, which is one of a flurry of recent groundbreaking announcements that we believe may put them on the path to being a true game-changer in the broadcast media sector. During this year, it has become evident that IP is going to disrupt the broadcast sector in much the same way it has already reshaped telecom. In our view, Brightcove is in the vanguard of this movement, and has articulated a vision as to what is possible with IP. More importantly, with the Brightcove Network, the company now has a well-defined product suite and business model that anyone can take advantage of.

Brightcove has been building their business since 2004, and have not taken any new funding since last November. They have raised $21.7 million to date over two rounds, and considering the current investment climate, they should have little difficulty raising follow-on capital if necessary. Their investors include A-list media giants such as AOL/Time Warner, Hearst, General Electric (NBC) and Allen & Company (part of Google’s IPO, Sun Valley retreat, etc.).

With Google’s recent acquisition of YouTube, we felt it appropriate to look at some of the other potentially interesting new media companies out there. While Brightcove potentially represents a disruptive media player, they do not easily fit into any traditional category. So let’s take a look at what Brightcove is and is not.

Getting back to the YouTube deal, some people feel that it is just as puzzling as eBay’s acquisition of Skype. Both are big Internet companies spending a lot to acquire a hot brand with a questionable business model. YouTube provides a seemingly endless stream of video content, which increases Google’s inventory for search (which we all know that Google can monetize better than anyone else). As with Skype, the millions of “users” are another major asset to the deal, and in time Google will find a way to derive revenue from this perpetually expanding community.

There are some parallels here to Brightcove, but also some important points of difference. The Brightcove Network, in essence, is a platform to allow professional creators of video content to bring their product to market in a commercially viable manner. In this regard, Brightcove becomes many things – a platform, a distribution channel and an ecommerce portal – all rolled into one. This is very different from YouTube, and in some ways actually positions Brightcove as a direct competitor to Google in terms of advertising dollars.

A fundamental difference between Google and Brightcove is the nature of the content itself. YouTube’s content is essentially user-generated and not geared for a broadcast audience, whereas content running on the Brightcove Network is produced by professionals who are commercially driven and seeking an audience. Brightcove’s CEO, Jeremy Allaire terms the two as “consumers” and “prosumers”, and put another way, YouTube’s strength is really about the consumption of video – 100 million downloads a day – whereas Brightcove is focused on the production and creation of video. These are very different positions on the spectrum.

Google does have monetization potential with YouTube in the form of advertising, and given their track record, they will undoubtedly find ways to do this. However, YouTube is simply a passive host, and has nothing to do with the creation of content. That said, it is becoming increasingly hard to tell if YouTube is making the content famous or vice versa, especially when copyrighted material such as music videos or television shows also end up there. This of course raises a whole host of digital rights management (DRM) issues, which Google needs to resolve as part of their integration with YouTube.

Brightcove’s model, on the other hand, provides a powerful Internet-based platform to produce, distribute, market, license and syndicate content. This scenario motivates and rewards professional production, which in turn, helps create well-defined audiences and communities around which advertisers will be attracted. As such, Brightcove can earn revenues from both advertising and the sale of content, which is entirely different and new business model.

In many ways, Brightcove is analogous to when cable TV entered the market to compete with the established TV networks. By providing more variety of programming, they expanded the pie by giving viewers more reasons to watch TV, and by extension, more opportunities for advertisers to reach their markets. This is what Brightcove is doing, but in today’s market, the impact is being felt more quickly. Being IP-based, the cost of entry is much lower. Production costs for video are far less than television, and content can be produced quite quickly. As with the IP software developer community, Brightcove is an enabler for a vast community of creative video producers who simply lack a distribution mechanism to reach their markets. Also, being Internet-based, “spectrum” broadcast costs are virtually nil, and the Brightcove Network is leading the way to what many refer to as “TV 2.0”.

The underlying story here is that Brightcove is providing substantial validity to the Internet for being an important channel for video. Broadband adoption in the U.S. continues to rise, and mobile video is poised to become mainstream in 2007, and momentum is very much on Brightcove’s side. They have correctly identified a hunger for Internet-based content, and IP technology has matured to the point where they have been able to develop a platform to support this in a commercially viable manner.

It is also important to understand that this is not about IPTV, which simply uses the Internet as a distribution channel for existing television content. Brightcove is all about video content to be viewed on the Internet, and has little to do with television, as most people know it. As such, Brightcove is not just expanding the pie, but they are potentially the foundation for an entirely new industry. Perhaps most importantly, they are not just expanding viewers, but also advertisers, especially those who cannot afford mainstream broadcasting channels. We see this as a boon for niche advertisers who wish to reach beyond their base market, but have never had an economical video option for doing so.

Given the nature of the distribution deals Brightcove has announced over the past few months with major broadcast and media producers, this notion has not been lost on the industry leaders. Brightcove may never be another Google, but they are much more at the center of gravity for where disruptive broadcasting is going. There is quite a bit more to their story, and Mercator will follow this up in the near future, especially since we anticipate another funding round sooner than later.

2. Tektronix Strengthens Its VoIP Test & Measurement

November was a busy month for deals. On November 6, Tektronix announced its acquisition of Canadian vendor Minacom for $27 million in cash. Neither company is a household name, but Tektronix is a leading player in the testing, measurement and monitoring business, and this is their fourth acquisition in the past two years. Let’s first look at what this deal brings to Tektronix and then place it in the broader context of the T&M sector.

Minacom fills two holes for Tektronix – one market related and one product related. On the market side, Minacom has a strong presence in the cable sector, primarily for VoIP testing, and this opens up a new market for Tektronix. Minacom also has a telecom customer base that spans 30 countries, with the likes of AT&T, BT, France Telecom and Cable & Wireless. For these customers, Tektronix can now offer a more complete solution set, hence deepening their relationships. In addition to service provider customers, Minacom sells to major VoIP OEMs such as Siemens, Ericsson and Cedar Point. Similarly, this should translate into tighter vendor integration for Tektronix.

On the product side, the acquisition makes even more sense. A core product in Tektronix’s T&M family is GeoProbe, which is a passive VoIP testing solution. As VoIP becomes more widely used, the requirements for T&M are becoming more demanding. There is a second type of testing tool – active testing – that Tektronix lacks, and this is what they acquired in Minacom’s PowerProbe product. In brief, a passive VoIP testing tool simply monitors VoIP traffic and reports problems as they arise. An active testing tool does not monitor existing traffic – instead, it creates its own traffic by producing test calls that are sent out over a network for real time analysis. Clearly, by having both capabilities, Tektronix can offer a more complete T&M solution for both the telecom and cable VoIP markets.

We suspect another reason for the acquisition is the fact that Minacom has been very proactive in developing its product portfolio and industry partnerships. Aside from having this focus to stay ahead of the market, Tektronix likely recognized a similar approach in staying strong. Both companies have made a series of moves to sharpen their edge in the T&M market, so there is a good fit in terms of best practices. While most of Minacom’s moves have been internally driven, Tektronix has built itself up through a series of acquisitions.

To illustrate what Minacom has been doing, consider their most recent offering, announced in October. Claimed as an industry first, their Advanced Test Agent is a long duration stress-testing tool for VoIP. This provides carriers – telcos and cablecos – with greater capabilities to ensure PSTN-quality VoIP calls not just for consumers but businesses as well.

In August, Minacom introduced Zoey, an IVR-based subscriber support tool. For subscribers doing self-installation of their VoIP service – whether from a telco or a cableco – Zoey allows them to call in and test their own service quality as well as do some basic troubleshooting, without the need to speak directly with a live agent. On the partnership side, we have noted their alliance announced in June with Tollgrade, which creates a more complete testing solution to support Triple Play offerings.

Tektronix, on the other hand, has followed the acquisition route, with Minacom being the most recent. Prior to that, they made two very small moves for testing software vendors TDA Systems and Vqual, at $4.6 million and $7.4 million respectively. Far more significant was their acquisition of Inet in June 2004. This was a stock and cash deal worth $325 million, and bought them an entrée into the fixed line T&M market.

Previously, Tektronix was positioned primarily in the wireless operator market, with a focus on testing solutions. Aside from bringing a wireline customer set, Inet’s solutions were mostly for network monitoring. As noted earlier with Minacom, the combination of their testing along with Inet’s monitoring tools gave Tektronix a more complete solution set for both wireline and wireless carriers. Today, this move looks even more prescient as all service providers are devoting serious efforts towards FMC – fixed mobile convergence – and will undoubtedly rely more on vendors with solutions that work across fixed and mobile networks.

Looking ahead, Mercator sees Tektronix as a smart consolidator in the VoIP T&M market. With Minacom they now have both depth and breadth to stay at the forefront of innovation, and to remain competitive with other vendors. Their peers – to varying degrees – include both public and private companies, namely Agilent, JDS Uniphase, Radcom, Spirent Communications, Telchemy, Psytechnics, Brix Networks, Qovia and Empirix. They are all chasing a market that has nowhere to go but up. VoIP T&M is becoming increasingly important as VoIP adoption grows and carriers seek to use voice quality as a way to differentiate their offerings. In that context, we expect to see further acquisitions from Tektronix as a means of expanding their T&M capabilities and offering an even more complete solution set to service providers.

3. Bridgeport Adds Funding and Pushes FMC Forward

On November 6, Bridgeport Networks announced its latest funding of $13 million, all of which came from existing investors. This brings Bridgeport’s total funding to date to $51 million, and has gone a long way to position them at the forefront of FMC, which we see as being one of the key drivers of telecom now.

The funding will help Bridgeport push forward on two fronts, both of which present promising growth opportunities. First is their MobileStick product, which was announced at 3GSM earlier this year. This is a mobile-PC VoIP solution, and is aimed at helping business travelers avoid roaming charges, especially for inter-continental calls. The “stick” is a USB device that has an embedded SIM card, which has the same phone number as the SIM card in the caller’s mobile phone. By using the MobileStick with a broadband connection, the caller can make or take mobile phone calls via a softphone on the PC.

MobileStick’s appeal is self-evident, but we see the second front as being more significant. Since June 2006, Bridgeport has been working closely with Siemens and Time Warner Cable to develop a dual mode service. At the heart of this service is Bridgeport’s NomadicONE convergence server, which is very much an FMC solution. It supports dual mode by allowing a single phone number to be used across multiple networks, and in this case, cellular and WiFi networks in particular.

The dual mode service is of great interest to the cablecos, who lack a mobile offering to compete against the telcos, as the bundling wars move from triple play to quad play. Mobility has always been the missing link for the cablecos, and Bridgeport is now primed to play a key role to fix this gap along with Siemens, who is now a global reseller of Bridgeport. We should also note that Bridgeport is the first FMC vendor we are aware of to launch a formal product integration – as well as a marketing partnership – with a legacy network equipment vendor. In our view, this provides strong validation for Bridgeport’s vision for both FMC and IMS.

Both vendors have a strong focus on IMS, and Bridgeport’s network convergence server enables the handoff of calls from one wireless network to another on the Siemens IMS platform. This is a complex task that Bridgeport has been focused on for some time, as it requires a seamless and secure handoff, as well as a reporting mechanism to support the billing systems for both carriers.

Bridgeport’s relationship with Siemens is important because Siemens has become a leading voice platform vendor for the cablecos, and Time Warner Cable is their first dual mode deployment together. Time Warner Cable has emerged as the market leader in residential VoIP, and we see no reason why they cannot be successful with dual mode as well.

Whereas Bridgeport and Siemens have the dual mode solution, and Time Warner Cable has the VoIP subscribers, one piece is missing here – the mobile network. This is where the fourth key player comes in, and to no surprise, it is Sprint/Nextel. Their wireless network is widely used by others to carry traffic, and this completes the FMC solution. In brief, Time Warner Cable’s VoIP network will carry wireless traffic via WiFi to and from its subscribers. Once these WiFi calls reach the limit of their range, they pass through Bridgeport’s NomadicONE convergence server, and seamlessly continue over Sprint/Nextel’s cellular network. The process is transparent to the caller, who only needs to have one number, whether making an all-cellular, an all-WiFi, or a dual mode call.

Initially, Time Warner Cable will be offering dual mode as a standalone mobile service, mostly likely to test market acceptance. Presuming this goes well, they will bundle dual mode with their existing Triple Play services, and could ultimately have the first Quad Play from a major U.S. cableco. As progressive as Time Warner Cable is, however, for North America, the distinction of truly being first among the majors goes to Canada’s Rogers Cable.

Aside from strengthening Time Warner Cable’s subscriber offerings, Bridgeport’s dual mode capability also serves to reduce their transport costs. Wireless traffic that is diverted off of Sprint/Nextel’s cellular network and on to their VoIP network is carried at a lower cost, which should also translate into higher margins for wireless calls.

Among the cablecos, the dual mode story does not end with Time Warner Cable. Last November, they were one of four U.S. cablecos who formed a strategic alliance with Sprint/Nextel to develop FMC capabilities and services on an exclusive basis. Joining Time Warner Cable in this effort were Comcast, Cox Communications and Advance/Newhouse Communications. Along with Sprint/Nextel, the cablecos put up $100 million, thus creating a $200 million seed fund to support the alliance.

Not only does this alliance shut out other cablecos, but also it effectively gives them a firm footing to compete against the RBOCs, who do not lack for wireless partners. Another benefit of the Sprint/Nextel alliance is the opportunity for cablecos to co-market service offerings nationally via Sprint/Nextel’s extensive channel of 1,600 retail outlets, along with third party distributors such as Radio Shack. As such, what works for Time Warner Cable will inevitably work for the other alliance partners, creating a strong ripple effect for both Bridgeport and Siemens.

On the FMC front, Bridgeport is in good company, and this recent funding news should help establish them as the vendor of choice, especially in the Siemens fold. Of course, this can go both ways, as it stands to exclude them from FMC deals with the other incumbent vendors. However, at least in the U.S., they could not have picked a better partner for the cablecos, and for a vendor of their size, we think this business will carry them a long way, even if that means being acquired by Siemens.

4. Art of the Deal - Motorola Acquires Good Technology

On November 10, Motorola announced it was acquiring Good Technology, which considerably strengthens their position in the lucrative wireless email market. Despite the fact that the terms of this deal have not been disclosed, it warrants our Art of the Deal coverage in light of the overall implications for this space, and especially given Motorola’s other significant acquisitions this year that include Netopia, Symbol Technologies, Vertasent, Broadbus Technologies, Orthogon Systems, and Kreatel Communications. Along with Cisco, Motorola has become the other viable exit strategy for many companies in the IP communications space.

Good’s wireless email software is widely used, but given how this market has evolved in 2006, Motorola’s move here sets the stage for dominance by three players. RIM is the undisputed market leader, by virtue of both their software and the ever-present Blackberry with close to 60% market share. To date, mobile email has been a business application, and now RIM faces two strong rivals, Nokia and Motorola, the world’s number one and two handset vendors respectively. Interestingly enough, RIM also made an acquisition of Ascendent Systems in March of this year (value also undisclosed), to add voice capabilities to RIM’s Blackberry Enterprise Solution.

Nokia made its official move into mobile email earlier this year with the launch of their E-series devices – the E60, E61 and E70. Supporting this is their Business Center platform, based on Intellisync’s software, which was acquired late last year. Nokia’s devices will also support other email platforms such as RIM, Visto, Seven and Good.

At the time of acquisition by Nokia, Intellisync had about 9% market share of the enterprise email market compared to Good’s 8% market share. With about $240 million of venture capital invested in Good, and over 12,000 enterprise customers, we can only speculate that Good’s price tag was similar to Intellisync’s $430 million valuation a year ago.

With Motorola’s acquisition, we now have three large players who have built vertically integrated solutions. Between their various families of mobile email devices and software platforms, each is well positioned to compete in the enterprise market.

While RIM has been the industry pioneer and clear market leader, they have only tapped a fraction of the market, and we believe it will be difficult for them to maintain that lead going forward. Aside from these moves by the competition, another concern is the impact of the NTP litigation. This was an all-consuming issue for RIM over the past year or so, and we have no doubt that it put a damper on innovation, and gave time for other players to aggressively enter the market. A good example of this was Microsoft’s launch of Direct Push for Windows Mobile 5.0 at 3GSM in February of this year. While widely viewed as inferior to RIM’s platform, Direct Push functionality was well received as it represented a litigation-free alternative, which is understandably of concern to large enterprises. RIM eventually settled, at a cost of just over $600 million, but now faces two well-armed competitors.

There is also a fourth player of importance, and one that now looks to be running out of options. Palm has long been an innovator in this market, both with their widely used operating system (OS) and popular Treo family of PDA devices. A key factor behind Good’s success has been their willingness not to lock their enterprise customers into integrated solutions with device vendors. Good has been a key partner for Palm, who lacks their own software platform, and will likely need to look elsewhere once the deal with Motorola closes.

Palm also faces significant challenges in their other lines of business. Emboldened by their success against RIM, on November 7, NTP filed suit against Palm, citing patent infringement by both their software and Treo phones. Their operating system is coming under attack on other fronts. Symbol Technologies, a leading OEM of specialty mobile devices announced last month it was discontinuing the product line that was using Palm’s OS. Although this move was not specifically attributed to Palm, it is not good news, especially as Microsoft’s Windows Mobile OS is gaining momentum.

To further complicate Palm’s problems, Motorola announced their plans to acquire Symbol on September 19, which would extend their reach into the enterprise mobility market. A special shareholder meeting will be held on January 9 to vote on whether to accept Motorola’s $3.9 billion bid. Finally, the current version of Palm’s OS is based on Linux, and was introduced earlier this year. There is limited support for Linux devices outside of Asia, and with most of Palm’s customers being based in North America, they will be hard pressed to keep pace with competing operating systems. And then there is Palm’s successful smartphone, the Treo. While well regarded, the 700 series product line is not price competitive, giving enterprises one more reason to choose other vendors. To address this, Palm launched their Treo 680 in October, but it may be too little, too late.

The Treo brings us to another segue, and yet one more challenge facing Palm. To date, mobile email has been a business solution, but the market has matured to the point where there is strong demand among consumers. The consumer market is more price conscious and brand driven, and on these points Palm comes up short against the big three. As noted earlier, Nokia and Motorola rule with the brand, especially with their most current models that can compete very well against the Treo. In particular, Nokia has the E62, and Motorola weighs in with highly touted Q model. And to round out the group, RIM launched its consumer-friendly Pearl model in September to widespread acclaim.

In our view, Motorola’s motivation to acquire Good was as much to become an early leader in the consumer market, as it was to make inroads against RIM in the business market. They have not been burdened by NTP, and in North America, the Q is arguably the most popular smart device today, thanks to a low price point. If they close the Symbol deal, that will be one less vendor for Palm to partner with.

All told, we believe that Motorola has positioned itself well for the mobile email market, and could possibly make other moves to further consolidate this space. However, no targets really stand out. By acquiring Good, only Visto and Seven remain as independent software vendors. We don't see Motorola acquiring these players or Palm, so the question arises as to whether anybody else will step up to acquire them?

Given Motorola’s strong financial position and global presence in many communications segments, they are also focused at rounding out other parts of their portfolio. Along those lines, on November 14, Motorola announced a much smaller deal to acquire Netopia for $208 million. This acquisition is in a very different space, and speaks to Motorola’s breadth of coverage in the IP communications sector.

The attraction for Netopia is less evident than Symbol or Good, but we see it as a signal that Motorola is looking to compete more aggressively with Cisco in the battle for the broadband home. Cisco spent far more – $5.3 billion – to enter the set-top business via its November 2005 acquisition of Scientific-Atlanta, a sector where Motorola was a dominant player thanks to their 1999 acquisition of General Instrument. Acquiring Netopia enables Motorola to better support Triple Play offerings, especially IPTV, which is expected to see large scale roll outs in 2007. And of course, the Broadbus, Vertasent, and Kreatel deals earlier this year all support Moto's IPTV strategy.

We do not see any synergies here with the mobile email market, but there is actually a potential benefit that ties in to the Brightcove story. One of Brightcove’s recent announcements was a deal with TiVo, which enables a segment of TiVo’s subscribers to watch Brightcove-supported Internet video content on their television sets. This is an interesting development as it reverses the relationship between television and the Internet. Conventionally, viewers would use the Internet as a transmission channel to watch television content online. In Brightcove’s world, the opposite is true, where the content is Internet based, and through TiVo, the television is simply an endpoint device. Mercator sees this as a sign of things to come, and in this context, Netopia makes more sense for Motorola.

5. Financial Highlights