October 26, 2008

Harvest and Growth in 3D Graphics Software

I read Montreal Tech Watch to keep up with technology and innovation in Montreal. A recent post about a change in ownership of SoftImage caught my attention.

Based in Montreal, SoftImage (animation and 3D graphics software for movies and TV) was bought by Microsoft back in 1994 and made into a subsidiary for four years, before being sold to
Avid in 1998. Last week SoftImage was acquired from Avid by its primary competitor Autodesk.

Montreal Tech Watch made a very pointed assertion about the deal:

"One troubling thing in this acquisition is the price paid for SoftImage (Note - $35M). The same company was bought by Microsoft in 1994 for $130 million, then was bought by Avid from Microsoft for $285 million in 1998. The difference makes it look like a firesale price, as if Avid did destroy SoftImage’s value 8 fold in a timelapse of 10 years....SoftImage had back then a star product, DS, the first and only non-linear video-editing suite. DS and the other video editing software has been Avid’s cash cow for the past 10 years, but they didn’t bring any further innovation."

I'm not surprised. Avid's approach defines a classic harvest strategy employed by many organizations. Harvest is when there is no product enhancement, coupled with reductions in costs, so as to maximize cash. Typically this is done when a product is late in its lifecycle and when there is limited opportunity for share or revenue growth. Harvest is also employed when a company isn't doing well and there's limited capital available.

A link in a comment on the Montreal Tech Watch article led me to a very insightful post on
CGenie entitled: "Autodesk: Friend of Foe?". In it CGenies says: "Today Avid is a struggling company, losing money and fast. Even including this sale, their net loss for the quarter was around $66.4 million."

In comparison - "Autodesk is an unexpected tale in the software world. Founded in 1982, it is now in its 26th year and shows no sign of slowing in growth."

Autodesk embarked on a growth mission to "Democratize this software for all size companies so they can get productive. It's a combo of price point and functionality." To deliver on this, Autodesk undertook an aggressive acquisition strategy and purchased at least 25 companies (and products) since 1999.

In my opinion Autodesk's grand mission has much in common with successful initiatives by WalMart and Microsoft:

WalMart - "Saving People Money So they can Live Better": WalMart engineers this by consistently dropping price points so the widest number of people are able purchase more things. They succeed by wringing out lower operating costs from suppliers and operations (supply chain.)

Microsoft - "Help People and Businesses Throughout the World to Realize their Potential": Perhaps it's the old tag line of "a PC on every desk and in every home" that is more closely connected to Autodesk's vision. Microsoft developed its own products, then relentlessly evolved them to increase rates of adoption and decrease price points....while at the same time buying and integrating companies to add value to those products.

Having a clear, strong mandate such as Autodesk's, is what it takes to enable sustainable grow. If I was at SoftImage or in any other company that's capital constrained, but innovative, I would welcome being part of a successful cash rich organization such as Autodesk....at least until capital markets turnaround!

3 comments:

  1. Very interesting read - liked the articles you linked to also!

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  2. Also, Avid wanted to marginalize one of their competitors so that their flagship Avid products would dominate the marketplace.

    Luckilly, Apple eat their lunch.

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  3. David Daniels,

    Ultimately, Avid's strategy was wrong. Back in 1998, they had the opportunity to create an even better product. They dominated the marketplace. But they preferred to "harvest" and get maximum profits. Now, I like to see companies like Apple coming with much more superior products.

    ReplyDelete