Next TV

Gary Lauder’s Exit Strategies

Longtime Tech Investor on Cashing Out of ActiveVideo 5/04/2015 8:00 AM Eastern

It’s been a busy spring for Gary Lauder, the managing director of venture-capital firm Lauder Partners LLC. Soon after selling the assets of OnLive, a cloud-based gaming service, to Sony in early April, he sold another cloud-focused company, ActiveVideo, to a newly formed Arris/Charter Communications joint venture for $135 million. The exit was a long time coming for ActiveVideo, which was founded as ICTV in 1988 and in 2012 got the best of Verizon Communications via a multimillion-dollar settlement over intellectual property. The longtime investor, a grandson of cosmetics entrepreneur Estee Lauder, spoke with Next TV editor Jeff Baumgartner after the milestone sale.

 

MCN: Why was now the right time to sell ActiveVideo?

 

Gary Lauder: We were approached by a party that shouldn’t be named about acquiring us, and that got us thinking. Part of the reason why it was an appropriate time is that I expected by around the time a deal was struck that our model would be fully proven, and therefore maximally valued. The deployment has happened slower than we expected, but we still got a fair value for the company.

 

It’s my belief that this model of video-services delivery will end up dominating the industry and will have profound beneficial effects on all of the operating metrics. Charter gets that, and it won’t be long before others do as well.

 

MCN: Was the party that was interested in ActiveVideo outside of the Arris/Charter group? Was there more than one party?

 

GL: There were multiple parties that were interested, but the process was initiated by an outreach from one.

 

MCN: How did this deal [with Arris and Charter] come together? Did they approach you at the same time?

 

GL: Arris is close with all of the major operators, and their talking with Charter about the deal was inevitable — at least for due diligence purposes — since they talked to our current customers and prospective customers. I assume that Charter deemed this technology to be too strategic for them to have it solely controlled by a single vendor … and they probably were interested in the upside from widespread adoption as well.

 

MCN: Do you think you could have held out for more?

 

GL: ActiveVideo’s main liquidity event happened after the Verizon judgment-plus-settlement in 2012 [$260 million judgment, plus an undisclosed amount for lifting the injunction against FiOS’s VOD]. The company then returned a lot more money to shareholders and employees in a recapitalization than what came after that through this sale. It was one of the things that made me more willing to accept the sale at all.

 

MCN: You beat Verizon. Why did you stop there?

 

GL: After that was successfully resolved, a number of people felt that the company ought to pursue other cable operators with the same patents. I put the kibosh on that.

 

MCN: What was the reason?

 

GL: There were a couple. One, that I felt that the value of our product to the industry would be so great and that the revenue streams from customers paying for a product would be greater than what we could realize in lawsuits. There would be potential acquirers who would be interested in buying product revenue streams, but not that many who would be interested in buying a bunch of lawsuits. And partly this was due to my friendships in the industry; and partly that it might seem trollish to [file more lawsuits].

 

In the Verizon case, Verizon started the lawsuit by suing Cablevision, whom we indemnified. Since [Verizon] started it, we didn’t mind coming to our customer’s rescue and finishing it.

 

MCN: You were extremely patient with ActiveVideo. Was it a matter of holding on knowing that the company’s technology would end up playing a significant factor? Were there times that you had serious doubts about whether that would happen?

 

GL: To be frank, I always believed that it would be a sooner timeframe than it turned out to be. Things always seemed to drag out. One joke I frequently made is: The cable industry eventually does the right thing, after having exhausted all the other alternatives.

 

MCN: You’ve seen that first hand, I guess.

 

GL: Yes. To put a finer point on it, this goes back a long, long way. For example, when Time Warner Cable’s Full Service Network issued their RFQ/RFI circa 1994, they wanted to use ATM as the switching protocol. We said, “We don’t think ATM is really ready,” so we recommend this other protocol called TCP/IP. That was among the reasons why we were not picked for the FSN. ATM went nowhere, and TCP/IP is now the basis of most networks and the Internet.

 

We also said the DCT-5000 [GI’s thick-client set-top developed for Tele-Communications Inc.] was not going to function properly for the quoted price, and nobody believed us. It turned out that we were right and it never went anywhere.

 

In the case of OpenCable/OCAP and EBIF, we had to be careful with our criticism since the individuals who created those standards were the same people who were evaluating our technology at the MSOs. It turned out that biting our tongues did not do any good since those operators did not deploy our technology anyway.

 

It’s often said that “being too early is indistinguishable from being wrong.” Whether we were too early, or the customers were too late and tended to not act independently (i.e., follow the herd), could be debated. Somebody has to go first, and if nobody does, things can go untried for years — or even decades.

 

One bit of evidence that we weren’t too early was that in 1998 a cable operator [St. Joseph Cablevision] that was not part of the industry cabal — where they all talk to each other and decide what truth is — tried us. They deployed us, and over the four years that our product, and their service, was deployed there, they realized an average of $18 per month of ICTV-only revenues, which was actually a pretty healthy payback. [ICTV changed its name to ActiveVideo Networks in 2008.]

 

When you’re offering something radical, most people have a hard time doing something different than the rest of the industry. That is one of the things that’s so wonderful about Jim Blackley [executive vice president of engineering and information technology of Charter] and Tom Rutledge [Charter CEO]. They’re willing to look at whatever evidence with fresh eyes and don’t feel compelled to conform in all respects. They did that with us at Cablevision, and it turned out well for them, so they took it to the next level at Charter.

 

MCN: Now that you’ve got a deal to sell ActiveVideo, will we still see you in cable circles?

 

GL: I am planning to go to the INTX show. I’m not sure how much I’m going to invest in additional companies seeking to sell to the cable industry because consolidation has made it harder and harder for a new third-party vendor to build a business. But my jury is out on that.

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