It remains to be seen whether the new owners of iBiquity Digital Corp. will, over time, lead the company in the direction to which we are accustomed. But the acquisition appears to be a vote of confidence in iBiquity’s business model and puts the technology into the hands of an owner whose main business is audio and enhancing consumers’ experience of it.
In September, DTS Inc. entered into an agreement to acquire iBiquity for $172 million, as we reported at
radioworld.com. DTS will pay for it with a combination of $135 million of new debt and $37 million in cash. The deal is expected to close this year, subject to conditions that seem a formality.
THE STORY ’TIL NOW
A message on the DTS website welcomes the iBiquity acquisition. The new owner DTS is publicly held; its stock trades on NASDAQ. The company makes “high-definition audio solutions and audio enhancement technologies.”
Its roots are in cinema sound, having introduced master-quality sound in 1993’s “Jurassic Park.” It entered the consumer products sector in 1996 with “scalable” digital audio architecture for consumer and pro audio products and multimedia formats. Its audio technology is used in car audio systems, digital media players, home theaters and various other consumer electronics platforms; you may know it for offerings like DTS Headphone:X, DTS Play-Fi and its new DTS:X sound system.
Radio World readers also may know the name through its pro audio acquisitions. In 2009, DTS acquired surround sound company Neural Audio; in 2012, it bought SRS Labs, which makes audio processing and enhancement. Its Play-Fi technology grew out of an acquisition of Phorus, also in 2012.
DTS corporate headquarters are in Calabasas, Calif., and licensing operations are in Limerick, Ireland. As of the end of last year, it had 372 employees, according to its annual report.IBiquity, of course, is the developer of HD Radio technology familiar to most Radio World readers, the basis of in-band digital radio transmissions used in the United States and in some other countries. It is a privately held company based in Columbia, Md., plus offices in New Jersey and Michigan; it has approximately 120 employees.
It grew out of efforts by commercial U.S. broadcasters to explore digital in the late 1980s and early 1990s. CBS, Gannett and Westinghouse formed USA Digital Radio in 1991, marketing IBOC as a way for stations to move toward digital on existing spectrum and on their own timeframe via a “hybrid” approach in which digital and analog signals coexist until such time as the industry might choose to turn off analog, if ever. USADR became a separate company in 1998, with backing from 15 broadcast groups. According to a company history, two years later it secured $40 million in additional funding from strategic partners and venture capital firms. It later merged with Lucent Digital Radio in 2000, forming iBiquity. While broadcast groups at one time were a significant part of its ownership, the largest of its current owners are financial firms: Bank of America, Columbia Partners and Silver Point Capital.
HD Radio technology has been controversial within radio. About a fifth of U.S. FM broadcast stations have adopted it, though those tend to be in the largest markets; iBiquity believes virtually all of the top-billing FM stations in the country carry HD Radio and that around three-quarters of American listening (albeit both analog and digital) is done on stations that have it.
The technology also has brought multicast channels to FM, offered a “translator play” to help stations extend their brands and provided data capacity that backers say adds to radio’s appeal. On AM, however, the digital efforts were sidetracked by interference problems, especially at night.
In recent years, iBiquity has focused its marketing on growing the number of vehicles that have HD Radio receivers, seeking to make the technology ubiquitous in the car environment.
LICENSING MODEL
Why buy iBiquity? DTS cited its technology, content and penetration at top stations, its footprint in the auto market and opportunities for growth in mobile and international markets. It likes iBiquity’s 100 or so patents and related intellectual property.
Radio’s global transition to digital, Chairman/CEO Jon Kirchner said, is still in its nascence. “Digital radio broadcast is an ecosystem. From a U.S. perspective, HD Radio is the core ingredient technology,” he told me.
DTS likes the revenue, too. It estimates that iBiquity’s revenue for 2015 will be about $40 million to $50 million, according to information on its website. That is fresh info for us about iBiquity’s business and may surprise some observers in radio, where skeptics often scoff at its business model.
But though station fees are what broadcasters see, such income is “a wholly immaterial part of our business model,” iBiquity President/CEO Bob Struble said. “We make our money on the sale in HD Radio receivers. The real value of the business is not on stations going on the air but on the radio being sold in cars.”
And apparently that money is pretty good. He said that with millions of radios now being sold, mostly in cars, “you’re able to build a good business. For some time we’ve been profitable and cash flow positive.”
This, of course, doesn’t tell us how past investors made out in this $172 million sale. An iBiquity bio of Struble states that during his tenure, he had raised over $300 million to date from the investment community, though it was unclear as of when or over what period of time; so someone lost money in there somewhere.
“There is overwhelming support for the deal amongst our investors,” Struble told me when I asked about this. “As with the sale of most companies who have been in business for a long time and had multiple rounds of fundraising, there are some investors who will do very well and some that will do not so well.”
(Some other financial data: DTS listed iBiquity’s operating income for this year as $12 million–$18 million, with operating margins of 30 to 36 percent, and it identified $5 million of annual interest expense from debt financing. The companies together are expected to bring in $140 million to $145 million in 2015, with an operating income of $34 million to $38 million, DTS said. It expects the acquisition to begin adding to its investors’ earnings per share in 2016.)
Struble said the companies are similar in their approach to technology and IP development. He said there isn’t much overlap; DTS has only a limited presence in iBiquity’s core broadcast markets, and while DTS is active in OEM automotive, iBiquity’s footprint there is greater.
Kirchner said that DTS adds, among other things, a strong international presence and a lot of experience in licensing IP, an important part of what iBiquity does. He also mentioned strong relationships with Silicon Valley that will add value to HD Radio.
Struble describes DTS as “stable, long-term committed ownership” and is pleased to have what he calls a strategic owner. “For the last many years we’ve been owned by financial investors; they’ve been great owners but not the kind of guys who can help us get to the next level.”
DIGITAL NASCENCE
More broadly, the companies positioned the move as a vote of confidence for over-the-air radio.
DTS talks about the power of traditional over-the-air broadcasting to provide content and entertainment. Kirchner said, “We believe broadcast radio has interesting opportunities for expansion in home and mobile markets.” Noting rising costs of broadband for consumers seeking content, he said, “Free over-the-air broadcast radio — upgraded to digital with HD Radio — has an important place in the range of options. This was a natural fit for us.”
Struble added, “I view this as a strong vote of confidence for terrestrial AM and FM broadcasting. This is a state-of-the-art technology company that has looked long and hard at the business we’re developing, [one] that is based solely on AM and FM radio, and come to the conclusion we’re a valuable asset that they want to have as part of their company.”
Many questions can be asked about what comes next: How HD Radio can further its penetration in the car; what role it will play a role in smartphones and mobile devices; what will happen with digital on the AM band; and how might iBiquity’s back-end IP be used in future DTS product offerings.
But Kirchner said immediate objectives include how to drive faster adoption and how to integrate two businesses without too much disruption.
Struble will lead the HD Radio business, providing continuity. I asked Kirchner what he could say to iBiquity employees about their long-term job outlook and about office locations.
“It’s too early to tell, ultimately, about the final integration,” he replied. “We’ll spend probably two or three months learning about how we’ll ultimately integrate the platforms.” He said there’s no plan at this time to change business locations. He complimented the iBiquity staff, saying, “There’s a lot of people hungry here to further change the world. As tech innovators and ecosystem builders, that’s why we get up in the morning — to create more immersive and compelling personal experiences.”
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