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KIT Digital Slashes Workforce By 22% – Decline Of The Long-Term Cloud Lock-In Deal Or Bursting Of The DAM Bubble?

by Naresh Sarwan on September 21, 2012

Back in April last year, we reported how various investment websites were ramping the potential of Cloud DAM vendors like KIT Digital by highlighting how they used (abused?) their contracts with clients to lock them in for 24 months to help guarantee a certain level of ‘income visibility’, as financial analysts like to say.  As is often the case with listed tech businesses (and arguably a few other sectors too), great news for stock holders often doesn’t necessarily turn out to be such a smart deal for end users.  At the time we suggested that exploiting corporate inertia and contract lock-ins probably wasn’t a good long-term business strategy for either client or supplier.  Well, it looks like the wheels may have started falling off the gravy train for KIT Digital  – who according to Reuters have not made a profit since they first listed back in 2009 and are now cutting their workforce by 22%:

Video technology provider Kit Digital Inc said it would cut 300 jobs, or 22 percent of its workforce, in the third quarter to reduce costs. Kit Digital, whose cloud-based system enables clients to broadcast digital videos across several devices, expects to record a restructuring charge of about $4 million in the current quarter.” [Read More]

As noted by the article, KIT Digital’s shares have fallen by 70% in the last year, so not exactly the ‘rising star’ they were once predicted to be, certainly at this stage of the game.  It’s not totally clear why things appear to have gone pear-shaped.  I am left to speculate on a number of possible causes.  One might be that many end users are unwilling to commit to lengthy 24 month deals for Cloud vendors on the basis that it offers limited benefit over an existing enterprise implementation with the added risk of not being able to retain the service inside your own firewall, or possibly that competitors are willing to offer shorter-term deals to differentiate themselves against the likes of KIT Digital.

The other less appealing possibility is that this is signalling the end of the line for the recent spike in interest in DAM solutions that many vendors and consultants have benefited from.  I do note that the recent upsurge in interest was especially focussed on video content – which was an area that would not be well served by many non-specialist DAM solutions before 2006-2007.  So a plausible theory is that many clients replaced their older DAM solutions with new ones that could cope with video and now that trend is tailing off with the early adopters having all bought a product already and the tight-fisted (or ‘mature’) end of the market now accounting for most of the pickings that remain.

I am aware that in some listed companies there is a process known as ‘mowing the lawn’ (to use a British expression) where pre-investment,  companies will take on lots of new staff to give investors the impression that they are growing at rapid pace and then once that has been obtained, profit will become the pre-eminent factor and they need to cut back aggressively to improve margins – usually by firing the same people that were recently hired.  No doubt, KIT Digital’s management will be using that line with their stockholders, but before they dance on KIT’s grave, other DAM vendors and consultants may wish to keep a close eye on their fortunes as a more visible indicator about how things are going in our sector.

I should emphasise, these are purely speculative conclusions on my part and if you were planning to put money into KIT Digital (or take it out) then you need to do your own research and use whatever due diligence process you are comfortable with before making any investment decisions.

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