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EIDOS – A SUCCESS STORY AFTER INITIAL HICCUPS

If you mention Eidos, most say ‘who they?’ Those with an eclectic classical education might appreciate the word from Greek meaning form, but there is a growing kalEIDOScope of people that are slowly hearing about them, and when they do – they pay respect. In 1993, Eidos won the Coopers and Lybrand award of best performing share price; Oracle, the world’s second largest software house and driving force behind the network computer, signed up worldwide rights to license their video codec technology; and last year they satisfied an acquisitive appetite, becoming Europe’s number one games publisher. The real story behind this growth stock is that the success was nearly snuffled at birth. James Page, a member of the Boxhall group of investors who now have a big share in Eidos, explained. In 1990 a previous company that should be called churn them, burn them and flog them, floated Eidos at 1m British pounds. They had charged some 300 grand for their services, it was excessive. Eidos at the time had no instant sales and was virtually running out of money. Everybody thought it was a video editing company, and didn’t really understand that it was into video compression. Basically the company was going to be used as a shell. Take it over in order to put in a recording studio in there. I was a friend of founder Steven Streater and I had to say no! There is actually some technology here and I was doing this at the time as a private citizen. Page, believing the technology should not be in the public domain, arranged a consortium to take them private with venture capital. We had a problem in that the fees to take the company over would have been more than the market cap of the firm. So the takeover failed. The founders then appointed a corporate advisor Charles Cornwall, who within six months was to become chairman. Page become an investor. The share price at this time was something like 20 pence: today it is above 8 pounds and climbing. Cornwall, originally a South African mergers and acquisition investment banker, was lucky enough to get involved in some mining projects when the gold prices were going up. Now it looks like he’s hit the vein again. The last fifteen years of training the people in here is now starting to bear fruit. Video compression and playback on software is now possible. When he arrived at Eidos there were two technical people; now he has twenty four. He didn’t take a salary for two years and kept costs tight. Insiders say he works all the hours that god sends and has a limited social life. So what is he up to that the city should be briefed about?

Textbook beginnings

Eidos is set up as the classic new media company – textbook business school. It has enabling technology (in the form of its video compression); content in terms of games, as well as production resources in software editing systems; and some state of the art 3D animation facilities in London. Many companies are adopting this strategy, but the difference is that this company is software based. No hardware. No expensive costs passed on to the consumer, only to be redundant when a new development occurs. Software that is proprietary and able to be licensed on all fast PCs, Network Computers and Apple Macs. This will be the key to this company’s future success. The market still hasn’t caught on. It’s the software, stupid. Their core is video compression. This was originally designed by founder Steven Streater, a former Cambridge, UK mathematician, lapsed PhD student at Imperial College in London, and ex-Ministry of Defense image recognition specialist. (The story has it that he learnt about the necessary algorithms whilst designing missile systems that would need to compress images of tanks as it sailed overhead.) Streater, still with the company, claims that the video compression is now better than MPEG2 on a Power Mac. Currently he is experimenting with the technology on the new StrongARM chip, a joint venture between chip manufacturer Advanced Research Machines and Digital. He believes that one day he might become a billionaire. Nice dream. It could happen. Eidos claims other video codecs that use discrete cosine transforms, vector quantization, wavelets or fractals are so heavily computationally intensive they degrade the image and ability to deliver it in time. Since the Eidos codec is specifically designed to use video, in Cornwall’s eyes it is a market leader. He isn’t timid about criticizing the competition, claiming Iterated Systems’ Fractal compression system, recently drawing publicity when network computer group ViewCall Europe licensed it, have problems. Fractal compression has been specifically designed for still images, it has been mutated to video and to some extent it does work. How long does it take to compress? One **** of a long time. Its relationship with processor enhancement is far more limited than ours. The Eidos codec allows the image to be maintained while minimizing the data needed to describe it. The difference, he claims, is reflected in quality on screen. Multimedia Futures only saw a six month old prototype but it’s reasonable at 28.8kbps, near clear on ISDN. The claim is that Eidos is doubling quality every three months, and homogenizing ARM and PC versions as you read.

Peer pressure

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It must have impressed Oracle chairman Larry Ellison when, by licensing it, he launched it to the status of a global software standard. But its implications stretch further. Digital Video is the vital component of multimedia. No video, no near-TV look in games and CD-ROMS, no video-on-demand and no multi billion dollar market place. But what about M-JPEG, MPEG, MPEG-2 and H.261/3 – you know, the so called standards of today and tomorrow? Times have changed. Hardware is an overhead and, more importantly, selling that to the public is rapidly becoming a dying concept. It will no longer be necessary to use dedicated hardware when its performance can be matched, updated through the net, and even beaten by software. No matter how much hardware costs we will always be cheaper because we are software. When cast in silicon, it is set in stone; when cast in software, the sky’s the limit. Eidos confirms that its software will be under $100 a piece. Although not totally forthcoming about the financial arrangements, Cornwall admitted that if the Network Computer takes off, Eidos will be earning ten of millions through a deal based on royalties. It was the single most significant event in the history of Eidos – yet it moved the company’s stock price just 7%. The herd of city dealers must be suffering from the mad market maker disease, considering that Iomega is valued at $6bn on $1m revenues. Anyhow the possibilities will be endless. There are four to five hundred million camcorders in the world today. The correlation between these and PCs is potentially enormous. If you think that cable firms will start offering Internet access maybe in late 1997, so bandwidth problems vanish, it’s star trek here we come. Expect dating agencies to be knocking on the doors of Eidos shortly, board meetings on PC and, oh yes, commercials. Streater just smiles when he talks about software cameras that could be given away with the software.

And on, and onward

The ailing non-linear editing facility, Optima, has been left neglected due to its exclusive platform being the out-moded Acorn. In theory we should have ported Optima from Acorn to an Apple Mac or to a PC, but at that time there weren’t the high quality digitizers around. Our next killer application will be a mass market form of Optima on PC, targeted at corporate video users who don’t want to spend a hundred thousands pounds on Avid. Cornwall believes this system could come in at about ten grand, surely attractive to cash strapped cable and TV ventures too. It can output video in real time at the end of an edit ready for CD-ROM mastering or broadcast. Optima could then position itself as a one stop shop for multimedia publishing although the marketing drive needed can’t be underestimated. All this from a company that a few years ago might have inadvertently sidelined the very video compression technology that has enabled them to develop further synergy with games companies. The collapse of the 16-bit games market hit all three of last year’s games acquisitions – Domark, Big Red Software, and Simis – making the purchase price irresistible. Eidos bought the revenue with a bonus of an office in the U.S. The game companies can respectively be described as: PC role playing; funky and off-the-wall; and ex-British Aerospace engineers making flight simulators. The PC orientation is backed up with some 32-bit Sega and Sony development since they share a large degree of C language commonality. He is still looking at Nintendo’s next-generation games machine, N64, but instinct tells him to avoid markets that demand royalties. A hit is some 250,000 units, at the gross profit level margins can be in excess of 60%, and operationally the model is highly geared, the bulk of product development costs are fixed, marketing will vary but when you hit break even volume, each incremental sale just falls down to the bottom line. It is such a sweet business on that basis. We will produce three or four titles that will classify as hits over the next 12 months.

Hit by the 16-bit hangover

Games are headed up by Ian Livingstone, the guru (to some) who discovered and licensed Dungeons and Dragons in 1975 and who has published more than 15m interactive books on the subject. Distribution is handled by Centregold, a company with dog status in the city, every year it made money until July 95 when losses went up to about 10.6m. Eidos bought the elease schedule to triple its own but surprisingly are now in the process of selling the distribution arm through a management buy out.

Cornwall explained I think the retail chain will become less important. Next week, next year it is important, but I am looking further into the future than that. We are looking at a favorable exit value, a snug relationship over the next few years and it is a low margin business. We have distribution people sucking at our kneecaps to do business. The future strategy will be to develop OEM deals, perhaps to digitizer companies, on the back of the codec, presenting a licensable package to bring video telephony to the business community at low cost; to strive to be the European number one games developer, so as to drive profits through high margins, staffed by some 250 quality people under an Eidos Interactive banner; and not forgetting the re-launch of the Optima as a low cost desktop video editing system. On top of this Cornwall wants to buy into the US. Exposure in Japan is zero, but he’s bullish about the PC market there, and is thinking about sino-product swaps or the exchange of some stock at some point. In essence he wants to retain intellectual copyright. The only criticism one

could level at the firm is it hasn’t been getting out in the corporate market and aggressively marketing its codec to provide communications solutions. Other firms have done it. But this company is developing the technology, it takes time, and will

only be introduced when it is right, ready and there to stay. That time is now.

Hype for life?

What Eidos is doing feeds the hype. Its technology touches all the fantasy dreams that ‘wired’ types have spoken about for the last few years. Yet the technology itself raises questions about the wider industry as a whole. Why are BSkyB and the BBC going to market with MPEG2 for their set-tops – a four year piece of hardware? Why will they try to force a monopoly on digital video? Do they really think they will compete by asking viewers to pay for this technology when video software, for a fraction of the price, might be sending video down cable. If that happened, as original maverick investor James Page explained, you’ll get channel by-passing, where producers will not need the likes of the broadcasters to distribute their movie or program. The viewer at home will pay per view and the revenue will go straight to the producer. Cornwall is sharp enough to realize his own Achilles heel. If the cable and Internet upgrade to fiber optic standards then the need for compression will subside. We need compression because we have a poor infrastructure, we don’t have fiber optics to the front door, and storage is expensive and slow. But it can be seen from another point of view. Why not look at storage and massively enhance the megabyte per dollar cost? That will be the next amazing technology. Then you don’t need compression, nor video-on-demand. We have a handle on this. He would say no more. Eidos don’t worry that people don’t know its name too well yet. They are content to build a gem of a multimedia venture. Soon with money in the bank and bankable technology the future looks set to expand. With the company’s results due imminently, what does Oracle see in Eidos? Jeremy Wall digs deep. You’ll get channel by-passing, where producers will not need broadcasters to distribute their film. The viewer at home will pay and the revenue will go straight to the producer. It must have impressed Oracle chairman Larry Ellison when, by licensing it he launched it to the status of a global software standard.
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CBR Staff Writer

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