Sling Media & EchoStar: The Dude Abides!

Today, EchoStar announced it has entered into an agreement to acquire Sling Media for $380m in cash. Sling is a Mobius VC portfolio company where I’ve had the pleasure of serving on the board for three very exciting years. I first met Blake Krikorian, Sling’s CEO and co-founder shortly after he presented at the May 2004 D: All Things Digital conference. After spending some time with Blake and hearing his vision for the Slingbox and a new kind of consumer electronics company focused on the digital media consumer, I was hooked. We issued Sling Media a term sheet to lead their Series A round. Shortly thereafter, David Chao of DCM came in as a co-lead on the round and

we consummated our investment in October 2004.

Being a gadget junkie, I had spent several years at Mobius looking at dozens of companies that could be referred to as “digital home” companies, but hadn’t made an investment in any of them. Most of the companies had one more more fatal flaws that fell into three categories.

Category one was encountered by hardware plays. Most companies I saw had designed a hardware product that was basically a PC architecture crammed into a set-top box, yet had to sell at a consumer electronics price-point of $299 or less, meaning razor-thin margins (at best) or negative margins, forcing the company to find alternative revenue streams to make profit. I call this the “TiVo problem”.

The second category of problem was encountered by companies that understood the first category problem and decided they needed to sell middleware to the existing CE and set-top-box companies so they could enjoy a nice high-margin software OEM revenue stream, and provide the CE companies with fancy new capabilities like the ability to network a DVD player or stream music and photos from a PC to devices connected to the user’s TV or stereo system. All well and good, except for the fact that these companies would inevitably discover that they would get far less money per unit shipped than they expected, or that their customers would take far longer (often years longer) than they had planned to push the startup’s fancy “digital media networking glue” software out into the field in their devices.

Imagine you’re a startup trying to sell your snazzy middleware to big CE players like Sony, Philips, JVC, Akai, etc, or to set-top-box vendors like Motorola or Scientific Atlanta. Either your customer is going to grind you down to sub $1/unit royalty or they themselves will be dependent upon telcos, cable companies and satellite broadcasters for final approval and deployment of the box the new software is embedded. A startup could (and many did) easily die on the vine waiting years for dollar one of revenue or come to find their revenue stream way less compelling than they had hoped, no matter how compelling the software they managed to create was.

Problem number three was the copyright/fair-use minefield any new media technology must tread carefully through. Any product that manipulates digital audio and video faces the spectre of possible litigation from major media companies and copyright owners who do not always, shall we say, embrace innovative new technologies for delivering and consuming content with open arms.

So why did Sling rise above the noise for me? Besides having an instant personal connection with Blake and his two other co-founders, his brother Jason and CTO Bhupen Shah, I got excited about Sling because they understood all three of these issues and dealt with them up front. First, Sling enjoys comfortable (and positive) margins with each Slingbox sold because the “secret sauce” lies in the software within the Slingbox and the client, and the Slingbox itself is elegantly designed and minimalist device from a hardware perspective — it is basically a plastic box with a few connectors and a DSP chip inside it, giving Sling an enviably inexpensive bill-of-materials.

Sling addressed the second problem (unknown time to unknown magnitude of revenue) by going straight to the consumer via retail with their software (which happens to be packaged in a cheap plastic box), so that they could prove consumer demand for place-shifting. After demand was proven, Sling would have opportunities for OEM/royalty-type revenue streams (which has indeed come to pass).

Finally, Blake & Co knew that the idea of place-shifting might be unsettling to some, so they worked diligently from day one to spend time with broadcast networks, studios and other members of the media ecosystem to help them understand how the Slingbox and all their products had been architected to respect the rights of content owners.

Admittedly, I also loved the fact that place-shifting was a delightfully out-of-the-box way of looking at the digital home landscape. Every company I encountered other than Sling was focused on getting media off a user’s PC and onto their TV or stereo. The Slingbox did the opposite: it was about getting your TV on to your PC or mobile device. And the Slingbox worked with whatever your existing TV/home entertainment infrastructure might be. A product that would add value to all your existing devices and would “just work”. And the last thing that hooked me was the fact that Sling had code-named their secret-sauce dynamic video-stream-optimization technology “Lebowski”, after that most -excellent Jeff Bridges movie. The tech has since been renamed SlingStream, but it was fun while it lasted…

After the Sling Series A closed in October 2004, it was off to the races. They went from a demo prototype to a finished piece of hardware on the shelves at thousands of stores (mainly BestBuy and CompUSA at launch) in less than nine months, launching the product on June 30th, 2005. Much of the credit for this amazing achievement goes to Bhupen Shah, Sling co-founder and CTO, who managed a transoceanic team between San Mateo and Bangalore that churned out hardware, software and firmware in record time.

The Slingbox garnered dozens of awards, great reviews, great word-of-mouth among early adopters and became one of the best consumer electronics product launches ever, selling 100,000 Slingboxes in the first six months of the product’s availability. That was followed up by a monster $47m Series B round in January 2006 led by EchoStar, Goldman Sachs and Liberty Media. And Sling marched on in 2006 by continuing to tell Slingboxes like hotcakes while launching support for the SlingPlayer software on multiple platforms including Windows Mobile, Mac OS, Symbian and Palm. Sling also managed to turn out three new second-gen Slingboxes in time for the 2006 holiday season and launch internationally throughout Asia, Europe and South America. I’m sweating just typing up this condensed history.

The success of Slingbox, which continues to outsell other place-shifting products by an order of magnitude, is a result of the company’s maniacal focus on product quality and user experience. A great product that “just worked” out of the box coupled with great customer support and Sling employees’ (from the CEO on down) active engagement in their user community led to great press and word-of-mouth buzz, too many awards to count, rapid user adoption and great brand awareness and identity.

Moving in to 2007, Sling continued to accelerate their Slingbox sales and began expanding their product line and feature set. At CES 2007 in January Sling pre-announced the upcoming SlingCatcher, in essence a hardware version of the SlingPlayer software, allowing users to connect to a Slingbox and watch it on another TV, not just a laptop or cell-phone screen. Blake Krikorian joined CBS’ Les Moonves in his keynote speech and demo’d the upcoming Clip+Sling functionality that will allow users to clip and share snippets of programming they are watching on via their Slingboxes. CBS was the first network to come on board and announce their support for Clip+Sling. This, coupled with the announcement a month earlier that Jason Hirschorn, former Chief Digital Officer at MTV Networks had joined Sling as President of Sling’s newly formed Entertainment Group, gave a preview of Sling’s founding ambitions to to move well beyond simply being a vendor of digital media hardware.

Today marks another step in fulfilling Sling Media’s grand ambitions. As Sling prepared to raise another equity round, they were approached by EchoStar about a more serious strategic transaction. After a long series of conversations, it became clear to Blake, Jason and Bhupen at Sling that becoming part of EchoStar would afford Sling resources, distribution and market muscle throughout the media landscape that they simply wouldn’t have as an independent entity and allow them to reach (and extend) their vision for Sling Media even more quickly. Congratulations to Blake, Jason, Bhupen and everyone at Sling Media, and contratulations to EchoStar on a very insightful purchase!

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