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November - 2002 - issue > On The Cover
I Edit, I Store, I Stream
Karthik Sundaram
Saturday, October 26, 2002
IN THE EARLY EIGHTIES, when the rest of the world was just waking up to the thought of owning PCs, Ajay Chopra went off to Switzerland to work with a Zurich-based watchmaker to design a computer mouse. Today, he is the co-founder and chairman of the board at Pinnacle Systems, a Silicon Valley company that is the premier supplier of tools for the creation of audio-visual content. Convinced that the user will live by the principle of I create, I store, I stream, Pinnacle Systems provides tools geared toward seamlessly integrating audio-visual content, straddling the consumer sector and the corporate media broadcasting sector. Evidently, markets love it; Pinnacle Systems now occupies 53 percent of the market for content-creation tools. It creates digital video-editing products that target professional videographers and camcorder-toting dads capturing their baby’s first steps on tape. Emmys grace Pinnacle’s lobby, lending evidence of the products’ strengths.

“I guess my claim to fame in the Valley would be from the games I developed for Atari, way back in the eighties. That was when computer graphics was a nascent invention,” reminisces Chopra. A few years later, he left Atari to join Mindset, a start-up headed by his previous boss at Atari. “We were trying to develop a graphics computer, just as Compaq was tooling around with a portable computer. The idea was to take the platform of Atari’s graphics and integrate it into regular computers,” recalls Chopra. They realized that they were too far ahead of their time since they lacked applications. “CAD was unknown, as it was just coming in. There were dedicated CAD stations, but AutoCAD was still a couple of generations away. Graphics-creation packages were rudimentary, and video was still analog. This was before the Mac, and our products were ahead of their time. We went around trying to get application companies to write to our products, and that was simply starving us,” says Chopra.

As Mindset was struggling, Chopra was asked to put together a strategy for a particular segment: video production. The graphic capabilities of the computer had elicited interest in the video community, and Chopra directed Mindset to add some features, one of them called GenLock, to the computer. GenLock allowed external video signals to be locked to the computer, synchronizing the input and eliminating jittering. Pretty soon, the video business grew to around $6 million, yet it was still too early. Investors were losing interest, and eventually, Mindset sold the video part of the business to JVC.

Chopra finally left Mindset, and started out on his own. “A few of us met in my living room, trying to figure out what to do next, and eventually put together the plan for Pinnacle. In 1986, we raised some seed money and started off,” recalls Chopra. With a quarter-million dollars in capital, Chopra and his team remained frugal, and worked out of a 3,000 sq.ft office space in Santa Clara. In October of 1986, Pinnacle launched its first product, took it to a trade show and landed their first million-dollar order. The PC-based video manipulation system was well-received by the television market. What it did was to take video input signals and manipulate the images: shrink them, rotate them, move them, and so on. These “rudimentary” special effects were simple products, with simple interfaces, and were sold for about $25,000. Broadcasting companies were fighting to order the products, and Chopra landed a million dollars’ worth of business, and no support to meet those orders.

Pinnacle hit the roads for some serious capital, and managed to raise about $2 million. As Pinnacle’s products began to win awards, Chopra found it easier to raise further rounds. Pinnacle turned profitable in a very short time, and built up a stable market space for itself. In 1994, Chopra took Pinnacle public with a well-received IPO. “In those days, it took a company about seven years before it could go public—a time-frame that shrunk to about 2 years in the 2000-era. And now, this time frame is being rolled back...people need to be more mature in their expectations,” says Chopra.

The group realized the need to move out of the narrow niche it was occupying and to expand into the emerging IT-based markets. Pinnacle’s next venture was in digital editing. Broadcasting companies were still operating on tapes, and there was a huge opportunity for digital editing. There were some names like AVID and Adobe, which were experimenting with editing tools. Pinnacle worked with the application providers like AVID, Adobe, and Apple to develop their platforms. Sony, Panasonic, AVID, Adobe, and the rest came to use Pinnacle’s underlying platform—the I/O hardware and the image manipulation engine—to build their editing applications. This lead position gave Pinnacle the strength to become the industry standard in digital editing. The business had re-invented itself in four years. This, Chopra feels, is the key to Pinnacle’s success. “I feel a company stays strong only if it examines itself every now and then, and sees what needs to be shed, and what needs to grow,” affirms Chopra.

It was natural for the company to get into the applications market. “Pinnacle had strong relationships with the applications vendors and we looked at segments that wouldn’t upset our relationships. We found our niche in consumer products,” recalls Chopra. Pinnacle built its first application product in 1997, and around the same time acquired Miro, a distribution company in Germany. Today, Pinnacle leads the market in consumer-usable editing software, worth about $100 million. Expansion into other regions fetched untapped markets, and Pinnacle managed to penetrate these new markets quite quickly. “Our software products are retailed through the biggest computer stores: Best Buy, CompUSA, Circuit City, and so on. Today, we are the largest-selling software product company in the home digital movie-making business,” says Chopra. “And this is only one half of our business.”

As applications became more and more critical for the broadcasting and professional video market, Pinnacle saw the opportunity to provide end-to-end solutions to these markets. “In the last two years, we went on an acquisition binge, and bought up around ten companies,” says Chopra. “This gave us the strength to get into specific solution-development businesses.” The most recent venture of this business has been solution development for the sports industry. “Take the NFL or the NBA. The players need to constantly analyze their plays, moves, and strategies. Traditionally, this has been done by video and classroom programs. We have captured player-moves on video, digitized them, and loaded them onto a database. Now a player can simply log on, download, and watch a specific replay or move. This has helped the sports classes take a huge leap forward. But better still, we deployed a real-time system in the last Super Bowl, where coaches and analysts on the sidelines can watch a game in real-time, recall moves and strategies of their team’s or opposing teams’ players, and plan moves for each game, in real time,” boasts Chopra. “And this would probably be of greater help, when each move or play results in winning or losing.”

Another vertical where Pinnacle has gained business-critical application strength is in news broadcasting. “News after 9/11 is very different from news on 9/10. Before, broadcasting companies would tape the event, run it to the editing room for editing and mixing, and then reload it back onto tape for use in the broadcasting. But all that has changed. Today, broadcasting companies have to be able to be on air within 10 seconds of the event’s occurrence. This is where Pinnacle saw yet another opportunity,” says Chopra. Pinnacle recently inked a deal with CNN for managing its content—digitally. The end-to-end solution that Pinnacle provides for CNN will take in satellite feeds from remote locations, digitize them, and feed them directly into the server at CNN’s station as data. This data is then available to any editor for editing purposes, or could be directly broadcast as news. “All this happens within seconds, and is enabled by Pinnacle solutions,” says Chopra. Pinnacle is also involved with AOL-Time Warner in the latter’s efforts to launch local news channels on cable.

Pinnacle’s strategy is to try and enter markets where it could establish itself quickly and become a leader. Of course, there is serious competition: Sony brings content-capture equipment, editing systems and tools, and broadcasting strengths to the table, where Pinnacle can bring only its applications expertise. But this hasn’t fazed Chopra and the team. “Sony is competition, yes, but they lack in application strength. Sometimes, they even partner with us to lean on our expertise. I would call this coopetition. We cooperate on many platforms, compete on many others,” laughs Chopra. This end-to-end solutions business has generated $150 million worth of business in the last two years for Pinnacle, and is growing to be a strong support to the retail business.

Analysts Paul Coster at JP Morgan and Gene Munster at U.S. Bancorp Piper Jaffray are upbeat about Pinnacle. “The market for the consumer video editing products is about $500 million, and I would say Pinnacle owns about 30 percent of this market,” says Coster. “Also, in the high-end broadcasting market, the players are only now looking at digital platforms. It is far short of saturation, and technology replenishment—which happens every four to five years—is just in its first year.” While there are a significant number of new players entering the professional broadcasting markets, Coster feels that Pinnacle’s experience and breadth of products will help it emerge a leader.

Munster at Piper Jaffray has watched Pinnacle for over seven years now. “Sony came in as very strong competition, but has only delivered a string of disappointments,” he says. This, Munster feels, has helped Pinnacle consolidate its position very quickly. “The home-editing market is very fickle. People will not invest hundreds of dollars in a product that would most probably be used once or a couple of times. This category pricing has helped Pinnacle sustain its advantage,” concludes Munster.

“Look at this product,” says Chopra, pointing to one of his products. “What do you read?‘Fun way to make home videos.’ Fun is the key word. Adobe does not make this. AVID does not make this. This is for you and me. My ten-year old son makes movies of his roller-blading activity out of this. This is the market for us.” Where Adobe’s product starts at a $599 ticket, Pinnacle’s copy costs about $99. “No home PC user will spend $599 for what is purely an amateur product,” says Chopra. But Pinnacle has an enviable advantage—the platforms for all of AVID and Adobe products come from Pinnacle.

Video server is another area in which Pinnacle has been experimenting. In 1999, they bought up a division from Hewlett-Packard, that was making video servers. HP had, in fact, invented the video server, which offers extraordinarily large storage features, compression features, and archiving systems. While the division was doing good business, it did not fit into HP’s bigger strategy, and Pinnacle wisely bought up this division, to enable its entry into the market. This established it presence in the server business. “Most of the major broadcasting establishments today use our servers for broadcasting purposes,” claims Chopra. Pinnacle has executed a sound strategy of bringing high-end technology to home-use products at affordable price-tags. This has delivered two levels of revenue: volumes from retail sales and market shares in corporate business. Each market’s dynamics has demanded a separate division, and Pinnacle has distinct teams handling the different products and markets.

“We have stayed away from 3D-generation products. Not many of the companies in this field are making money, and the market is not mature yet,” cautions Chopra. “This is only getting worse, as companies in Asia and Europe who have put out products for a few hundred dollars.” But Pinnacle is keenly watching the gaming market. While cautious about voicing Pinnacle’s current involvement, Chopra says that the industry is on his radar.

Chopra has played a variety of roles at Pinnacle—from CEO to CTO, at one time in strategic marketing, to president of a division. In the early days, Chopra was in business development, while the other two co-founders were in the technology. “What is interesting in the way we built Pinnacle is its culture of transparency,” says Chopra. “No one has cabins, and anyone can simply step into my cubicle to see me. This is the way we believe in facing challenges. Openly, easily, and transparently.” Chopra sees Pinnacle’s inherent corporate strengths helping it outlast him or his co-founders. “Yes, we are in this business for profits and all that, but what is important is the commitment,” says Chopra. “We did not build this company, just to take it public and then jump off it, once we made the money. If you look at the biggest public companies in India, they are run like fiefdoms. The founding family would own about five percent of the stock, but they run it like they own about 70 percent. In all this, Infosys has come as a breath of fresh air, where Narayan Murthy has set up a management and culture which will surely help Infosys continue working the same way in the future, as it is working today. That clarity of vision and culture is what we have in place today,” affirms Chopra.

“Digital is going to rule the future. The retooling in the broadcasting industry will drive digital content, and move it away from tape-based content,” says Chopra. “Tape has a limited life span, while digital is pretty much timeless. This is the future even of cinemas, where the content will be held at the production company’s base, and the theatre will simply choose movies based on consumer preferences, and download them via satellites, to air them in the movie hall.”

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