Native Instruments Insolvency and Updates

[fossile]

the “New Owner” is legally obligated to honor existing licenses, but you are responsible for proving you own the products.

unless they sell off the IP versus the operating company(s)… for example, if the reason NI is going under is poor operations, then one could wonder if a smart acquisition would be to buy the ops, vs just the IP and re-brand it… or another common one – buy the ops and IP, then resell the IP and dump the ops… thus avoiding potential legal issues for NI if doing it directly… and NI then simply becomes just another innocent instrument provider vs the entire infrastructure…

 

[LinkedMusicians]

@fossile It appears that NI was well managed on a day-to-day operations level. It’s the acquisitions and massive debt vs. earnings that led to their insolvency. Their acquisition spree occurred during the post-COVID home-studio boom, so they paid top dollar for everything. When interest rates rose, all of their earnings went to paying down the debt (again, according to CDM’s report, their debt was roughly 10x their annual earnings).

So, it’s basically a given that there will be an asset deal — an intellectual capital transfer — where the buyer doesn’t inherit the debt obligations. No sane business person/company would take on the level of debt NI has accumulated. Those assets include NI’s user database and activation servers. Here’s where current NI customers should take note — the new buyer has a strong motivation to keep the activation servers running — they need to do that to maintain the value of what they purchased. So, it’s very likely that NI customers’ existing licenses will transfer to the buyer of the new company (let’s say Kontakt for this example).

For us long-time NI customers, when Francisco Partners first bought NI—they moved everyone over to the “Soundwide” ecosystem, and our serial numbers us there. Hopefully, that is what will happen in this case.

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[LinkedMusicians]

Now, I realize that I will lose some folks on this, but while one might think this is similar to what occurred with Gibson’s sale of intellectual property to BandLab, it’s actually quite different.

BandLab bought all of the intellectual property (IP), including the source code for SONAR, brand trademarks, and patents not the customer database or obligations. Gibson retained the legal liabilities and any remaining corporate debt of the original Cakewalk subsidiary. Of course, BandLab also hired core Sonar developers like Noel. Again, BandLab didn’t buy and takeover the Cakewalk customer database. We had to opt-in to BandLab’s database. With NI, the insolvency administrator is trying to scrub the debt from the parts of the company for sale and sell the various parts of NI, including customer databases as part of the core assets to ensure continuity.

When BandLab bought Cakewalk’s assets, they didn’t buy the obligations between Gibson and the users. That’s why those lifetime deals or any customer agreements didn’t have to be honored by BandLab. In effect, BandLab was saying to customers, “We didn’t make that deal with you, so we don’t have to honor it. That was with Gibson, not us.” Instead, BandLab attempted to buy the goodwill of the customer base by giving away product (what was once, and is now again, called Sonar) for free for a limited time.

From my understanding, the company that buys from NI has the option of doing what BandLab did and telling customers, “you’re not my problem.” The new buyer, for example, is unlikely to give your Komplete 15 license 10 years of free support — you bought that from a company with different owners, and legally, they’re not obligated to do that. However, not honoring existing NI licenses, while legally their right, would be brand suicide. So, I think it’s most likely that buyers will be honoring existing licenses to some extent, but likely limiting or ending support of older products. They may very likely do things like revise or terminate things like NI’s generous license transfer policy.

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[LinkedMusicians]

If the chatter around the NI M&A discussion is correct, the companies presently in talks with NI/NI’s insolvency administrator are Fender, Focusrite, Yamaha/Steinberg, InMusic, and Adobe — there’s also some social media discussion that deadmau5 and NI’s original founders (Haver and Galic) might be attempting to raise money to buy part of NI.

I have another blog post in the works that weighs the pros and cons of each of the above companies buying Kontakt (I’m just focusing on Kontakt due to my time constraints and my knowledge being the deepest with that product and its ecosystem). I would love to hear from our members, if they could pick the company that think would be best for the future of Kontakt, which one of those it would be.

My pick — by far — is Fender. It has proven that it knows what to do with an acquired software company with PreSonus. Focusrite would be a question mark. They haven’t been great when it comes to managing software. They’ve discontinued a lot of the software they’ve introduced. They definitely operate like a hardware company that doesn’t prioritize or even treat their software lines as equally important.

My concern with Yamaha is that HALion is already the second largest sampler in the industry and buying their competitor would create less competition in the marketplace, which would have negative impacts on innovation and pricing. InMusic would be a nightmare based on their terrible track record with software. Innovation would almost certainly stop as InMusic has a well-known history of not investing even in the maintenance of the software brands they’ve acquired (Air Music Tech and BFD top the list, but there are others). Adobe would be the the worst case scenario of all, as they would almost certainly turn Kontakt and any NI products into subscription-only, leaving current Kontakt perpetual license owners in a very bad position.

I’d love to get everyone’s thoughts. Again, this is a big deal to me because (1) most of the sample libraries I own are Kontakt formatted sample libraries (and I’ve spent a lot of money on Kontakt sample libraries) and (2) I have made a good deal of friends who are sample developers who I know are in a tough spot right now.

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[Brian]

Good argument for Fender.  I would love to see them take in NI hardware and software, but not the other companies (Izo, etc) that were grossly over-paid for.  I suspect the seller of P.A. (to NI) is going to get it back for pennies on the dollar 🙂

Edit-  Adding a bit re: In Music.  While I have been burned by them more than once, I think their HeadRush Guitar pedals (at least the Flex Prime I recently bought) is amazing, and unbeatable for $500.  I still would HATE to see them get NI, but not all of their companies are dumpster fires.

1

[LinkedMusicians]

On Brian said

Good argument for Fender.  I would love to see them take in NI hardware and software, but not the other companies (Izo, etc) that were grossly over-paid for.  I suspect the seller of P.A. (to NI) is going to get it back for pennies on the dollar 🙂

I think the price any of these parts of NI will sell for is dependent on the competition for them. If there are indeed many companies discussing — and possibly — making offers, that, of course, lessens the likelihood that this will be a fire sale. That’s why the administrator’s first order of business is scrubbing the debt from the business, because it appears these are otherwise profitable sub-brands. If PA has been profitable and the debt is scrubbed, and there is competitive bidding, it could sell for a decent price.

The parties in these equations that is guaranteed to get a small fraction of what they put in are creditors.  So, they know that, and they’re just  trying to get as much as they can, knowing it will only be a small fraction of what they’re owed. But they don’t want a fire sale and there’s no need for a fire sale if there are numerous interested parties.

A fire sale would happen if these parts of NI had poor sales and were long neglected technologies, but that’s not the case. So, when you remove the debt, you have very attractive brands and business units. If the reports are true and the debt was at something like $240 million (that’s from memory — I wrote of it earlier) and the company was earning $25 million annual revenue, there’s no way those creditors are going to see anything close to what they loaned the company and no buyer would take on a company with that debt to earnings ratio. We can’t stress enough that the problem with NI wasn’t that their products aren’t competitive, the problem is all of those acquisitions made, buying companies when their prices were very high, and being saddled with massive debt due to that, especially when the market changed and interest rates increased. So, again, separate all of that debt from the picture, and you likely have an attractive business or businesses.

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[fossile]

thanks, for me, 40+ years of working with giant evil corporations seeking world domination (aka wall street etc) when i say “operations” – i mean as the corporate executive whole, not the folks on the front lines creating the products and maintaining them. 🙂 irresponsible compounding of debt is (in my speak) an “operating issue”.

anyways, i am hoping my few thousand dollar investment in NI and Kontakt platform instruments will be preserved… but i’m somewhat cynical that the same type of people running NI into the ground in the first place, will be able to discern the proper path forward…

[LinkedMusicians]

On fossile said

thanks, for me, 40+ years of working with giant evil corporations seeking world domination (aka wall street etc) when i say “operations” – i mean as the corporate executive whole, not the folks on the front lines creating the products and maintaining them. 🙂 irresponsible compounding of debt is (in my speak) an “operating issue”.

anyways, i am hoping my few thousand dollar investment in NI and Kontakt platform instruments will be preserved… but i’m somewhat cynical that the same type of people running NI into the ground in the first place, will be able to discern the proper path forward…

I think you and I are in agreement that it is the actions of top-level management responsible for acquisitions, like the CEO and CFO, and strategy people that are responsible for NI ending up in insolvency. I wouldn’t fault the NI development, marketing, brand, support, HR, or sales staffs. They aren’t involved in all the acquisitions and resulting debt that led to NI’s downfall. Of course, I’d love to see, for example, Fender, buy at least Kontakt, and hire the team that has worked on it. While all of the debt they were under hindered progress, I think that team has done a good job and I have heard mostly good things from developers who work with them and still continue to have meetings with them through all of this.

@fossile, what company would you most like to see end up with Kontakt?

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[LinkedMusicians]

We’re coming up on a milestone; we’re four days away from the 90-day mark. That’s especially important, as in Germany, the government guarantees employee wages for 90 days during an insolvency. After that, companies must fund their employees themselves or lay them off.

This is an uneasy time in the industry. I’m hearing that numerous companies are laying off employees. I have heard that one company in talks with NI is not moving forward, but I don’t know how trustworthy that is. But we’re at a point where an announcement is likely going to be made very soon.

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