Tuesday, October 19, 2010

What does the OverDrive/Insight Venture Partners deal mean?

Yesterday, OverDrive announced a "major investment" in the company by Insight Venture Partners. OverDrive enables libraries to lend audiobooks, eBooks and videos, and Insight is an investor in Chegg and two other education-focused companies, as well as many other companies, including Twitter. OverDrive's press release says that the company will use the funds to fuel additional growth. The press release also says that OverDrive has been profitable for 20 straight quarters. Under normal circumstances, that would be a recipe for an Initial Public Offering, but these are hardly normal circumstances, and the market for IPOs is likely to remain small for at least another year or two.

One has to assume that some of the Insight investment is going to OverDrive's owners to allow them to partially cash out, but what about the growth opportunities for OverDrive? The company is in a perilous position; many libraries are adopting Amazon's Kindle readers (which are incompatible with OverDrive's service), even though Amazon's user licenses officially bar lending. Amazon hasn't taken any action against libraries, but the risk for OverDrive is if Amazon decides to officially allow lending and makes a big push into the library market. Amazon's pricing power and Kindle readers would make it very difficult for OverDrive to compete.

One potential opportunity (and this is speculation on my part) is that OverDrive might use part of the proceeds from Insight to acquire Findaway World. Who is Findaway World? They make an audiobook player called the Playaway that's designed for lending and education use. Each Playaway comes preloaded with an audiobook, and when a patron borrows a Playaway, they get the audiobook and headphones. You may think that the idea of selling MP3 players loaded with a single audiobook is crazy, but Playaways are very popular with both libraries and publishers. Libraries check the Playaways in and out just like conventional books. Publishers like the fact that audiobooks on Playaways can't be downloaded or copied.

There's not the frenzy of competitive activity in the audiobook business that there is in eBooks. OverDrive could build a strong competitive position there that would be much less vulnerable to competition from Amazon or other vendors. Findaway World would help OverDrive to sell many more products through its existing distribution channels, to its existing customers. Also, both OverDrive and Findaway World are based in Cleveland, OH, so it would be simple to consolidate the two companies. Finally, Findaway World knows how to build devices that can stand up to heavy usage, which would help OverDrive if it wants to develop its own media devices for the library market.
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