Colorado Springs, Colo. Cisco Systems Inc. believes its recent acquisition of Scientific-Atlanta Inc. opens the door for an expansion into edge routing. While Scientific-Atlanta's unit revenue may be slanted toward customer-premises equipment, in the form of the company's vaunted set-top boxes and cable modems, "the access market is relatively mature, while the opportunity in edge routing to the headend may be enhanced [by the deal] more than is realized," Cisco's senior vice president, Mike Volpi, said at a recent technology conference.
Indeed, the new Cisco-S-A organization will go after a "quad play," adding mobility integration to voice, video and data services, said Cisco CEO John Chambers. This means providing an end-to-end solution
to customers, including customer-premises equipment and headend distribution, he said. Chambers told financial analysts that the object was not to dominate TV distribution per se, but to recognize that "all seven layers in the Open Systems Interconnect protocol stack will be tightly linked to all service types, including the converging data, voice and video of triple play."
The $6.9 billion acquisition, announced on Nov. 18, is Cisco's largest in years. Chambers called the merger one of the four most significant acquisitions in Cisco's history, along with the purchases of Crescendo Communications, StrataCom and Linksys.
Cisco has offered cable-management termination routing platforms for several years, and partners with other OEMs for encoding and ad-insertion systems in the headend. The San Jose, Calif., company made its first foray into residential gateways in 2003, when it acquired Linksys Inc., a leader in Wi-Fi routers for the home. Now, Volpi said, Scientific-Atlanta's Explorer STB and WebStar telephony adapter can be added to the Linksys systems offered in retail channels and through cable multisystem operators (MSOs).
Jeff Heynen, directing analyst for broadband and Internet Protocol TV research at Infonetics Research Inc., said that cable operators and their telco competitors have more reasons than traffic aggregation for moving to IPTV. Besides the appeal of moving to all-digital IP traffic, he said, service providers want "the potentially nefarious knowledge of the details of each consumer click-to-video data." Clever marketers can use that information "to sell and market to ever more finely grained submicromarkets," he said.
Chambers of Cisco said that Scientific-Atlanta's profit margins, while healthy, have not been as high as Cisco's. "But we don't see either company's future revolving around separate boxes," he said. Instead, routing, gateway, set-top-box and broadband modem functions will merge in a seven-layer services platform, Chambers said.
Analysts are aware of Scientific-Atlanta's customer base of 50 million consumers, he went on, but few recognize the importance of its professional-services organization, which Cisco sees as key in evolving analog and standard-definition TV networks to HDTV and IPTV.
Scientific-Atlanta's presence in the client end has three parts, said Volpi, who will manage the S-A operation under Cisco's routing and service provider technology group: subscriber hardware systems; network management systems and related software; and the SciCare support services operation. A separate transmission systems group at Scientific- Atlanta will augment Cisco's existing expertise in fiber distribution networks.
Since IPTV has made greater inroads in Asia than the United States, Cisco's broader international footprint may help raise the profile of Scientific-Atlanta subscriber platforms as those systems migrate to all-IP packet traffic. "We are still in a position of 70 percent of business coming from North America," said Scientific-Atlanta CEO Jim McDonald. "We don't have relationships with many service provider customers internationally, and Cisco gives us that."
Whereas most multibillion-dollar deals in the 1990s involved switching and routing infrastructure in the network core, Scientific-Atlanta's strong play is in existing broadband cable systems for the home, and in future IPTV systems forming the basis of IP-based integrated services.
The acquisition reduces the cable modem race to the home to two primary players, Cisco and Motorola Inc., along with such small suppliers as Terayon. Motorola acquired General Instrument in 1999, removing one of the major players of the previous decade. Other early leaders in broadband cable modems have gone out of business as the larger Docsis cable modem players have dominated MSO channels.
A key factor that convinced the Scientific-Atlanta board to accept the Cisco deal was its promise of accelerating the ability to get new products to market, McDonald said. Network equipment manufacturers are expected to bundle new services at a time when MSOs are consolidating and facing new entertainment threats from phone companies, he said. Scientific-Atlanta's expansion into hard-drive personal video recorders and DVD burners exemplifies the way equipment providers must expand quickly into consumer electronics fields, McDonald said.
McDonald said that he and key senior management staff of Scientific-Atlanta will remain with Cisco for a minimum of two years after the close of the deal.