Market Insight

Ericsson's acquisition of Microsoft Mediaroom

April 21, 2013

Daniel Simmons Daniel Simmons Executive Director, Enterprise & Residential Communications Technology, IHS Markit
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Telecommunications solutions provider Ericsson is to acquire Microsoft's Mediaroom IPTV Middleware business. Mediaroom is an IPTV software platform that includes the entire set-top box software stack and also related software that runs on operators' head-ends. On the set-top box, Mediaroom includes the electronic program guide (EPG), VOD storefront, Mediaroom Advertising Platform to enable targeted ads, digital rights management (DRM), the middleware and the operating system.

The acquisition is expected to complete in the second half of 2013 and will see Mediaroom's 400 employees join Ericsson's Business Unit Support Solutions. The financial terms of the deal have not been disclosed.

Mediaroom began as part of Microsoft's company-wide push into multimedia and consumer applications, and represented the company's strategy of entering into the premium video market. The product suite was successful, becoming the market leading IPTV middleware solution with 20 per cent share of the global IPTV STB installed based by the end of 2012. Concurrently over this period, premium video delivery over the top (OTT) of open internet become a reality and the connected device ecosystem exploded, allowing Microsoft's Xbox360 games console and Windows operating system to become viable premium video delivery platforms in their own right. As well as launching its own content stores, Microsoft began to partner with pay TV operators, independently of Mediaroom, to access their over-the-top (OTT) video services. Microsoft had discovered an avenue to deliver premium video direct to the consumer using Xbox and Windows, without being limited to particular IPTV operator partners' strategies. As a result, the Mediaroom product was increasingly isolated from the rest of Microsoft's video strategy.

Currentlly 60 per cent of Mediaroom's installed base of set-top boxes is with AT&T U-verse in the US. Deutsche Telekom, including international subsidiaries, is the next largest customer with 13 per cent share. British Telecom, Portugal Telecom and Swisscom each comprise 5 per cent of the installed base, though Mediaroom lost BT as a customer in 2012. Additionally, Mediaroom has a strong Canadian IPTV market share, reaching more than half the IPTV STBs in the country. Ericsson's current middleware customers consist of Telekom Austria and Chungwha Telecom. The combined company is forecast to grow from a 28.6 per cent share of the market at the end of 2012 to 31.0 per cent at the end of 2016, when the installed base is forecast to reach 29m. The combined company added 3.4m new active STBs in 2012, by is forecast to add 1.2m STBs by the end of 2016, as its major customers approach market saturation.

Ericsson's acquisition of a pay TV software company is not without precedent. Cisco's recent purchase of NDS and Motorola's acquisition of Secure Media and Dreampark are both in a similar strategic vein. The acquisition not only allows Ericsson to remain competitive, but it has the additional benefit of preventing anybody else acquiring such a large middleware footprint and portfolio of top tier telco relationships. Prior to the transaction, Ericsson's market consisted of 0.5m set-top boxes in the field. The acquisition confers to Ericsson the flexibility to create new value by bundling more complete IPTV solutions than either Mediaroom or Ericsson could do alone, with the additional benefit of access to Ericsson's mobile expertise.

The acquisition is not absent risk, however, as the history of network equipment companies acquiring middleware providers is somewhat mixed. Nokia Siemens has closed down the Myrio IPTV middleware platform which it purchased in 2005. Imagenio, purchased from Telefonica by Alcatel-Lucent, has an eroding set-top box installed base, having peaked above 2m STBs in 2011. Motorola, on the other hand, has achieved some growth on their DreamGallery platform by porting it into the cable space, for example. Additionally, DreamGallery's HTML5 support is a key building block of the Verizon Media Server's user experience. Ericsson could find similar success by finding a way to expand the Mediaroom offering past the traditional telco market, and establishing new links through to other pay TV platforms such as cable and satellite, where it has extensive reach through its video infrastructure portfolio.

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