Market Insight

Technicolor to acquire Cisco’s STB and Broadband CPE business

July 30, 2015

Daniel Simmons Daniel Simmons Executive Director, Enterprise & Residential Communications Technology, IHS Markit

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Technicolor is to acquire Cisco’s Connected Devices division, which generated USD 1.8 billion in sales of set-top boxes (STBs) and broadband customer premises equipment (CPE) in 2014, for USD 600 million in cash and stock. The deal is expected to close in late 2015 or early 2016, and will see Cisco’s STB and CPE products and workforce transferred to Technicolor’s Connected Home business unit, which recorded revenue of just under USD 1.8 billion in 2014. Cisco will retain its cloud and infrastructure solutions for video, which are currently marketed under the Videoscape brand.

Our Analysis:

This acquisition ends years of speculation about Cisco exiting the STB market, and makes Technicolor the second largest STB and CPE provider in both shipment and revenue terms globally, behind ARRIS and Pace combined, based on 2014 results.

Cisco and its investors had come to view the STB business as a major burden on a Service Provider Video business unit otherwise positioned for growth. The recent performance of its STB business and the future outlook for the market are not well aligned with the type of quarterly and annual growth Cisco executives and investors expect from the individual business units. Jettisoning the business aligns much more closely with its long term aims than investing in further STB scale, as ARRIS has done with Pace. Cisco has been positioning its Service Provider Video business unit towards software and service solutions that are more in line with the company’s high level corporate strategy and cloud vision for a long time. Now, the video business unit can highlight the growth opportunities from its Videoscape product and service portfolio. Additionally, with customer contracts now being awarded for Cisco’s CBR-8 CCAP platform, the video segment has the potential to become one of the highest-growth segments for the company.

The Cisco deal is a sign that Technicolor has clawed its way back from its financial difficulties of 2009, when it had to undergo a complete financial restructuring to stave off bankruptcy. The overall company is much leaner than it used to be, yet it certainly has the resources and know-how to absorb a major business unit such as that of Cisco.

Technicolor will benefit from a large increase in scale, which is emerging as the key strategy for success as the low-margin STB and CPE markets mature. Technicolor’s own quarterly STB and CPE performance has been very lumpy with inconsistent sales and the Cisco acquisition should provide its Connected Home division with some much needed stability by enabling Technicolor to fill in significant gaps in it market positioning; similar to those Pace will fill for ARRIS. Technicolor leads the global satellite pay TV STB market by units shipped, with a share of 18%, and is well positioned in the DSL broadband CPE space with a share of 6.5% making it the fifth player. However, its position in the IPTV STB market and in the cable STB and CPE markets is relatively weak. Cisco will significantly bolster Technicolor’s presence in the both the IPTV and cable STB and CPE markets.

Technicolor will also increase its North American market share quite significantly. This is important because the region will continue to be the single most valuable STB and cable CPE market through to 2019, so re-establishing a strong share in this territory will provide a platform for growth. Technicolor’s share in the region has eroded in recent years as DirecTV, its main North American client, has become less reliant on it in favour of Humax and Pace. The timing of the announcement is interesting, given its coincidence with the FCC’s blessing of AT&T’s proposed takeover of DirecTV. Moving forward, it appears that AT&T will rely on DirecTV as its primary TV platform, while the current U-Verse TV solution will likely be capped. Cisco has been the lead supplier of IP STBs to AT&T, though its unit shipment numbers, which averaged over one million units per quarter have dropped to nearly 600,000 per quarter as U-Verse TV subscriber additions have slowed. Without a significant satellite STB presence to compete for the potentially increasing DirecTV business, Cisco stood to lose significant share at its largest telco IPTV customer. But with the acquisition, Technicolor now bolsters its case to expand its presence with DirecTV, given it will now be a supplier to both pay TV platforms.

Cisco paid USD 6.9 billion for Scientific Atlanta in 2005. A decade later, the company’s value is roughly one tenth that number. This demonstrates and industry-wide change in preference from dedicated hardware products for video delivery to software-based solutions, which is being driven by consumer demand for Internet-based, non-linear, multi-device video experiences over legacy broadcast TV and STB based systems. This limits the potential for STB growth somewhat, despite the expected arrival of UHD TV services, but places increased emphasis on the importance of broadband CPE. This is a crucial element of any internet service provider’s offering: it ultimately governs the maximum broadband speed to the home and to devices in the home that rely on the Wi-Fi network it often supports. There are imminent transitions to next generation access technologies such as DOCSIS 3.1, G.Fast, FTTx and 802.11ac Wi-Fi that all have the potential to drive value for Technicolor’s broadband CPE business. Growth aside, Cisco’s price tag of USD 600 million should see Technicolor make revenue gains on its investment well inside a year from closing the acquisition.

ARRIS’s acquisition of Pace in comparison represents a strategy that’s based around the benefits of being able to supply end-to-end video and data solutions, whereas Cisco’s divestiture to Technicolor represents a bifurcation, with the network and in-home elements of service delivery clearly separated. ARRIS’s end-to-end approach is more in line with the general industry consolidation trend, which is expected to continue, but Cisco’s strategy could give other cloud and network video solutions providers pause to consider whether they need an in-home-hardware presence, should they be considering entering the STB or CPE space. This context makes it interesting to consider what might have been for Technicolor. Had the company not been forced to sell off its Grass Valley unit and the broadcast video division (now Thomson Video Networks,) the company could very well be an end-to-end infrastructure and CPE provider like its chief rivals. If Technicolor can make this acquisition work, it is possible that type of re-integration could be a next step. Supplementing low-margin STB and CPE business with higher-margin infrastructure sales is a well-worn path.

Geography
France North America
Organization
Arris Cisco Pace Technicolor
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