Motorola Boosts Its Telco-Access Play

Motorola last week may have beaten rivals to the punch in picking up Netopia, a maker of digital-subscriber-line equipment — and for what analysts saw as a relative bargain at $208 million in cash.

Netopia sells broadband customer-premises equipment for DSL networks, with products that include wired and wireless modems, routers and gateways. That lineup would complement Motorola’s formidable cable-access portfolio. It also would provide the copper side of the telco coin to accompany what Motorola offers through Quantum Bridge, a fiber-to-the-premises equipment vendor it bought in 2004.

After the acquisition closes — expected to happen in early 2007 — Motorola plans to maintain Netopia as a wholly owned subsidiary based in Emeryville, Calif.

In fact, Netopia will serve as the new headquarters of Motorola’s global voice and data CPE business. Netopia CEO Alan Lefkof will remain in charge, reporting directly to Dan Moloney, president of Motorola’s Connected Home Solutions business.

Geoff Roman, corporate vice president of strategy and business development for Connected Home Solutions, said Motorola was attracted by Netopia’s key deals with telecom providers AT&T, BellSouth and Swisscom, as well as its software for remotely managing customer-premises equipment.

“If you put this together with some of the things we’re doing in the [Internet Protocol] TV space, it gives us a more comprehensive story to take to the telco providers,” he said. In January 2006, Motorola acquired Kreatel, a Swedish IP set-top box and middleware vendor.

Roman said Motorola’s other CPE operations, including the voice-and-data cable business unit, will be merged into Netopia. “The pieces that will move into this business are associated with cable modems and integrated IP telephony [multimedia terminal adapters],” he said.

About 100 engineers, product managers and other employees located in Horsham, Pa., and San Diego will join the Netopia group. Roman said “the bulk” of Netopia’s 297 employees are expected to join Motorola.

Cisco Systems, among others, had been rumored to be sniffing around Netopia. Roman said Motorola had been in talks with Netopia for several months, and added that “we looked at all the players” in the DSL gateway market. Netopia’s key competitors include 2Wire, Westell Technologies and ZyXEL Communications.

Motorola’s bid of $208 million, or $7 per Netopia share, was a 25% premium over Netopia’s share price the day before the deal was announced. Still, that may have been a steal: ThinkEquity analyst Anton Wahlman, in a note to investors, said he was “a bit disappointed with the price.” He had anticipated Netopia getting taken out for closer to $10 per share.

The acquisition certainly will give Motorola better ammunition to square off in the telco space against Cisco, which in 2003 acquired Linksys, a maker of home-networking and broadband gear for consumers and small businesses.

But analysts said telcos may be a bit wary, given Motorola’s past troubles in the DSL market, said Ron Westfall, principal analyst for broadband infrastructure at Current Analysis.

Motorola “stubbed their toe” with Next Level Communications, he said. “They’ve taken a perception hit on DSL.”

Motorola inherited a majority stake in Next Level, a digital-subscriber-line equipment maker, when it bought General Instrument in 1999. But Next Level subsequently suffered deep losses; Motorola bought out the rest of the company in 2003.

Westfall added, though, that the Netopia buy is a logical move for Motorola. “It’s self-evident that Motorola needed to bolster its telco access and CPE proposition,” he said.

Meanwhile, in what Roman said is a wholly separate project, Motorola is in the early stages of cooking up a “next-generation” set-top box that will use Conexant Systems’ network and multimedia processors. Motorola’s current generation of digital cable set-top devices use network chips from Broadcom and other vendors.

Motorola isn’t tipping its hand about what the box will actually do.

“We probably won’t even be talking about this for another year,” said Paul Alfieri, senior manager of communications for Motorola Connected Home Solutions. Conexant said it wasn’t disclosing any additional details of the chips at Motorola’s request.

The new set-top, according to Conexant’s Nov. 10 announcement, is “intended to offer consumers a more flexible and compelling entertainment experience” and will provide home-networking capabilities.

Financial terms of the deal were not disclosed.

In a statement, Marc Kauffman, vice president of engineering for Motorola’s Connected Home Solutions business, said: “By incorporating Conexant processing technologies into our next-generation design, Motorola will be able to offer consumers the 'next level’ of seamless entertainment, information and communications, in and out of the home.”

That ambiguous description raises more questions than it answers, said Mike Paxton, senior analyst at research firm In-Stat (which, like Multichannel News, is owned by Reed Business Information).

“We don’t know if this is a cable box, an IPTV box, a DVR, a gateway, or what,” he said.

“This could be a significant announcement, but we don’t have enough information about it,” Paxton said.