As I Was Saying

Duopoly Demise: A World without Motorola or Cisco

3/05/2012 2:01 PM

Whenever a company professes “110% support” for an ailing element of its operation, the only digit I hear is the final “zero” in that number.

Hence, Cisco’s staunch vow to maintain its set-top box business triggered visions of an imminent sale. Cisco’s top executives uttered their utmost support for the STB line-of-business in response to reports that the company is shopping around that legacy cash cow acquired from Scientific-Atlanta six years ago.

Simultaneously, thoughts turn to Motorola’s STB business, which could be in play at the same time “if” (pronounced “as soon as”) new owner Google decides to abandon the home hardware line it gets with its Motorola Mobility acquisition. Google has been very tight-lipped about its STB plans, not even awarding it “110% support” status. But, according to sources, Google has advised Motorola Mobility’s top echelon that “all is on track” for a transition without changes. Which probably means “changes.”

Are ARRIS, Samsung, Ericsson, Pace, various Chinese vendors and public equity firms listening? The prospect of overhauling the Motorola/Cisco duopoly and its joint 85% share of the U.S. STB installed base is also a rare moment for the MSOs. At last: possible relief from the long-simmering love-hate relationship, even though new owners may tilt the price equations that operators can control.

Like Cisco, Google’s focus is on cloud and IP-based services. STBs may transmogrify into IP gateways, but they still represent the past, not the future for Silicon Valley-centric purveyors. Even Google’s recent commitment to build a fiber optic broadband operation in Kansas City doesn’t necessitate that it manufactures the home equipment.

So what happens if both major U.S. STB makers abandon the industry? And what’s the outlook for service and maintenance to the tens of millions of STBs that will be in homes for a decade or longer? Depending on who buys the companies — and how long the deals take — we could face a year or more of uncertainly, not particularly comfortable for MSOs in today’s environment.

Craig E. Moffett, the prolific cable and satellite industry analyst at Sanford C. Bernstein & Co., LLC, is sanguine about a duopoly exodus.

“It’s a sign of the times,” he told me. “With or without Cisco, the industry isn’t shutting down, it’s simply moving to Asia. Cisco’s margins in the STB business were and are unsustainably high. So were Motorola’s.”

Moffett believes the dual exit would not be “the end of the world. Samsung will happily step in to fill the void.”
Another Wall Street analyst agrees that the STB makers are “likely to find a home in private equity, where they can get the cost center of the business.” This analyst, who prefers to remain anonymous, believes that Cisco will keep the STB business even though it is detrimental to margins. Indeed, he admits that keeping the STB line may seem counter-intuitive because it “dampens profitability.” But he sees it as a way for Cisco to reassure customers that “we’ll be there” for end-to-end service.

So what happens next?
Asian electronics companies — which have been trying to crack the U.S. STB market for more than a decade — are the most obvious suitors. Yet, Panasonic’s decision early this year to abandon the U.S. STB category reflects the downside. True, financially-troubled Panasonic had plenty of reasons to quit the market, just as Sony did a few years ago. Several Chinese electronics up-and-comers may poke around, much as Huawei Technologies did recently.

More obviously, existing competitors with a smaller U.S. footprint could step in, offering MSOs the assurance that they, at least, understand the U.S. cable business. British-based Pace plc. is the most obvious opportunist, along with Arris Group Inc., which could integrate (with some effort) STBs into its services for design and engineering of broadband networks.

There are also plenty of wild-cards. Ericsson could see U.S. opportunity, now that it is out of the U.S. handset business thanks to the recent sale of its stake in the Sony-Ericsson joint venture to Sony. Ericsson has plenty of credibility in the back-end of cable operations, but it has not been active in the STB sector lately. With its acquisition of Tandberg TV last year, Ericsson plunged deeper into its own version of the end-to-end game.

Lots of attention is going toward private equity, which may focus on STB fundamentals, such as Comcast’s purchase of seven million STBs per year (at least for now). We’ve heard interpretations that some prospective buyers, notably ARRIS, would not work with private equity companies after recent unhappy experiences on unrelated ventures.

Meanwhile, speculation raises fascinating options as “what-if” scenario often do. One insider with no particular inside information, whispered the name “Ed Breen,” the former General Instruments executive who ascended to Motorola President in 2002, then seven months later was lured away to become Chairman/Chief Executive Officer of then-troubled Tyco International Ltd. While Breen’s possible interest is pure speculation, there have been plenty of examples where departed executives ride to the rescue of their corporate alma maters.

It’s hard to get pumped up about declining businesses such as STBs, except that tens of millions of “regular” cable viewers will be using those commodity boxes for a long time. Small operators will still depend on the hoary devices, even as the largest MSOs migrate to other technologies. That’s why the Cisco/Motorola ownership situation will continue to get — and deserve — plenty of scrutiny.