Arris, Pace Topped Set-Top Box Market in 2014

Combined For 25% of Global STB Revenues: Infonetics
X1 box  400x300.jpg

RELATED STORY:Arris, Pace Shares Soar

The proposed $2.1 billion merger of Arris and Pace will bring together the world’s two largest set-top makers, which together generated 25% of global revenues in the category for all of 2014, according to data from Infonetics Research.

Arris, which acquired Motorola Home in April 2013, finished calendar year 2014 with 14% of overall set-top revenues ($2.7 billion), up 6% from the previous year, while Pace represented 11% of global set-top revenues ($2 billion), according to Infonetics data supplied to Multichannel News. Those numbers outpaced other suppliers in the sector such as Cisco Systems, Samsung, Humax, Technicolor, EchoStar, and ADB, among others.

Arris was particularly strong in North America last year, holding 27% of revenue and 23% of unit shipments.

Jeff Heynen, principal analyst for broadband access and pay TV at Infonetics, said the Arris/Pace deal is another indicator that the set-top box business (and broader consumer premises equipment market) “is all about scale,” noting that the total addressable market for STBs is not growing, save for regions such as China.

But CPE still remains a “huge part of their revenue portfolio,” so consolidation, he said, will help Arris maintain its margin profile while also enabling it to grow its business outside of North America, where pay-TV sub growth is sluggish. Buying Pace will also give Arris a much larger presence in satellite TV, which is growing on a global basis.

“Satellite was an area we’ve been homing in on,” Bob Stanzione, Arris’s chairman and CEO, said Wednesday during a call with analysts and reporters.

Stanzione also agreed that achieving more scale was a key driver to a deal, calling it a “mutually sought transaction.”

“We believe that, globally, customers are looking for suppliers that have the scale and ability to innovate and drive cost out of the business,” Stanzione said, adding that he believes the proposed deal will be “well received” by customers.

Arris also shrugged off concerns that the deal could struggle to win regulatory approval because it will bring together the world’s two largest set-top box makers. He said STB market remains fiercely competitive.

“We’re very confident that we will be able to have it approved…There are a lot of players in this business,” Stanzione said, noting that surge of new OTT entrants and TV-connected streaming devices.

Though Arris and Pace hold significant STB share at Comcast, the world’s largest cable operator, Stanzione said the vendors don’t overlap much outside the U.S.

“When you look outside the US, we are extremely complementary,” Mike Pulli, Pace CEO, said.

Stanzione conceded that Arris and Pace do overlap in some product areas, but said the plan is to combine them quickly and accelerate development on new products much in the way Arris did following its acquisition of Motorola Home.

The Arris/Pace deal is considered a “corporate inversion” whereby a company reincorporates overseas to reduce tax burdens. There was a crackdown on it last year to discourage it in certain situations.

The resulting “New Arris,” to be 76% owned by Arris shareholders and 24% owned by Pace shareholders, will be a new holding company that will be incorporated in the U.K., while keeping its operational and worldwide headquarters based in Suwanee, Ga. Stanzione said the proposed deal is “well within the rules for an inversion,” noting that the rule is 20% minimal ownership, and that New Arris will be a “big taxpayer as a result of this [deal].”

Don’t Forget About the Access Network

Though the focus of the deal tends to center on the set-top implications, Heynen said it’s important not to underplay the access network side of it, pointing to Pace’s acquisition of Aurora Networks in 2013, and Aurora’s earlier purchase of Harmonic’s cable access unit, which included optical transmitters, amplifiers, receivers and nodes.

Heynen said the merger with Pace puts Arris in a better position to drive the optical node market and give it access to more distributed forms of access technology that Aurora is also known for. That, he said, will help Arris keep pace as operators consider distributed forms of a Converged Cable Access Platform (versus the fully-integrated centralized form found in Arris’s flagship E6000 CCAP), and give Arris a larger share of the optical market in Europe.