Move over, content. Consolidation is now king.
Even as a deal to combine the two largest U.S. cable operators unraveled, the world’s two largest makers of set-top boxes — Arris Group and U.K.-based Pace plc — were tying the knot.
Proving again that scale is the name of the new game, Arris, just two years removed from its $2.35 billion acquisition of Motorola Home, followed up last Wednesday (April 22) with a proposed $2.1 billion deal for Pace, a company that will expand Arris’s global presence, provide some important network infrastructure technology, and enable Arris to fill what has been an historic gap in its business — a strong presence in the satellite-TV set-top market.
Arris had a minor satellite-TV play in Europe through its Motorola Home acquisition, but adding Pace to the mix will bring in relationships with providers such as DirecTV, Astor, Foxtel, MultiChoice and Sky.
On a broader basis, the deal will expand Arris’s set-top market-share lead. Arris and Pace together generated 25% of global revenues in the category in 2014, according to Infonetics Research; Arris had 14% ($2.7 billion), while Pace represented 11% o ($2 billion), well out in front of other players that include Cisco Systems, Samsung Electronics, Humax, Technicolor, EchoStar and Advanced Digital Broadcast.
Arris was particularly strong in North America, commanding 27% of revenue and 23% of units shipped, per Infonetics.
The deal will also enhance Arris’s position at Comcast, its largest customer, and likely keep it relatively insulated even as Comcast continues to bring set-top design and software development in-house. At the moment, Pace and Arris are key suppliers of boxes powering Comcast’s Internet protocol-capable X1 platform, though Cisco Systems is also said to be in the mix. Samsung and Humax are known to have developed products that could work with X1, but neither has announced X1- facing supply deals with Comcast.
Deal Is ‘All About Scale’
The Arris-Pace deal is another indicator that the set-top box business (and broader consumer premises equipment market) “is all about scale,” Jeff Heynen, principal analyst for broadband access and pay TV at Infonetic, said. He noted that the total addressable market for set-tops is not growing, save for regions such as China.
Still, CPE 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 the sluggish North America pay TV market.
Notably, Arris will enhance its position in set-tops even as the industry trends toward advanced all-service gateways, and toward cloud-based architectures in which the functions of a traditional set-top are “virtualized” inside other devices, including tablets, smart TVs, and gaming consoles, as well specialized streaming devices such as Roku boxes.
Arris is also mounting a defense against this trend by joining Charter Communications in a $135 million purchase of ActiveVideo Networks, maker of a Cloud TV platform that can deliver services to just about any form of connected video device. ActiveVideo has also developed a component called StreamCast that enables operators to stitch in over-the-top video from sources such as YouTube.
While set-tops are a big focus of the Arris-Pace marriage, the access network side of the deal shouldn’t be ignored. To keep up with Arris and Cisco, Pace had beefed up its networking end through its acquisition of Aurora Networks in 2013. Aurora had previously snapped up Harmonic’s cable access unit, which included a lineup of optical transmitters, amplifiers, receivers and nodes.
Heynen said the proposed deal will strengthen Arris’s position in the optical node market, particularly in Europe, and give it some important technology that will help the vendor expand its development of new, distributed forms of the Converged Cable Access Platform, a high-density system that combines IP- and MPEG-based services. Arris has been pursuing the CCAP market via the E6000, a centralized, all-in-one chassis.
Though some analysts believe the deal will face some anti-trust risk due to the stronger set-top market presence that would result, Arris and Pace see it having no trouble passing muster.
NO ANTITRUST WORRIES
“We’re very confident that we will be able to have it approved … There are a lot of players in this business,” Bob Stanzione, Arris’s president and CEO, asserted, noting that the market is growing more competitive amid a surge of OTT video and a broadening swath of TV-connected streaming devices.
The Arris-Pace deal is considered a “corporate inversion” whereby a company reincorporates overseas to reduce tax burdens. 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., but keep its operational and worldwide headquarters 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].”
As for which side initiated the M&A talks — Arris or Pace — both sides are keeping that a secret for now.
“The way this got started was mutual, and it led to what we announced,” Stanzione said, adding that it was no secret that Pace, led by CEO Mike Pulli, was also interested in buying Motorola Home in 2012, but ultimately relented.
“I’ve known Mike for years,” Stanzione said. “We’re fierce competitors.”