Cisco Sheds Set-Top Unit

Technicolor Buys Cisco’s Connected Devices Unit for $600M
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Cisco Systems is getting out of the set-top business.

Almost 10 years after entering the STB biz via its $6.9 billion acquisition of Scientific-Atlanta, Cisco has entered a deal to sell its customer premises equipment business to Paris-based Technicolor for $600 million ($450 million in cash and $150 million in stock).

The deal, which also covers DOCSIS cable modems and gateways and represents, marks another big round of consolidation in the tough set-top sector, following Arris’s proposed $2.1 billion merger with U.K.-based set-top maker Pace Plc., and, on a smaller scale, Amino Technology’s just-announced $73 million purchase of Entone Technologies.

The sale, which comes as Chuck Robbins is about to succeed John Chambers as Cisco’s CEO, is poised to propel Technicolor to the world’s second-largest maker of set-tops. Arris and Pace are the world’s current top suppliers, at No. 1 and No. 2, respectably, and will represent 25% of the market when those companies are combined, followed by Cisco, according to Infonetics/IHS data for the end of 2014. 

Technicolor, which also makes cable modems and broadband gateways, estimated that it will secure a 15% share of the global CPE market via the Cisco agreement, shipping 60 million devices per year and an installed base of 290 million set-top-boxes and 185 million gateways in over 100 countries. Technicolor also expects the deal to represent €3bn of pro-forma revenues in 2014 (Cisco said its Connected Devices business will end fiscal 2015 with revenue of approximately $1.8 billion),  doubling Technicolor’s revenues in its Connected Home segment, and expects synergies via the deal to exceed €100 million per annum.

The deal will also position Technicolor well at Charter Communications, which selected Cisco as a primary supplier for its new “Worldbox,” a hybrid IP/QAM device that will utilize a downloadable security platform. Cisco was tapped to supply Charter with a “substantial share” of Worldbox units; Humax is Charter’s known second supplier of the device.  Cisco is also one of the known developers of a new “XG2” device for Comcast’s X1 platform.

The deal also enters play following a period in which Cisco has slowly backed away from the struggling set-top sector as the functions of the set-top become increasingly virtualized in connected TVs and mobile devices and as MVPDs migrate to gateway/client architectures and cloud-powered content delivery platforms (the latter was a key reason why Arris and Charter recently acquired ActiveVideo through a joint venture). Cisco is also shedding CPE amid a massive wave of MVPD consolidation, led by the proposed AT&T-DirecTV merger and Charter’s pursuit of Time Warner Cable and Bright House Networks.

In addition to selling the Linksys home networking business to Belkin in 2013, Cisco sold its set-top box manufacturing facility in Juarez, Mexico, to Foxconn Technology Group in 2011, and revealed in 2013 that it was “walking away” from low-margin set-top deals.

More Deal Details

Although Cisco is selling a CPE business that factored into its broader Videoscape strategy, Cisco said other aspects of the agreement will enable it to remain “close to this business and our service provider partners.”

On that point, the agreement also calls for Technicolor and Cisco to enter into a strategic partnership that will allow both companies to develop and deliver next-gen video and broadband technologies, with a specific focus on Internet of Things (IoT) solutions and services. They have also inked a long-term patent cross-licensing agreement that covers specific intellectual property and patents from both companies.

Upon the closing of the deal, Hilton Romanski, Cisco’s SVP and chief strategy officer, will join Technicolor’s board of directors.

“The strategic relevance of video to every consumer, business, city and country around the world is only growing, and the market is moving rapidly," Chambers said, in a statement . “This is the right time and we have the right company in Technicolor to drive the future of the CPE business to deliver what our customers and partners need, today and into the future. At Cisco, we are prioritizing our investments to deliver on our strategy of video in the cloud, and will partner with Technicolor to position the CPE business and employees for future success.”

“Cisco will continue to refocus our investments in service provider video towards cloud and software-based services businesses,” Romanski noted in this blog post about the deal. “On close, we expect to see a positive impact to Non-GAAP gross margins of approximately 1 point with negligible impact to the bottom line as we continue to invest in our video business.”

He said Cisco and Technicolor expect to close the deal during Cisco’s fiscal second quarter.

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