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Cisco Backs Away From 'Low-Margin' STB Deals

Jeff Baumgartner
LR Cable News Analysis
Jeff Baumgartner

Welcome to today's cable and broadband news roundup.

  • Cisco Systems Inc. still loves set-tops, but apparently just the most profitable ones. Cisco is "walking away" from potential deals involving lower-margin boxes, a class that presumably includes IP clients, company Chairman and CEO John Chambers said on Wednesday's second-quarter call. [Ed. note: We've asked Cisco to clarify.] "We have been more selective in the business … in terms of set-top boxes, and the lowest margin boxes in particular," Chambers said. "If it's purely a bid that is on very poor margins, we're not even going to bid." Cisco is emphasizing this strategy in Europe, and that was reflective in the second-quarter numbers, as revenues for the EMEA (Europe, the Middle East and Africa) region reached US$3.09 billion, down from $3.2 billion in the year-ago quarter. The shift comes about a year after Cisco defused rumors that it might try to sell its set-top business. Wednesday's revelation likely means Cisco will apply focus on higher-end devices, such as multi-service gateways, that share content with IP devices on the home network and rely on cloud-based apps and user interfaces. Driven by its integration of NDS, Cisco is "evolving from low-margin set-top box business to more of a profitable and strategic Videoscape architecture in the cloud," Chambers said. (See Cisco: 'We Love Set-Top Boxes'.)
  • High-end gateways are central to the plan at Liberty Global Inc., which is using NDS (Cisco) as a key vendor partner for its Horizon TV platform. Liberty Global President and CEO Michael Fries said on the company's fourth-quarter call that the operator has sold more than 100,000 Horizon TV subscriptions in the five months since its launch. The operator has introduced Horizon TV in the Netherlands and Switzerland, with Germany and Ireland coming online later this year. But Horizon TV has yet to put a stopper in video sub losses -- Liberty Global still shed 28,000 video customers in the period. (See Liberty Global Embarks on New TV Horizon.)
  • Expect M&A action in cable's Tier 2 circuit to stay hot: Private equity firm GTCR has struck a deal to buy NewWave Communications from Pamlico Capital for an undisclosed sum. GTCR is completing the deal in partnership with Rural Broadband Investments, a company formed last year aimed at acquiring broadband networks in small and mid-sized markets. NewWave serves about 90,000 customers and passes 250,000 homes in rural parts of Illinois, Indiana, Missouri and Arkansas. And NewWave is just the start. RBI said the deal will be the first in a series of buys as it looks to acquire systems that, in total, will serve 300,000 to 400,000 cable subs.
  • DirecTV Group Inc. fourth-quarter net income rose 31 percent, to $942 million, thanks in part to a $111 million pre-tax gain tied to the sale of its 18 percent stake in the Game Show Network. Subscription growth helped to drive revenues up 8 percent, to $8.05 billion. DirecTV added nearly 761,000 net subscribers (including a record 658,000 in Latin America) in the period, extending its worldwide total to 35 million.
  • The Federal Communications Commission (FCC) isn't laughing at an emergency alert system (EAS) hack that issued a warning of an imminent zombie attack. In the wake of the hoax, the FCC is urging TV stations and cable operators to shore up the defenses of their EAS systems, including the resetting of default passwords, reports Multichannel News. The EAS hoax spread to several local TV stations, including KRTV (CBS) in Great Falls, Mont.; WBUP-WBKP (ABC) and WNMU (PBS) in Marquette, Miss.; and KENW in Portales, N.M. (PBS), according to this this roundup. Here's a sample of what the fuss was about: — Jeff Baumgartner, Site Editor, Light Reading Cable

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    User Rank: Light Beer
    2/15/2013 | 10:38:45 PM
    re: Cisco Backs Away From 'Low-Margin' STB Deals
    Since you referred to a cross-industry trend: Maybe Amazon is a stellar counter example to the low-margin fad? Yet some bears (shorting AMZN) fear it is what happens when you get trapped in a deceptively attractive low-margin box. A mixed menu sounds prudent. "Would you like a million instances of some relatively higher margin EC2 to go along with that box of give-away Kindles?"
    User Rank: Light Beer
    2/15/2013 | 9:12:28 PM
    re: Cisco Backs Away From 'Low-Margin' STB Deals
    And Huawei? Never know when they may show up. They impacted pricing on DTAs, for instance.
    User Rank: Light Sabre
    2/14/2013 | 10:16:09 PM
    re: Cisco Backs Away From 'Low-Margin' STB Deals
    The obsession with higher margins is a fad that cuts across a number of industries. It plays to the idea that organizations should be managed to their share price rather than to their long-term well-being. Taken to its illogical conclusion, a company like McDonalds would stop selling burgers and just focus on drinks. Margins would shoot up .... for a while.
    User Rank: Lightning
    2/14/2013 | 7:22:25 PM
    re: Cisco Backs Away From 'Low-Margin' STB Deals
    The problem with a "high end" only strategy is the low end vendors will be getting Million unit pricing for semi-conductors and the high end vendor will be getting 100k unit pricing. -áSince there are many common components the low end will be able sell "high end" STBs at lower prices with higher margin. -áThus a high end only strategy is unsustainable and a sure path to market irrelevance. -áThe argument that STB are commodities at the HW level anyway only makes sense in the short term. -áThe SW equivalent of Moore's Law, i.e., SW gets better with every release, -áwill mitigate any software advantage over time.-á
    User Rank: Blogger
    2/14/2013 | 6:25:06 PM
    re: Cisco Backs Away From 'Low-Margin' STB Deals
    How can you talk about set-top boxes at a time like this, when a zombie attack is imminent? I'm gonna go git my shotgun.-á

    You gotta love hackers with a sense of humor. -á
    Jeff Baumgartner
    Jeff Baumgartner,
    User Rank: Light Beer
    2/14/2013 | 4:41:07 PM
    re: Cisco Backs Away From 'Low-Margin' STB Deals
    Although Europe appears to be the focus of this shift in focus, it would appear that Cisco will be conceding the market for devices like the Comcast Xi3 to the likes of Pace, Humax and the other vendors that decide to jump in for those potentially high-volume but low-margin HD IP-only client boxes. JB-á
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