August 23, 2006
Cisco Systems Inc. (Nasdaq: CSCO) is making a serious run at building an end-to-end IPTV solution for carriers, and several sources feel an IPTV middleware platform may be next on the networking giant's shopping list. Several recent deals involving Cisco seem to indicate that middleware is a missing piece in its IPTV arsenal. (See IPTV MiddleWARs: Far From Over.)
Cisco’s acquisition of the VOD player Arroyo Video Solutions Inc. , announced Tuesday, is one indicator of its plans. (See Cisco Snatches VOD Vendor Arroyo.) VOD (video on demand) is an increasingly popular part of commercial video services, so some say Cisco's move is another incremental step toward piecing together an end-to-end IPTV distribution system of its own.
Another meaningful strategic move by Cisco is its investment in the video content management company Widevine Technologies Inc. , announced in April. The digital rights management (DRM) piece is of central importance to video distribution because it protects the content and controls its monetization. Seattle-based Widevine has strong ties to the Hollywood content community and has emerged as one of the leading content management players in the IPTV space. (See Cisco Fertilizes Widevine.)
“When you start getting into the DRM integration with the middleware, that’s when it starts getting really interesting,” says Heavy Reading senior analyst Rick Thompson. That integration would give Cisco a way to manage video rights and security from the headend all the way to the set-top box in the subscriber’s living room.
Widevine CEO Brian Baker declined comment for this story.
IPTV middleware has been called the central nervous system of the IPTV distribution system. It is the software brain that orchestrates the interaction of network elements from the headend through to the set-top box.
“The large incumbents are all putting together an end-to-end IPTV story,” Thompson says. “Cisco and Alcatel are the two main ones.”
Thompson points to several good reasons for Cisco to own a middleware product.
With an IPTV middleware platform of its own, Cisco could in time pose a credible threat to the Microsoft Corp. (Nasdaq: MSFT) / Alcatel (NYSE: ALA; Paris: CGEP:PA) IPTV partnership. Microsoft and Alcatel have virtually run the table on large telcos hoping to come out of the gates quickly with mass-market video services. (See Microsoft Wins IPTV Deal at DT.)
“It’s not critical to have middleware as part of that solution, but there are some advantages when it comes to integration, especially if you are acquiring the set-top boxes,” Thompson says. “If you can control the integration time needed to make all the pieces of the food chain work together, you can control the time needed for the carrier customer to turn up profitable services."
Thompson points out that IPTV middleware is not the most profit-rich piece of the IPTV distribution chain. But once installed, it can “pull through” sales of more expensive items like encoders and VOD servers, not to mention Cisco's own networking gear.
Several sources report hearing the "Cisco middleware" rumor. “I would not be surprised at all if that’s the case,” says Harmonic Inc. (Nasdaq: HLIT) VP of solutions and strategy Nimrod Ben-Natan. “One of the key arguments we’ve heard from Cisco is that they want to be a big player in IPTV.
“They acquired Scientific-Atlanta, but after about two months they realized they had a lot going on in cable but had very little going on in the IPTV space.” Ben-Natan points out that the only major telco TV deployment in which Scientific-Atlanta Inc. is engaged is AT&T Inc. (NYSE: T). “So I wouldn’t be surprised if they are going after an additional component,” he says.
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Cisco itself isn’t entirely secretive about its thoughts on middleware. “It’s a critical piece of the puzzle, so we have great interest in it,” says Cisco spokesman Wilson Craig. “Whether we partner, build it, or acquire it -- as you’ve heard John [Chambers, Cisco's CEO] say many times -- really depends on the particular market segment and our customers' needs.”
Not everybody agrees that Cisco will pony up for middleware. “If you look at Cisco’s acquisitions in Scientific-Atlanta and now Arroyo, it spells 100 percent cable and zero percent IPTV,” says Steve McKay, CEO of the VOD server and CPE company Entone Inc. (See Harmonic Spends $45M on Entone VOD-Ware.)
“Arroyo is a complete non-player in the IPTV market -- it’s like the ninth-ranked VOD player in the market. It can’t have helped Cisco's cause there at all. In fact it could be seen as a negative for them.”
Heavy Reading’s Thompson says Arroyo doesn't necessarily take Cisco out of IPTV contention. “I do think [Cisco] can take Arroyo into the telco market. I believe Cisco views IPTV as a priority and a forward-looking opportunity, but recognizes that cable is where the video market is today.”
Meanwhile, others feel that Cisco will have a hard time unseating Microsoft even after building or buying the IPTV middleware piece.
Susquehanna Financial Group analyst Joe Chiasson points out that even with the middleware piece in hand, Cisco faces a tough challenge forming an end-to-end video platform. “It’s a tricky balance -- it becomes an issue of how you allocate resources," Chiasson says. "It’s one thing to say that you are going to integrate every piece in the IPTV food chain, but to put those things into practice it becomes pretty problematic. It’s a lot more difficult than it sounds." (See AT&T Still Has IPTV 'Jitters'.)
Microsoft isn’t saying much about the potential threat of Cisco to its IPTV middleware business. “Microsoft has no comment on rumors,” says spokesman Jim Brady. “Cisco is a part of the Microsoft IPTV ecosystem. Basically, they deliver the advanced set-tops and encoding solutions to the IPTV portfolio.” (See Scientific-Atlanta, MSFT Team.)
So, of the many IPTV middleware platforms currently on the market, which would Cisco consider serious acquisition targets? Our sources say the field can be narrowed to just a handful whose products have already been reality tested at actual telco video deployments.
One clue might lie in the middleware platforms that already integrate with Widevine content security. According to Widevine, these include Orca Interactive Ltd. and Minerva Networks Inc. (See Orca's Not Blubbering and Nortel, Minerva Find IPTV Partners.) Widevine interoperates with Kasenna Inc. VOD servers, but apparently not specifically with the Kasenna middleware platform. Widevine also integrates with Myrio Corp. middleware, but Myrio was taken out of the game by Siemens AG (NYSE: SI; Frankfurt: SIE) last April. (See Siemens Snaps Up Myrio.)
The Israeli company Optibase Ltd. (Nasdaq: OBAS), whose second-quarter revenues dropped to $4.3 million from the $6.5 million it reported for the same quarter last year, has also been mentioned as a possible acquisition target.
— Mark Sullivan, Reporter, Light Reading
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