Cisco/SA: The Integration Starts Now
Cisco Systems Inc. (Nasdaq: CSCO) begins its life as a video and entertainment company today, as the company has closed the acquisition of Scientific-Atlanta Inc.
The acquisition was completed this morning at the price of $43 per share. That's roughly $7 billion -- or $5.5 billion, if you subtract Scientific-Atlanta's cash -- financed by the first bond debt in Cisco's history. (See Cisco Closes SA Buy, Cisco's $6.5B Bond Bonanza, and Cisco to Acquire Scientific-Atlanta.)
When Cisco acquired LinkSys, that firm became a Cisco division unto itself, but Scientific-Atlanta will be integrated into multiple sectors within Cisco. Details such as product integration are still being kept quiet, but Cisco is acknowledging the obvious pairing of LinkSys and Scientific-Atlanta technologies.
"In the networked home, LinkSys has a strong position. There's a tremendous opportunity to take some of those networking technologies and integrate them into the set-top box," says Paul Sanchirico, Cisco's director of video solutions marketing.
From the start, Cisco has touted Scientific-Atlanta as a complete video piece. That is, Cisco wants not only the set-top box, but the back-end video systems, encoding, and integration skills that come with Scientific-Atlanta. Cisco's thesis is that video is the most difficult of services to deliver and requires an experienced touch; moreover, Cisco sees that infrastructure as part of the overall platform that the set-top box represents. (See Sci-Atlanta: Cisco's IPTV Lifeline?)
"In our view and Scientific-Atlanta's view, the headend and what's going on in the set-top box are all one system," Sanchirico says. "If you don't view it that way, you're going to end up with poor user performance, or it's not going to scale, or it's going to end up costing you a ton of money."
Alcatel (NYSE: ALA; Paris: CGEP:PA) has a similarly integrated strategy, although it doesn't own a piece of the home network. Still, Alcatel's function as a systems integrator has been an advantage in IPTV buildouts, winning the company notable jobs, like Project Lightspeed with AT&T Inc. (NYSE: T). (See Mais Alors! Alcatel Bags $1.7B SBC Deal and Alcatel Router Revenues Surge.) Cisco officials have cited the need for integration capabilities as one motivation for the Scientific-Atlanta purchase.
Much of the focus will be on Cisco's role in the digital home, however. Aside from being the coolest aspect of the merger, it's also going to be a contentious area as multiple tech giants vie for supremacy. Motorola Inc. (NYSE: MOT) is an obvious competitor due to its set-top franchise. Consumer-electronics giant Sony Corp. (NYSE: SNE) is another candidate, as is Microsoft Corp. (Nasdaq: MSFT), which is riding a wave of buzz over the Xbox 360.
Some believe that the future home gateway will be based on Xbox or a similar platform -- something consumer-oriented with a PC at its heart. But that's been tried repeatedly without success so far, primarily because carriers want such a box to be designed with the complete network in mind, Scientific-Atlanta officials contend. "It's an environment where it is very difficult to jump in," says Luis Avila, Scientific-Atlanta's vice president of corporate strategic planning.
"The notion that the Xbox is the easy answer there is yet to be proven," Sanchirico says.
Still, the digital living room will be new territory for router magnate Cisco. Sanchirico notes that carriers' goals these days revolve around consumer services. "Just as the Internet became the platform for communications, we want to create the next-generation entertainment platform."
In a different kind of entertainment, the acquisition puts Alcatel and Cisco side-by-side in Project Lightspeed, the home-broadband initiative from AT&T. Alcatel is the lead systems integrator for Lightspeed, but it assigned the video integration portion to Scientific-Atlanta. (See Scientific-Atlanta Wins $195M SBC Deal.)
Predictably, Sanchirico refuses to talk trash about his newfound partner: "Cisco and Alcatel are mature companies, to their customers' success. We'll continue to work with AT&T."
— Craig Matsumoto, Senior Editor, Light Reading