IPTV isn't even a mass market phenomenon yet, and already two of its primary equipment vendors are consolidating. Today Norway's Tandberg Television agreed to buy Sunnyvale, Calif. SkyStream Networks Inc. for $80 million in cash and stock.

Since its founding in 1999, it's not clear how much money SkyStream had raised to date. According to its public statements, the company had in excess of $54 million in funding as of August 2003. So it's safe to consider Tandberg's $80 million a deep discount compared to what the company was once worth.

“It’s not surprising, and likely good for both parties, aside from the relatively low valuation for SkyStream given their VC investment to date,” says Heavy Reading senior analyst Rick Thomson. “SkyStream provides a better in road into the IPTV space for Tandberg; it also provides Tandberg with good head-end encoder density in a relatively small footprint."

Heavy Reading observed last summer that while the IPTV market shows promise, the market is being served by a sea of vendors large and small. (See Expect More IPTV M&A and 2005 Top Ten: Heavy Findings.) The analysts predicted a significant amount of consolidation in the works, owing to the fact that all those disperate technologies can’t easily be integrated by carriers.

Both SkyStream and Tandberg supply compression systems needed to send IP video content through video distribution networks. Tandberg’s product focus has been on larger central head-end systems while Skystream’s products have focused on smaller regional systems.

“The difference is that our products have always been higher video quality and we tend to do a one box, one channel solution that is generally preferred by the Tier 1 telcos,” reports Tandberg’s marketing director Lisa Hobbs.

“Tandberg, as a respected cable-world incumbent can hopefully grow SkyStream’s Tier II and III carrier presence with a shot to compete for business in the Tier I telco arena,” Thompson says.

Tandberg has signed deals with “at least” one North American Tier 1 telco, and several others in Europe, Hobbs reports.

The company will keep SkyStream’s 100 or so employees -- including fifty engineers -- on the payroll at their current location in Sunnyvale, which Tandberg will use as its Silicon Valley beachhead.

SkyStream, which reported $30.7 million in revenue during 2005, is Tandberg's third aquisition in the past 12 months. (See Skystream Reports Profitable '05.) The company also bought N2 Broadband and GoldPocket Interactive in 2005.

The SkyStream transaction is expected to close in April.

— Mark Sullivan, Reporter, Light Reading