Video services

Motorola, Cisco Buyouts Vex VOD Market

The wheeling and dealing in the cable video-on-demand (VOD) market may have only just begun. Now that Motorola Inc. (NYSE: MOT) and Cisco Systems Inc. (Nasdaq: CSCO) are preparing to take the plunge into the market by buying hot startups, market analysts, investors and other industry sources are buzzing about who the next takeover targets will be.

Most of the fresh speculation is focused on the two current VOD market leaders, SeaChange International Inc. (Nasdaq: SEAC) and Concurrent Computer Corp. (Nasdaq: CCUR), because of both their visibility and their vulnerability. In the most widely discussed scenarios, sources see Comcast Corp. scooping up SeaChange and Arris Group taking out Concurrent.

Representatives of all four companies either decline comment on the purported deals or dismiss them as groundless rumors. SeaChange and Concurrent executives also contend that their companies feel no urgency to sell out because they are still strong, big, and diversified enough to stand on their own.

"I don't think it really changes anything competitively for us because the same two companies are there," says Yvette Kanouff, SVP and chief strategy officer for Acton, MA-based SeaChange. "I don't see that as threatening."

Concurrent and SeaChange officials agree, though, that more VOD deals will likely take place as cable operators and telcos place more emphasis on the on-demand business and increasingly seek integrated, end-to-end solutions from larger equipment providers.

"The fact that Motorola and Cisco are willing to spend money is really a validation of the space," says Tim Dodge, VOD marketing director for Concurrent. "There probably will be more consolidation in the space."

Despite some recent struggles, SeaChange and Concurrent have ruled the on-demand market for years, combining for the lion's share of cable system deployments and VOD streams. In the latest market rankings by Kagan Research, for instance, SeaChange accounted for about 1.3 million VOD deployed streams while Concurrent accounted for nearly 1 million streams.

But the two publicly traded companies will soon find themselves dwarfed in size by two much smaller rivals when Motorola closes its planned $186 million purchase of Broadbus Technologies Inc. and Cisco Systems Inc. consummates its planned $92 million buyout of Arroyo Video Solutions Inc. Motorola and Cisco aim to wrap up their back-to-back summer purchases by the end of October.

"It's almost like the market has flipped upside down in a matter of a month," says Kip Compton, senior director of video and IPTV development for Cisco. "The small guys will suddenly be the big guys."

Indeed, analysts say competitive pressure is already mounting on SeaChange and Concurrent to make some kind of move. Facing the prospect of competing directly against Cisco and Motorola, the two VOD players must weigh bulking up through their own acquisitions, merging their operations together or selling out to such bigger telecom equipment providers or MSOs as Comcast Corp. (Nasdaq: CMCSA, CMCSK), Nortel Networks Ltd. , Siemens AG (NYSE: SI; Frankfurt: SIE), Alcatel (NYSE: ALA; Paris: CGEP:PA), Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), Ciena Corp. (NYSE: CIEN), and Arris Group Inc. (Nasdaq: ARRS).

"What are those mid-sized players going to do?" asks Sterling Perrin, a senior analyst with Heavy Reading, who recently completed a major report on the cable industry's next-generation video plans. "There'll be market pressure, I'm sure, for them to get bigger or even merge together."

A pact that SeaChange recently signed with one of its biggest cable customers, Comcast, has only fanned the takeover speculation flames. In an eye-opening filing with the Securities and Exchange Commission early last month, SeaChange disclosed that Comcast has committed to purchasing at least $45 million in VOD products and services from the vendor through the end of next year, including the roughly $8.7 million in goods that the MSO has already bought this year, along with two one-year options through 2009.

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