Harmonic's New Comcast Deal Oozes Subtext
In a surprise move, Harmonic announced this morning that it's signed a warrant agreement with Comcast that gives the cable company access to an investment stake in Harmonic of up to 10%. The deal is dependent on Harmonic achieving specific product milestones and sales targets over the next seven years. During that time, any Harmonic stock that Comcast buys will be at the fixed price of $4.76 per share.
There are two big takeaways from the warrant agreement -- one that's well-recognized, and one that's less so. First, the agreement is a big deal for Harmonic after a period of time when the company's cable access business has slipped. Harmonic is hoping that its newly announced CableOS software-driven CCAP solution will make it competitive again against rivals Arris Group Inc. (Nasdaq: ARRS), Casa Systems Inc. and Cisco Systems Inc. (Nasdaq: CSCO). And by tying the warrant agreement to CableOS sales, Comcast Corp. (Nasdaq: CMCSA, CMCSK) is validating that product strategy. (See Harmonic Unveils Software-Based CCAP Solution, CableOS.)
Separately, the warrant agreement also underscores the importance that Comcast is placing on the industry's broad shift toward virtualized networking. Harmonic CEO Patrick Harshman referred to that point in an investor call discussing the warrant agreement noting that cable is "primed to be disrupted by the transition to software."
The second big takeaway, however, may be less obvious. This is the third warrant agreement that Comcast has signed with a major vendor in the last six months. In March, Comcast signed a similar deal with Universal Electronics Inc. and in July the cable operator entered a warrant agreement with Arris around that company's Network & Cloud products and services. (See What Does Comcast Want From Arris?)
Comcast clearly wants to extend its already-significant influence on cable technology research and development even further than it already has today.
There are several examples of how Comcast has put itself in the driver's seat of cable R&D over the last few years including the company's establishment of the Reference Design Kit software initiative, and its development and licensing of the X1 cloud-based video platform.
By taking ownership in its vendor partners' businesses, however, Comcast is, in a sense, creating a distributed R&D organization with financial incentives for everyone involved to deliver high-performance results.
It's particularly interesting to consider Comcast's model here in the context of how the wireless industry is driving its own technology development. The big US telcos have also outsourced a significant amount of R&D to their vendors, but those vendors are almost entirely outside the United States. The same is not true in cable.
In cable, most of the top technology vendors are right here in the US; right here in Comcast's backyard.
— Mari Silbey, Senior Editor, Cable/Video, Light Reading