Across Continents, Comcast & Liberty Align
When it comes to customer premises equipment (CPE), Comcast and Liberty Global have a lot in common.
Both of them rely on Arris Group Inc. (Nasdaq: ARRS) and Pace plc as hardware manufacturers -- two suppliers that are planning to merge. Both of them have cited Arris and Compal Electronics Inc. (a company better known for making notebook computers) as vendors for their new gigabit gateways. And both are partners, along with Time Warner Cable Inc. (NYSE: TWC), in the RDK Management LLC joint venture.
The similarities say two things to me. First, there's more cross-continental cable conversation than ever before. And second, the vendor landscape in the cable industry is still dominated by a small number of players.
It's not surprising to see similarities between Comcast Corp. (Nasdaq: CMCSA, CMCSK) and Liberty Global Inc. (Nasdaq: LBTY). The CTOs of the two organizations are close, with Comcast CTO Tony Werner hailing previously from Liberty and ushering in current Liberty CTO Balan Nair as his replacement. The two companies have presumably also grown closer in their technology perspectives since Cable Europe Labs merged with CableLabs in 2013, creating more cross-the-pond cable research and development collaboration. And finally, Liberty's agenda clearly began to merge with its North American counterparts when it joined as a partner (with Comcast and Time Warner Cable), helping to manage development of the open source set-top software stack known as RDK.
The closeness is interesting, however, because of the joint buying power that Comcast and Liberty Global enjoy. Together, the two companies report having more than 54 million cable subscribers, and that means they have a lot of influence over the cable industry's technology agenda. More specifically, they have a lot of influence over what cable vendors are buying and selling.
On the vendor point, the fact that a few companies hold significant market share is no accident. It goes back to the issue of content security technology and a long history of set-top duopoly that's been difficult to break. (See About the Death of the Set-Top…)
And while the migration to IP is opening up the cable market, it hasn't yet significantly altered the cable set-top business. Market research from Futuresource shows that a combined Arris/Pace entity would control 23% of global market share. Infonetics echoes that conclusion, also noting that "Arris claimed the worldwide STB revenue market share lead" in the first quarter of 2015.
Arris and Pace do have competitors. After Technicolor (Euronext Paris: TCH; NYSE: TCH)'s just-completed acquisition of Cisco Systems Inc. (Nasdaq: CSCO)'s CPE business, for example, that company claims "(at least) 13% of the global STB market place," according to Futuresource. However, market share numbers drop precipitously once Arris and Pace are separated from the pack.
Some might argue that market dominance is less of an issue now that the importance of cable CPE is waning. (Everything's moving to the cloud! All anyone needs is a low-end streaming box like a Roku!) But that's a misguided view.
Set-tops, and more importantly home gateways, aren't going away. Certain functions are being virtualized, but there's still value in having local processing power and in managing the home network from a controlled device. This is particularly true as demand for high-bandwidth video continues to grow, and as companies invent new Internet of Things applications and devices, all of which have to communicate to each other in some way.
Comcast has been very clear that it wants to own the intelligent hub in the home. The company's upcoming gigabit gateway, like Google (Nasdaq: GOOG)'s recently launched OnHub router, will include support for IoT protocols. Also, Matt Strauss, Comcast EVP and general manager of video services, recently talked at the Wells Fargo Securities 2015 Technology, Media & Telecom Conference about X1 hardware more generally as acting like a smartphone or computer. Similar to those two devices, he envisions the X1 becoming a box that customers never have to turn off and that connects to a number of other devices in the home while offering a wide range of video-related and non-video-related services. (See also Battle for the Home Network? It's On.)
"That's the big opportunity, to make X1 not just a device for video but something you never turn off," said Strauss.
Liberty Global hasn't (to my knowledge) progressed as far on expanding the functions of the home gateway to cover specific IoT support. However, as part of RDK Management LLC , it will have a role in developing the new RDK-B software stack, a pre-integrated bundle of software that should do for broadband CPE what the original RDK stack (sometimes known as RDK-V) has done for video set-tops. In other words, Liberty Global will remain close to Comcast (and Time Warner Cable in this case) on development of new standardized features in broadband modems and gateways. (See RDK-B Could Revolutionize Home Network.)
So what does it all mean?
It's hard to assign judgment, good or bad. On the one hand, consolidation of interests is generally worrisome because it tends to lead to consolidation of power. On the other hand, coordination in this case drives greater technology scale, potentially lowering costs and speeding up development. It also gives top cable companies a better shot at competing with web-scale companies like Google, Amazon.com Inc. (Nasdaq: AMZN) and Apple Inc. (Nasdaq: AAPL).
If nothing else, the aligning of agendas may at least act as a decent predictive mechanism. Where Comcast's CPE roadmap goes, it looks like Liberty's will follow. And Arris and Pace (whether together or separately) will benefit greatly from the business.
— Mari Silbey, Senior Editor, Cable/Video, Light Reading