Set-tops aren't dead… at least not for Arris.
Based on 2014 earnings reports, Arris Group Inc. (Nasdaq: ARRS) stands to make an estimated $6 billion in annual revenues from customer premises equipment (CPE) -- that includes set-tops, gateways and modems -- if its deal to acquire Pace plc is completed. That $6 billion figure is roughly 75% of the almost $8 billion in total revenues the two companies earned together last year.
Ironically, Arris and Cisco Systems Inc. (Nasdaq: CSCO), two companies that have battled each other as arch rivals for years, may no longer be considered competitors thanks to changes in part due to the proposed acquisition. Even as Arris is doubling down on set-tops with plans to purchase Pace, Cisco is jettisoning its set-top business in a sale to Technicolor (Euronext Paris: TCH; NYSE: TCH). Synergy Research Group Chief Analyst John Dinsdale points out that the result is a growing divide in the industry between network solutions and client-side hardware. (See Cisco Sells STB Unit to Technicolor for $604M.)
"While this clearly signals a shake-up of the video infrastructure market, the main implication is the divergence of the market into separate client hardware and network/software segments," said Dinsdale in a statement. "Technicolor will be a pure play client hardware vendor while Arris will generate almost 80% of its revenues from client hardware. There is a strong case for arguing that neither Arris nor Technicolor will be direct competitors of Cisco once the deals close."
Arris had been diversifying its business and emphasizing network and cloud services prior to the decision to buy out Pace. In 2014, the company saw 69% of its revenue come from CPE, with virtually all of the rest generated from network and cloud solutions. However, because Pace earned 86% of its revenues from CPE during the same period, Arris now stands to increase the size of its set-top division relative to network and cloud.
The financial picture doesn't tell the whole story. Beyond set-tops, Arris gained an early lead in the Converged Cable Access Platform (CCAP) market with its E6000 converged edge router, and that business has the potential to grow as operators consider new CCAP deployments. When the Pace deal was announced, CEO Bob Stanzione also emphasized the importance of Pace's own optical products, as well Arris's as plans to develop more cloud-based solutions through its joint purchase of ActiveVideo with Charter Communications Inc. (See Arris & Pace: More Than Just a Set-Top Deal.)
"When I look at all the pieces that [ActiveVideo] brings with what Arris had before … and some of the pieces that Pace has, I think that we can put together a much more significant portfolio of cloud-based products," said Stanzione at the time.
In the near term, however, set-tops are still where the money is, particularly if Arris's acquisition of Pace gets regulatory approval.
— Mari Silbey, Senior Editor, Cable/Video, Light Reading