Cisco Snatches VOD Vendor Arroyo Video

Quickly following in the footsteps of chief rival Motorola Inc., Cisco Systems Inc. has swung a deal to buy video-on-demand (VOD) server vendor Arroyo Video Solutions Inc. for $92 million in cash.

The move, forecast in a July 13 Cable Digital News story on the on-demand market, will give Cisco a small but well respected VOD software startup to fill one of the last gaps in its digital video lineup for both cable operators and phone companies. That will allow it to compete better against Motorola, which filled a similar gap last month by snagging the somewhat larger Broadbus Technologies Inc. for a reported $186 million in cash.

Based in Pleasanton, Calif., no more than 25 miles from Cisco's headquarters in San Jose, Arroyo is mainly a software company that takes off-the-shelf hardware from IBM for its VOD servers and then adds its customized software solution. But, like Broadbus, it's considered a hot startup and counts Comcast, Time Warner Cable, and Charter Communications as MSO customers. Launched in 2002, the privately owned company has raised more than $25 million in two rounds of venture capital funding from investors, including Time Warner Investments and Comcast Interactive Capital.

Cisco officials, who have been scouring the hotly contested on-demand server market for months, say they took the step partly because they see the VOD business starting to take off as both cable operators and phone companies seek a competitive edge in the digital video business. Cisco executives say they also took the step in response to strong demand from both cable and telco equipment customers, which include such top MSOs as Comcast and Time Warner.

"It's a nice adjacent fit for the rest of our products," says Kip Compton, senior director of video and IPTV development for Cisco. "The technology is actually suited for both markets."

Several market analysts and other industry experts saw a Cisco acquisition of Arroyo as logical because of the startup's unique, distributive software approach to VOD. Instead of putting one large set of on-demand servers at a cable system's headend or phone company's central office, Arroyo can deploy smaller servers throughout the network, enabling service providers to place the servers according to customer demand and network load.

Analysts also cite the potential to use Arroyo's software for network digital video recorders (nDVRs), Internet video, and mobile video applications, among other things. In something of a market coup, Arroyo has been supplying the video servers and software for Cablevision Systems' controversial deployment of nDVR service in the New York market, now the subject of lawsuits and countersuits because of the ticklish copyright issues involved.

"The software looks really solid," says Michael Howard, principal analyst and co-founder of Infonetics Research. "I think it's the best set of software to do all the network DVR applications, plus digital ad insertion."

Indeed, Cisco executives say they picked Arroyo over other takeover candidates in large part because of the software's applicability to nDVR and other next-generation services. They note that both cable and telco customers have been pushing them to delve more deeply into the VOD, nDVR, mobile video, and related businesses.

"We didn't just want to get into the VOD market," says Cisco's Compton. "They're a great platform for the future that also happens to be the best VOD solution today."

Market analysts also see Arroyo as a smart buy for Cisco because of the small firm's highly regarded group of engineers. The company counts Drew Mayer, an original founder of Novell, as its co-founder and chief scientist, and Paul Sherer, former CTO of 3Com, as another co-founder and CTO.

"They have a great team," Howard says "I think Cisco did a smart thing in getting that team of engineers and the software they produce and getting them out of the market so no one else could get them."

In addition, analysts applaud the move because of the relatively low price that Cisco is paying for Arroyo. Although Broadbus boasts more cable on-demand deployments than Arroyo, some industry experts have chided Motorola for paying twice as much for its VOD baby.

"They [Cisco] got a nice bargain when you look at the market caps of SeaChange and Concurrent," the two leaders in the VOD market, says Greg Ireland, research manager for consumer markets at IDC. "They got the technology without having to pay for the installed base of customers."

The back-to-back VOD server vendor acquisitions by Motorola and Cisco will no doubt increase pressure on other large cable and telecom equipment makers to dive into the VOD market. For instance, several analysts and other sources believe that cable vendor Arris is weighing a buyout of Concurrent Computer Corp., the second biggest VOD player after SeaChange International, because Arris is now much smaller than its two chief rivals and needs to bulk up to compete.

"Everybody's been snooping around everybody anyway," Infonetics' Howard says. "This'll force the rest of them to actively look harder."

-- Alan Breznick, Site Editor, Cable Digital News
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