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Pace Shoots for STB Stardom

Pace Micro Technology is set to absorb the set-top and connectivity division of Royal Philips Electronics N.V. (NYSE: PHG; Amsterdam: PHI) for about $135 million, a move that should make the U.K.-based company the No. 3 provider of set-tops in the world. (See Pace Buys Philips STB Biz.)

Pace CEO Neil Gaydon, who discussed details of the deal Wednesday with reporters and analysts and in a follow-up interview with Cable Digital News on Thursday, said the combination of Pace and the Philips unit will represent 2006 pro forma revenues of more than $1 billion, and north of 8.5 million shipped set-top boxes.

Pace, presently seventh in set-top market share, would rise to No. 3 with the addition of Philips, currently No. 5 in the world. The combined company would trail only Thomson S.A. (NYSE: TMS; Euronext Paris: 18453) and Motorola Inc. (NYSE: MOT), while pushing past Scientific Atlanta /Cisco Systems Inc. (Nasdaq: CSCO) and China-based Tongda, based on 2006 data from IMS Research .

Table 1: Global Set-Top Market Share 2006
Rank Company Name Estimated 2006 Market Share
1 Thomson 11.6%
2 Motorola 8.4%
3 Tongda 5.2%
4 SA/Cisco 4.3%
5 Philips 4.2%
6 PBI (China) 3.4%
7 Humax 3.4%
8 Pace Micro 3.3%
9 ZhuoYi 2.8%
10 Echostar 2.6%
Source: IMS Research on 2006 shipments




The deal doesn't give Pace much help with its strategy in the United States, where it trails well behind Motorola and SA. The U.K. company has had to scratch and claw since 1999 to establish itself in that rock-hard market, while others, including Pioneer (USA) Inc. , opted to drop out.

Still, Pace's Americas division has gained some ground in the U.S., with shipments to cable operators and satellite TV operators jumping to 1.2 million units for the fiscal year ended June 2, versus 200,000 in the previous fiscal year. (See Pace's Patience Finally Paying Off .)

Philips, meanwhile, flirted with the U.S. cable industry in the earlier part of the decade but got little more than a peck on the cheek in return.

Philips had won two U.S. deals. In 1999, MediaOne Group Inc. (now part of Comcast Corp. (Nasdaq: CMCSA, CMCSK)) included Philips boxes in an ambitious multivendor pilot, and in 2000, Philips reached a deal to supply 1 million digital set-tops to Tele-Communications Inc. (also part of Comcast today). But Philips walked away from both projects as it decided to shelve its U.S. cable set-top plans. (MediaOne's plans fell apart anyway, as AT&T Broadband scuttled the project in 2001.)

Philips also made Docsis cable modems in the late 1990s before deciding to exit that business.

'Zero Overlap'
Fast-forwarding to today, Gaydon said Philips offers Pace a new base of customers, as only three TV service providers, DirecTV Group Inc. (NYSE: DTV), UPC Broadband , and another yet-to-be-named, are supplied by both set-top companies.

Those common customers use different models from Pace and Philips, and Gaydon thinks they would continue to do so. "There is zero overlap. It's completely complementary to the business, even down to the silicon," he told Cable Digital News.

In the case of DirecTV, Pace supplies thick-client HD-DVR boxes, while Philips provides lower-end satellite TV receivers. The opposite is true with UPC, as Philips is preparing to launch an HD-DVR combo box in 2008.

Geographically, Pace has an established presence in the U.S., U.K., and parts of Europe and Asia, while Philips adds in more "mainland European customers," and some leadership in the Latin American TV marketplace, he said.

In the Americas, for example, Pace has distribution deals with companies such as Comcast, Bright House Networks , Rogers Communications Inc. (NYSE: RG; Toronto: RCI), Time Warner Cable Inc. (NYSE: TWC), and Vidéotron Telecom Ltd. . In the Asia/Pacific region, it has agreements with ViaSat Inc. (Nasdaq: VSAT), Sky , Virgin Media Inc. (Nasdaq: VMED), and Sky New Zealand, among others.

Philips, meanwhile, will add to the mix customers such as Sky Mexico, BT Group plc (NYSE: BT; London: BTA), Sky Brazil, Net Brazil, Canal+, Numericable-SFR , Telefónica SA (NYSE: TEF), Sogecable SA, and Astro.

What's in a Name?
Perhaps more significantly, Pace plans to tap the Philips brand so it can move "very meaningfully into retail."

Pace will be allowed to use the Philips name for up to three years on some set-top products. At the start, look for Pace to employ retail strategies in parts of Europe and Latin America, rather than in the U.S., although some box makers are considering U.S. retail plays following the separable security mandate that went into effect in July. (See Countdown to 'Seven-Oh-Seven'.)

"It's a little early for that," Gaydon told Cable Digital News regarding any cable set-top retail plans Pace might be considering for the U.S. market. "But don't think it hasn't crossed my mind."

In addition to retail, Pace will also look to Philips and its relationships with BT and Telefonica to reenergize Pace's IPTV set-top strategy.

"This [deal] will accelerate that capability," Gaydon said. About 15 percent of Philips's set-top revenues come from the retail channel. Roughly the same percentage is tied to Philips's IPTV-related set-top revenues.

Despite the market share gains, Philips's STB unit did suffer losses in 2006 after posting a profit in 2005. But the rest of the set-top industry suffered as well during this period, Gaydon pointed out, noting that a shift to MPEG-4 and high-definition in 2006 caused delays in launching products and obtaining new customers.

Looking ahead, Pace hopes to apply its streamlined operational model to Philips, which employs about 330 people in the STB division.

"There are improvements to be made, we think fairly dramatic, to how they produce their boxes," Gaydon said during Wednesday's press conference.

— Jeff Baumgartner, Site Editor, Cable Digital News

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