Why Cisco Wants Out of Set-Tops (Or Not)
Let's start with the case why Cisco would want out: shrinking margins.
"The set-top box business sucks right now for anybody," says an industry source who's close to the market, noting that Cisco has hired an investment banking firm to find some prospective buyers for that part of the business. Another source says Cisco has been pitching the idea "selectively." (See Cisco: 'We Love Set-Top Boxes' and Cisco Puts STB Unit Up for Sale.)
Margins are worsening thanks to heavy-handed price cutting by Samsung Corp. as part of its strategy at Time Warner Cable Inc. (NYSE: TWC), Cisco's biggest set-top customer, Bright House Networks and Cablevision Systems Corp. (NYSE: CVC).
A source says Samsung's kept the pressure on by dropping its price on fully-featured HD-DVRs and less-capable client boxes by more than 20 percent in the last 12 months. "They [Samsung] have made a long-term commitment to this market, and they are doing it through pricing," the source says.
Additionally, Samsung's set-top group is part of its consumer electronics division. Some MSOs like that structure, because the vendor can help them develop concurrently on set-tops and on Samsung connected TVs -- an evolving strategy that box competitors like Cisco, Motorola Mobility LLC and Pace Micro Technology would have trouble matching. (See CES 2011: Samsung Puts MSOs in the Picture.)
And Samsung's approach with major MSOs means Cisco's STB pricing, even on existing contracts, isn't necessarily fixed. Some of its larger customers have stipulated in supply contracts that the vendor keep pricing within a whiff of the lowest rates for like products or risk losing the deal. "Cisco's realized that they can't compete on a pricing standpoint," says a source who is familiar with the policy.
Chambers, though, insists Cisco doesn't even question keeping set-tops. He says they are a central piece in Cisco's long-term video strategy and because service providers consider it important for Cisco to stay in the business.
In a roundtable session with press on Wednesday, covering a wide scope of topics, Chambers had to chuckle about getting asked "every three months" about whether Cisco will sell the set-top business.
"After growing 23 percent last quarter? Can you imagine what our service providers would do to us if we said we're moving out of the set-top business?" Chambers said. "For us to move out of a market where we're a leader and the market's evolving as we hoped -- that would just make no sense."
Cisco's belief is that video will ultimately live in the cloud -- where Cisco's Videoscape framework would connect it to a variety of devices and networks. That transition will take at least five years, during which time set-tops will change accordingly, starting with a shift to being IP-based, Chambers said.
Cisco typically doesn't comment on rumors, but Chambers seemed eager to squelch this one. "I'm surprised you aren't beating me up on why we even let that rumor get out, given how important it is to all our customers, from the AT&Ts to the Verizons, to Cox to Time Warner Cable, to the Deutsche Telekoms, to the BTs -- I mean, this is mainline for them."
Who would buy it?
The New York Post's original story about Cisco's interest in selling its set-top business identified private equity firms among the likely suitors. Other observers tell Light Reading Cable that Cisco might get some interest from Asian manufacturers that are looking to break into domestic cable. Huawei Technologies Co. Ltd. once had eyes for Motorola, but U.S. government scrutiny on the Chinese giant might make a play for Cisco's set-top unit a tough sell. (See Huawei Seen as Likely Moto Suitor and US Gets Worried About Huawei .)
But what's left for Cisco to sell? It still has lots of set-top box customers, and sales to service providers did rise 23 percent, as Chambers noted. So, it still might appeal to a set-top player that wants to expand its U.S. presence, such as Pace plc .
However, it's not the same standalone business it used to be after Cisco sold off its set-top manufacturing facility, and it no longer spins its own set-top silicon, a previous strategy that helped Cisco differentiate while also helping MSOs keep Broadcom Corp. (Nasdaq: BRCM) in check.
Cisco still has a set-top box design and engineering group, but even that's smaller now that some engineers who joined Cisco via the Scientific-Atlanta acquisition have since left.
It's also unclear if Cisco would pitch its conditional access system as part of the package. Cisco might try to keep that piece and continue to sell CableCARD security modules, which have better margins than the set-top boxes they are slotted into.
That would also help Cisco say with a straight face that it's indeed committed to the set-top box market, while also ensuring that its Videoscape platform can be integrated with set-top boxes from any supplier.
— Jeff Baumgartner, Site Editor, Light Reading Cable, and Craig Matsumoto, Managing Editor, Light Reading