Will Cisco Bail on Set-Top Boxes?
For now, most believe Cisco when it says it has no intention of bugging out, partly because boxes will fit into its Videoscape architecture and partly because the business of selling set-tops to telcos and MSOs simply isn't that bad, at least not yet. (See Can Videoscape Save Cisco's Set-Top Business? and Cisco's Cable Crunch .)
"It's still significant and their market position is still relatively strong on a global basis," says Teresa Mastrangelo, Infonetics Research Inc. 's directing analyst, video.
Worldwide, Cisco is third in set-top revenues behind Motorola Mobility LLC and top dog Pace plc , while still enjoying the number-two spot in cable set-top box sales and the catbird seat for IPTV set-top boxes. Those positions fit well with John Chambers's condition that Cisco focus on markets where it's at or near the top, Mastrangelo notes. (See Pace Snatches Moto's Set-Top Crown.)
And no one is ready to believe the hype that the set-top box is going to completely disappear or somehow go "virtual" inside iPads, TVs and other connected devices overnight. They'll be around for a while, even if Videoscape strategy is to help video service providers put more of the service smarts on the network and pipe their goods to devices that don't fit the traditional set-top box mold. (See Can Videoscape Save Cisco's Set-Top Business? and The Disappearing Set-Top .)
How quickly cable, one of Cisco's key targets, starts to transition to IP will help to determine how big a part set-top boxes will play in the near term. But those strategies -- and when MSOs will execute them -- are far from uniform. (See Comcast Demos New Web-Based TV Service.)
"Given all that uncertainty, we do expect that set-top boxes will have a pretty significant role for the next three to five years, but you can start to see … the edge of a shift away from at least emphasizing set-top boxes," says SNL Kagan Senior Analyst Ian Olgeirson.
But some analysts think Cisco will remain a key player because cable will still rely on it to make hybrid boxes that can speak both QAM and IP video. "They [Cisco] want to stay in that business because there's going to be a product cycle around it," predicts Morgan Keegan & Company Inc. Communications Equipment Analyst Simon Leopold.
And there are other business and operational factors that will maintain Cisco's link with the set-top box. Videoscape's a big network-focused play, but Cisco will still make set-tops or more advanced gateways that can run it. Plus, no one should expect Cisco to start ripping up contracts that tie set-tops to the purchase of other Cisco gear, Mastrangelo says.
Margin of error
And what of the sale that takes the set-top factory in Juarez, Mexico, out of Cisco's hands and takes 5,000 employees off the books? Cisco insists Foxconn's production prowess can help it reduce margins, but trying to calculate those savings is almost useless right now because no one knows yet how much Cisco will end up paying for boxes when Foxconn takes over the manufacturing.
"All you can conclude is that Cisco wouldn't do it [sell the set-top plant] if they didn't think it was favorable to their margin," Leopold says, noting that the lingering unknown factors prevent him from plugging any anticipated margin improvements into his model for Cisco beyond an expectation that there will be some sort of tailwind to be factored in later.
But an engineer with a top U.S. MSO, who didn't wish to be named, is glad to see Cisco make the move because it's further indication that the components in cable boxes are increasingly reaching commodity levels. "If there's a way to create better economies of scale, I think it's not an unwise move," the engineer said of the pending sale.
— Jeff Baumgartner, Site Editor, Light Reading Cable