Cisco has agreed to sell its set-top box and cable modem business to Technicolor (Euronext Paris:TCH). Three months ago, ARRIS (NASDAQ:ARRS) announced a deal to acquire Pace (LSE:PIC). If both deals go through, there will be a change in the leadership of the video infrastructure market, with ARRIS taking over from Cisco and Technicolor moving up to the No. 3 ranking. However, while the deals are expected to be game-changers for ARRIS and Technicolor, they do not necessarily signal Cisco's demise in video infrastructure. Cisco is expected to remain the market leader in both video infrastructure software and video network hardware.
Both deals are being driven by changes in the client hardware (or CPE) market. Revenue growth has mostly gone from this mature market, and success is predicated on the ability to generate margins from high-volume global operations. While it isn't quite a mass-market consumer business, it does share some characteristics. With cloud architectures increasingly driving the video infrastructure market, Cisco prefers to focus primarily on the network and software side of the business and sees insufficient benefits from maintaining its CPE operations. Once the deals are complete, its video infrastructure business unit will be markedly different from those of ARRIS and Technicolor.
"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," wrote John Dinsdale, a chief analyst and research director at Synergy. "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."