Blockbuster video deal for Cisco

Cisco nabs Scientific-Atlanta for $6.9 billion to gain access to consumers' living rooms.

Cisco's proposed $6.9 billion buyout last week of Scientific-Atlanta makes clear that the enterprise network leader wants into your living room, too.

The planned takeover of the cable TV set-top box giant paves the way for Cisco to make home entertainment and video its next $1 billion-a-year Advanced Technology opportunity.

The company's idea is that Cisco is IP, which is the foundation for next generation TV, so Cisco is TV. "Cisco has always done well selling routers to carriers. But they haven't been able to get a real strategic chunk of a provider network," says Rob Whiteley, an analyst at Forrester Research. "The push to IPTV is really going to be one of the things that gets them there. Linksys couldn't do it alone - it's not enough of an end device. So this is really an attempt to marry that - the really intelligent back end with the routers, to a really intelligent front end, a cable set-top box."

Analysts say Cisco's move makes sense.

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Cisco's proposed $6.9 billion buyout last week of Scientific-Atlanta makes clear that the enterprise network leader wants into your living room, too.

The planned takeover of the cable TV set-top box giant paves the way for Cisco to make home entertainment and video its next $1 billion-a-year Advanced Technology opportunity.

The company's idea is that Cisco is IP, which is the foundation for next generation TV, so Cisco is TV. "Cisco has always done well selling routers to carriers. But they haven't been able to get a real strategic chunk of a provider network," says Rob Whiteley, an analyst at Forrester Research. "The push to IPTV is really going to be one of the things that gets them there. Linksys couldn't do it alone - it's not enough of an end device. So this is really an attempt to marry that - the really intelligent back end with the routers, to a really intelligent front end, a cable set-top box."

Analysts say Cisco's move makes sense.

"We believe TV content will drive huge growth of Internet traffic, with implications for the Internet's largest equipment vendor, Cisco," states Anton Wahlman of investment firm Needham and Co. "Cisco must better understand video, quickly."

If you look on your cable set-top box, you're likely to see Scientific-Atlanta's logo or that of Motorola. Scientific-Atlanta also makes head-ends, hubs, advanced encoding devices and digital content managers for service providers. It has installed about 56 million cable devices in the United States, representing about 40% of the market.

The acquisition helps Cisco build an end-to-end portfolio of IP TV and triple play - bundled voice, video and data services - infrastructure for service providers. Cisco already had the routers, switches and cable modem termination systems for cable companies; it also recently acquired DVD home entertainment technology with its purchase of KiSS Technology.

The buyout will give Cisco set-top boxes used to provide interactive, on-demand digital TV for consumers and, when combined with Cisco's Linksys consumer network portfolio, a broadband router/gateway for other residential entertainment applications.

"Video is an integral part of our strategy that must be a core competency," said Cisco CEO John Chambers during a Webcast announcing the acquisition. "Video is too valuable to do in a partnership arrangement."

The deal shows how traditional suppliers of enterprise network equipment are looking to diversify.

"Consolidation among equipment players is intensifying as they are faced with slower sales in the enterprise market," says Susan Kalla, managing director of telecom and media research at Caris and Company, in a bulletin on the acquisition. "Equipment manufacturers are looking to enter the booming . . . consumer market for digital television and mobile video offerings."

Cisco will pay $43 per share in cash for each share of Scientific-Atlanta, and assume outstanding options. The deal matches Cisco's previous largest acquisition - the $6.9 billion purchase of metropolitan optical transport vendor Cerent in 1999.