Cisco: The Cable Guy

Cisco Friday announced it plans to branch out beyond enterprise networks with a proposed $6.9 billion buyout of cable TV set-top box leader Scientific-Atlanta.

Let there be no doubt: Cisco is coming to your living room.

Cisco Friday announced it plans to branch out beyond enterprise networks with a proposed $6.9 billion buyout of cable TV set-top box leader Scientific-Atlanta.  

The move is an indication that Cisco intends to make home entertainment and video its next $1 billion-a-year  “Advanced Technology” opportunity – the company’s idea being that Cisco is IP, IP is the foundation for next-generation TV, so Cisco is TV.

“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 SA’s logo or that of Motorola – the two companies that dominate the cable TV set-top box market. SA also makes headends, hubs, advanced encoding devices and digital content managers for service providers.

SA has installed about 56 million cable devices in the U.S., 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 of Denmark this summer.

Cisco now has a set-top box to provide interactive, on-demand digital TV from consumers and, when combined with Cisco’s Linksys consumer networking portfolio, a broadband router/gateway for other residential entertainment applications.

“A combined Cisco/SA is a full frontal assault to create telco products that integrate multiple services – phone, broadband, and television – from routers through set-tops inside the phone infrastructure,” states market research firm Forrester Research.

“Video is emerging as the key strategic application in the service provider triple play bundle of consumer entertainment, communication and online services,” Cisco President and CEO John Chambers said in a statement.

“As consumers demand more sophisticated information and entertainment services in their home, tightly coupled applications, devices and networks will be essential,” Chambers continued.

Analysts say the deal indicates that traditional suppliers of enterprise networking equipment are looking for way to diversify.

The deal “has moved the networking equipment giant more deeply into the consumer market,” states Susan Kalla, managing director of telecom and media research at Caris and Company, in a bulletin on the acquisition. “Consolidation among equipment players is intensifying as they are faced with slower sales in the enterprise market. Equipment manufacturers are looking to enter the booming…consumer market for digital television and mobile video offerings.”

Under the terms of the agreement, Cisco will pay $43 per share in cash in exchange for each share of SA, and assume outstanding options, for an aggregate purchase price of approximately $6.9 billion, or approximately $5.3 billion net of SA’s existing cash balance. This size of the deal matches Cisco’s largest acquisition – the $6.9 billion purchase of metro optical transport vendor Cerent in 1999.

The acquisition of SA is expected to close in the third quarter of Cisco’s fiscal year 2006. It’s been approved by the board of directors of each company.

Following the close of the transaction, SA will become a division of the Routing and Service Provider Technology Group under the leadership of Cisco Senior Vice President Mike Volpi. SA CEO Jim McDonald will report to Volpi.

SA was founded in 1951. The company has more than 7,500 employees. For its 2005 fiscal year, which ended July 1, Scientific-Atlanta reported a revenue of $1.91 billion.