Cisco quits set-top box market, sells business to Technicolor

After ten years of making networked set-top boxes, Cisco Systems plans to quit the business, selling its Connected Devices division to French firm Technicolor, the companies said Thursday.

Although Cisco will stop making video customer premises equipment for service providers, it will continue to develop software and cloud services to help telcos deliver IPTV and other video services to their customers, Cisco’s business development director Hilton Romanski wrote in a blog post.

The companies plan to collaborate on developing video products for service providers, he wrote, and that collaboration will include Romanski taking a seat on Technicolor’s board.

Technicolor is already a major player in this market, but acquiring Cisco’s video CPE business will double its revenue in the segment to around €3 billion, it said. That revenue will come from shipping around 60 million set-top boxes and home gateways each year, building on an installed base of about 290 million set-top-boxes and 185 million gateways, it said.

The companies expect to close the sale, for €550 million (US$600 million) in cash and stock, by the end of January.

Giving up a foothold in customers’ homes with the sale of its Connected Devices division, just as the Internet of Things market is warming up, may seem a strange move for Cisco, which has a lot to say about the “Internet of Everything” these days.

While some “things” are powerful enough and connected enough to find their way to the Internet through any old Wi-Fi router, many others are not. Small sensor-based devices with tiny batteries communicate via low-power radio systems such as Z-wave, Zigbee or Bluetooth Smart, and require a matching gateway close by to help them connect to the Internet.

Telcos are increasingly asking their suppliers to build such technologies into their home gateways, allowing them to offer own-brand ranges of home security and surveillance equipment, or energy-saving smart switches and lighting controllers. Meanwhile, other companies are battling to become the dominant home gateway provider, with the likes of Google, through its Nest subsidiary, striking deals with utilities to get its smart thermostats into customers’ homes—and then linking them up with smart smoke alarms, smart security cameras and other devices still to come.

But Cisco’s Internet of everything pitch is more about providing the cloud infrastructure that allows such smart devices to talk to servers far away, rather than to other, similar devices nearby.

For Cisco and Technicolor, the motivation for the Connected Devices sale is more about relative profitability: Cisco is doing better overall than its video CPE business, and selling it off will boost Cisco’s gross margin by one percentage point, Romanski wrote. Cisco generated earnings of $2.4 billion on revenue of $12.1 billion in its last fiscal quarter. Technicolor, on the other hand, is less than a sixth as profitable: On Thursday it reported half-year earnings of just €48 million—almost double a year earlier—on revenue of €1.6 billion. It expects the acquisition to boost its connected home earnings before interest, taxation, depreciation and amortisation (EBITDA) from €77 million in its last fiscal year to €200 million in the next.

Consumers touched by the deal may notice little more than a change of logo on the bottom of the box shipped by their telco—unless that collaboration between Cisco and Technicolor results in a broader market for a particular low-power wireless gateway technology in the home.