I’m not that close to the cable market — though, once upon a DOCSIS moon, I worked for a company that sold transceivers to cable-device vendors — so perhaps I am missing a nuance or subtlety that might have tempered the opinion I am about the express.
Still, I feel relatively confident asserting that Cisco’s acquisition of Scientific Atlanta ranks among the worst buys the networking giant has ever done.
Misstep Followed by Tumble
Yes, the acquisition of Pure Digital Technologies and its Flip video camcorders must rate at the top (or is that bottom?) of the charts. Whereas Cisco paid $6.9 billion for Scientific Atlanta and only $590 million in stock — plus about $15 million in retention-based compensation — for Pure Digital, the former is still lumbering along a wayward path while the latter has been shuttered outright. When an acquired company is shut down with prejudice, as opposed to sold to a third party, a little more than two years after the purchase was announced, well, you have to count it as a misstep — perhaps followed by a severe tumble down a long staircase.
That said, Scientific Atlanta also has fallen well short of the winning mark for Cisco, and its future as a going concern is murky. While Cisco yesterday announced that it has sold a Scientific Atlanta manufacturing facility in Juarez, Mexico, to Foxconn Technology Group, Cisco apparently will remain in the consumer-facing cable set-top business, at least for now.
That’s a puzzler for at least a couple reasons. First, commercial prospects for the cable set-top box in developed markets are uncertain at best, as the devices increasingly are rendered less valuable — and potentially obsolete — by the proliferation of Internet-connected televisions and mobile devices such as smartphones and tablets, all of which detract from the consumer-controlling power of the cable box. In developing markets, moreover, other vendors, including a number of Chinese and Asian players, are getting more than their share of the cable set-top market in jurisdictions where it’s still a growing business.
Oh, there’s no question cable MSOs want to keep the boxes in subscribers’ homes for as long as possible. There’s also no doubt that vendors, such as Cisco, will try to adapt the boxes for new purposes and applications. Still, consumers ultimately will call the tune, and many MSOs seem to acknowledge that reality, looking to jack up the price of bandwidth to compensate for any loss of control as media-content gatekeepers.
Zeus Kerravala, an analyst with Yankee Group Research Inc., has put forth the following argument in favor of Cisco keeping Scientific Atlanta:
“Everybody looks at set-top boxes and says Cisco should cut the set-top box. But that’s often part of a bigger sale to a cable company, with switches and routers. It would be detrimental to their relationships.”
Questioning the Logic
I question that line of reasoning. Several years ago, it might have had some merit, but circumstances have changed. I don’t think Cisco needs to be in the consumer-facing part of the cable business to succeed as a vendor of switches and routers to MSOs.
An appropriate analogy, though somewhat inverted, is to Nokia and its Nokia Siemens telecommunications-equipment joint venture. Once upon a time, Nokia realized value, through mutual reinforcement, in selling both networking gear and handsets to its carrier customers. Now, well, not so much. Ever since the advent of the iPhone, consumers rather than carriers drive handset selection. Tossing a bunch of handsets that nobody wants into a telecommunications-equipment deal isn’t going to seal the bargain.
Sell . . . Before It’s Too Late
I would argue that the same separation will occur, if it already hasn’t, in the cable world. Increasingly, as consumers resist set-top boxes and choose to consume their content through other devices, it won’t matter that Cisco can offer both network infrastructure and set-top boxes. The value propositions will have to stand on their own.
So, I will offer Cisco some admittedly unsolicited but free advice: Get out of the cable set-top box business. It’s more pain that it’s worth, it’s not your forte, and you need to focus your efforts and resources on bolstering other parts of your business.
Besides, Huawei might take the business off your hands for a pretty penny. You just have to persuade the US government to let them have it.