August 21, 2006 9:00 PM PDT

Cisco buys video-on-demand start-up

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Networking equipment maker Cisco Systems is set to announce Tuesday that it will spend $92 million to buy a small software start-up called Arroyo Video Solutions to ready itself for the new age of on-demand TV viewing.

Arroyo, which has facilities in California and Utah, has developed software that aims to help cable operators and phone companies deliver a more flexible video-on-demand service.

While Cisco is best known as a provider of Internet Protocol equipment to large companies and Internet service providers, its acquisition of Scientific-Atlanta also has made it a video infrastructure player. The Arroyo acquisition builds on the products that Cisco acquired from Scientific-Atlanta and could help the networking company address changes in the paid TV market.

"The platforms out there today will not scale to the degree that we envision," said Paul Bosco, vice president of video and cable initiatives at Cisco. "The nature of on-demand programming is changing. Cable operators used to be able to offer 100 choices that would get updated every couple of months, but consumers are soon going to expect millions of titles anytime they want them."

Cable operators have been offering video on demand for several years, but the service has traditionally allowed viewers to choose from only a handful of movies or TV programs shown at specific times. But as consumers get more accustomed to watching television when they want, thanks to TiVo and other digital video recording services, it will likely be a natural evolution for TV viewers to expect more on-demand content that they can access anytime they want.

What makes Arroyo's software different from technology used widely today to deliver on-demand services, is that it can offer millions of titles to hundreds of thousands of customers. The company's software is flexible enough that it allows advertising to be inserted into the on-demand content.

Cisco also envisions using the software to allow viewers to access content from the Web on their televisions. For example, cable operators and phone companies could use the technology to allow people to access user-generated videos from sites such as YouTube on their TVs.

While several companies offer video-on-demand technology, Cisco is hoping it has picked a company with a lot of momentum in the market and a strong technology lineage. The 44-person start-up, which is only 4 years old, already counts the two largest cable companies in the U.S.--Comcast and Time Warner--as customers.

Arroyo has a strong technology team, including Drew Major, a founder of Novell and industry icon who is recognized for his expertise in network operating systems, distributed systems and content delivery networking. Paul Sherer, former chief technology officer at 3Com and key contributor to a broad portfolio of networking patents and technologies, is also on the Arroyo team.

"Designing software is not easy," said Michael Howard, a principal analyst at Infonetics Research. "And what Arroyo is doing is very tricky stuff, so it's impressive that the company has industry heavyweights such as Drew Major onboard."

Cisco's rival in the video infrastructure business, Motorola, recently announced its plans to buy a video-on-demand start-up called Broadbus Technologies.

The Arroyo acquisition, which is subject to various standard conditions, is expected to close in the first quarter of Cisco's fiscal year 2007, ending Oct. 31, 2006. Upon the close of the transaction, the Arroyo team and the company's products will be integrated into the Cisco Cable & Video Initiatives Group, within the service provider organization led by Senior Vice President Mike Volpi.

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