November 18, 2005 12:58 PM PST
Cisco's IP vision becomes reality
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On Friday the company announced it will acquire Scientific-Atlanta, one of the largest makers of set-top boxes and video transmission technology in the cable industry, in a deal ultimately valued at $5.3 billion.
For a long time Cisco has been talking about network convergence, the idea that data, voice and video traffic will one day travel over a single network. The vision has already come to fruition within the carrier's network. Most cable operators and phone companies carry their internal traffic over an Internet protocol, or IP, network that uses Cisco routing and switching equipment.
Now the trend is finally making its way into the home, as cable companies and phone companies start offering customers a triple play of services that includes high-speed Internet access, telephony and, finally, video--all over an IP network.It's this fundamental transition in how TV service will be delivered in the future that makes a deal between IP networking gear maker Cisco and cable equipment maker Scientific-Atlanta seem auspicious.
"The networking market is in transition now," said Ned Hooper, senior director for corporate business development at Cisco. "IP telco TV is accelerating on a global basis, and we realized that by combining our offering with Scientific-Atlanta's that we could offer a complete solution to the service providers building these new networks."
Indeed, evidence of the market transition is abundant. In the United States, two of the biggest phone companies, Verizon Communications and SBC Communications, have already spent billions of dollars to build new networks that can handle the delivery of TV service. And hundreds of phone companies around the world are also planning to use IP to deliver TV service to their customers.
The cable companies also see IP as a promising technology. As more of their users move to digital service and demand for high-definition programming increases, IP will allow cable operators to use their network bandwidth more efficiently.
"For a long time we've talked about streaming video over IP," Mike Volpi, senior vice president and general manager of Cisco's Routing Technology Group, said during a conference call on Friday. "And for a variety of reasons that has been inhibited. But we are seeing a dramatic change where video over broadband is becoming a reality."
The interactive hook
IP will also provide a completely new experience to TV watching, regardless of whether it's delivered by a phone company or a cable operator. People will not just sit back and watch TV, but they will interact with what they are watching. This means choosing the camera angle they want while watching a baseball game, or ordering any movie they want to watch whenever they want to watch it.
Cisco has long been the leader in building the underlying infrastructure--the pipes--that connect various pieces of a carrier's network. But this deal with Scientific-Atlanta helps make Cisco a true end-to-end player when it comes to building the next generation of IP networks. Because video is such a demanding application and uses so much bandwidth, carriers will be designing their networks around video requirements. Voice and data applications, which don't use up as much bandwidth and don't have the same quality-of-service requirements, will be afterthoughts since new, souped-up networks will easily be able to carry these less-demanding applications.
"Historically in networks, the dominant applications dominate how the networks are built," said Volpi. "And video is that dominant application."
Cisco has evangelized its IP convergence vision for a long time, and the company has long predicted that IP technology will be the cornerstone of the new digital home, linking everything from TVs to toasters together over a wireless IP network.
This is the main reason that Cisco bought Linksys back in 2003. Cisco has used this entr?e into the consumer market as a way to brand itself as a home networking supplier as well as an infrastructure player. Through the Linksys product line, Cisco is one of the largest providers of home wireless routers that are used to connect multiple PCs and laptops together.
From the PC to the TV
But Cisco has also predicted that the IP revolution in the home will step beyond the PC. It has long recognized that entertainment products like TVs will play a significant role in the networked home.
"There is going to be a lot of money spent on home entertainment and networking," said Zeus Kerravala, an analyst with the Yankee Group. "And Cisco wants a piece of that pie."
So it makes sense for Cisco to control the device that connects the centerpiece of home entertainment, the TV, to the carrier network. That device is the set-top box. These boxes act as extensions of the carrier's network. They're supplied by the carrier as part of the service, and they are designed to be managed and controlled remotely from the carrier's network.
"I don't think this acquisition is crazy," said Erik Suppiger, a networking sales specialist for Pacific Growth Equities. "It's a logical fit from a product portfolio standpoint. The real challenge is going to be execution of the vision and melding the two corporate cultures."
Indeed, this may not be a small task. Scienfitic-Atlanta is a much larger company than Cisco is used to acquiring. Most of Cisco's 100-plus acquisitions have been of small start-ups with small revenue streams. The company also prefers to buy companies that are located close to its San Jose, Calif., headquarters. Scientific-Atlanta is a well-established company with nearly $2 billion in annual revenue, and it's located on the East Coast, in Georgia, far from the reaches of Silicon Valley.
But Cisco's CEO John Chambers said during a conference call on Friday that he doesn't expect these issues to be a problem.
"The first five companies in a market are always the leaders," he said. "Scientific-Atlanta is a leader in the market, and that is why we focused on it. When (Scientific-Atlanta CEO) Jim McDonald and I talk (about our vision) we can almost finish each other's sentences. I think (the acquisition) will be successful."
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