Acquisition won’t blur Cisco’s enterprise lines, says analyst

Cisco’s enterprise business focus will be unaffected by its planned acquisition of Scientific-Atlanta Inc., but the US$6.9-billion buyout will strengthen its stake in the service provider market, according to a former official with Cisco Systems Canada Co.

Vito Mabrucco, managing director of Toronto-based research company IDC Canada Ltd., says the acquisition is not so much a consumer play, as it is targeted at the service provider.

“I don’t think this will take anything away from Cisco’s enterprise market,” says Mabrucco, who was formerly a marketing manager at Cisco Canada. “It just makes the company more relevant to the service provider. Cisco already does voice and data, and this is now a position in video.”

According to Cisco, Scientific-Atlanta will become a division within the company’s routing and service provider group and will operate as a separate business.

Mabrucco says The Linksys Group Inc., which Cisco purchased for $500 million in 2003, is a good example of how Cisco manages an acquisition as an autonomous business. “Linksys has proved a very successful acquisition. Cisco has managed to keep [Linksys] separate from the rest of its business model and has run it very independently.”

At almost US$7 billion, Cisco’s purchase of Scientific-Atlanta is the company’s biggest since 1999 when it acquired optical equipment firm Cerent Corp. for US$7.29 billion.

Scientific-Atlanta is best known for its Explorer set-top boxes for home use, but the company is more than just a device maker and has expertise in broadband video in a number of areas, according to Mike Volpi, senior vice-president, routing and service provider group for Cisco Systems Inc.

Scientific-Atlanta also provides transmission networks and an integration, consulting and support business called SciCare broadband services. Volpi says Cisco is particularly interested in SciCare, which includes an array of management tools and services to help service providers support existing broadband networks and launch new ones.

“Cisco’s share of the service provider space has been low, but the company now has a new market that it can sell into,” says Mabrucco.

According to Mabrucco, the acquisition really completes Cisco’s service provider offering because Cisco already offers customers network equipment in the IP core. “Cisco now has an even broader offering to those same customers that they’re already calling on.”

He notes that while Cisco’s original market was the enterprise network, the bigger opportunity is in the service provider market. “Cisco is now well positioned to become a key player in the delivery of end-to-end Internet TV to the home.

“Scientific-Atlanta’s largest customers are [service providers like] Comcast Corp. and Cablevision Systems Inc., and those are [big] target markets for Cisco.”

In the move toward IP TV, it’s vital that set-top boxes form part of an “end-to-end” system where they behave as part of the network itself, rather than some alien device that plugs into the network, says Volpi.

A set-top box typically connects a television to the cable provider’s signal. For IP TV, the device acts as a two-way communicator in decoding video streaming media over the IP network.

Volpi says the networking business is in transition and the industry’s old rationale to provide ever-increasing amounts of bandwidth to users both at work and in the home is coming to an end. “There needs to be a migration to offering rich and unique services over a broadband pipe.”

With the huge demands video places on bandwidth, the next-generation of networks will have to be built around video’s needs first, with “other applications [left] to ride on its coattails,” says Volpi.

The combination offers San Jose, Calif.-based Cisco the fourth component of what the company is calling a “quad play” of data, video, mobility and voice convergence.

“Video is emerging as a key element in the service provider’s quad play,” says John Chambers, Cisco’s president and chief executive officer. “In fact, video may be the most critical in this bundle for consumer loyalty.”

Cisco already has products that let service providers deliver data, voice and mobility. Scientific-Atlanta adds the video component.

According to Chambers, by integrating Scientific-Atlanta’s set-top boxes with router products from Cisco’s Linksys group, Cisco can deliver a unique converged offering to the market. “The opportunity for Cisco is to reduce complexity for users,” he says. “An integrated architecture is in our opinion the only way to reduce complexity.”

Some industry observers agree. A single device that includes cable TV capabilities, a cable modem, wireless LAN, VoIP and potentially even high-definition TV, would be valuable, says Peter Hulleman, a research manager at IDC.

Cisco already has many of these technologies. A single device might make it easier for users to download movies from the Internet and watch them on their televisions, for example, says Hulleman.

“Cisco has always done well selling routers to carriers. But they haven’t been able to get a real strategic chunk of a provider network,” says Rob Whiteley, an analyst at Forrester Research.

“The push to IP TV is really going to be one of the things that gets them there. Linksys couldn’t do it alone – it’s not enough of an end device. So this is really an attempt to marry that – the really intelligent back end with the routers, to a really intelligent front end, a cable set-top box.”

With the backing of Cisco, Scientific-Atlanta is in a better position to pursue opportunities in a changing marketplace, says Jim McDonald, chairman, president and chief executive officer of Lawrenceville, Ga.-based Scientific-Atlanta.

According to McDonald, cable companies are moving toward a new architecture that allows them to deliver video and voice services over converged networks. At the same time, he says, telephone companies are making offerings in the entertainment market. And both markets want integrated solutions from fewer vendors.

“This dynamic environment has tremendous potential for us, but we need more resources to capture the opportunity in these expanding markets,” says McDonald, adding that the Cisco acquisition will enable that.

Cisco expects the acquisition to close next March, in the third quarter of its 2006 fiscal year. The deal has reportedly been approved by the boards of both companies.