Merging the world's two largest set-top makers, Arris' $2.1 billion acquisition of Pace offers insulation from a volatile U.S. pay-TV market, as well as the unpredictable revenue streams of the disparate CPE product cycles, analysts say.
"The North American market is going to be challenging this year, as capex budgets are reduced or are at best flat," said Jeff Heynen, principal analyst for broadband access and pay-TV for research company Infonetics. "Arris needed to add in more international exposure as well as exposure beyond the cable space to help reduce the risk of reduced spending among its core North American customer base on the STB side of the business."
In an interview with FierceCable, Heynen added that spending cycles on set-tops and DOCSIS-related customer premises equipment (CPE) tend to run in opposite cycles.
"Vendors must be in both sides in order to maintain a more predictable and steady revenue profile, which is what investors like," he said. "The acquisition helps Arris expand its STB and CPE product portfolios to achieve that balance and offset any regional or technology declines."
The merger, coming nearly 33 months after Arris bought Motorola's STB business, results in a company that controlled 25 percent of global pay-TV STB and CPE market last year. It will spur speculation about dealmaking among competitors in the category, which include Cisco Systems, EchoStar, ADB and Humex. And, of course, consolidation of the No. 1 and 2 competitors in the category will likely mean higher equipment costs for pay-TV operators globally.
Speaking with investors Wednesday shortly after the deal was announced, Arris Chief Executive Bob Stanzione said the merger will allow Arris to better compete with a flurry of new competitors, entering the market as over-the-top services proliferate.
"Over the past several months, there have been a number of new entrants both on the side of new services that are being offered over-the-top, as well as new devices that are used at homes in order to translate those services to video streams to serve television sets," Stanzione said.
In the U.S. market, Heynen says the deal will also enable Arris to shore up its relationship with the top pay-TV operator, Comcast, which had been giving increasing amounts of its STB and CPE share to Pace.
"Arris needed to shore that account up to avoid the risk of losing more business at their leading customer," he said.
Arris also gained some important infrastructure benefits," Heynen added. "Pace acquired Aurora Networks, which was a growing supplier of outside plant equipment for cable MSOs," he said. "Prior to the acquisition by Pace, Aurora acquired the HFC assets of Harmonic. A major part of both companies' portfolios are optical nodes. Arris now becomes the clear market leader in global optical node units.
"As MSOs globally begin to add more optical nodes and upgrade their existing nodes to support R-PHY, distributed CCAP and other distributed access architectures, Arris stands to benefit most," Heynen also noted. "Additionally, Arris gains an fiber-to-the-home product portfolio to help address those cable operators that are adding FTTH alongside their DOCSIS 3.1 upgrades."
For more:
- visit this Arris investor relations page
- read this Reuters story
Related links:
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