Cisco is buying Scientific-Atlanta, the maker of television set-top boxes, for $7 billion, reports Light Reading and the New York Times. “This completes a large part of our quadruple play,” Chambers said in a morning press conference.

Chambers made it clear that the company’s technology will be tightly woven into Cisco’s IP infrastructure, and combined with the Linksys WiFi ability to create a home IP networking-entertainment platform, says Telephony Magazine. Cisco’s newly announced WiFi mesh products could also find their way into cable, phone and municipal infrastructure.

The deal, one of the largest acquisitions ever for Cisco, was approved by the boards of both companies after the close of the stock market yesterday.

The final price is expected to be around $5.3 billion because Cisco expects to acquire a cash balance of approximately $1.7 billion from Scientific-Atlanta.

With the deal, Cisco will, for the first time, be able to sell digital television equipment that provides high-definition programming; shows and movies on demand; and an array of interactive services. Scientific-Atlanta, the second-largest provider of these set-top boxes, and Motorola, the largest, have effectively held a duopoly in this market.

Both Scientific-Atlanta and Motorola have long supplied set-top boxes to cable operators like Comcast and Time Warner Cable. The boxes, though long viewed as stodgy decoders of encrypted television signals, have become far more sophisticated in recent years.

Cisco is envisioning a future that includes home entertainment systems built around a set-top box that communicates with not only the television, but also with audio equipment and a range of appliances. Cisco also sees potential growth in services that store television programming on giant servers for delivery to consumers on demand.

Scientific-Atlanta is also likely to benefit from a requirement that broadcasters return their analog spectrum to the government in 2009. By then, hundreds of millions of American televisions will need the equipment to receive digital signals.

A purchase of Scientific-Atlanta would be a coming-out party of sorts for Cisco as a more consumer-oriented company. The company has been best known for equipment that routes data around the Internet. These so-called routers have turned Cisco, with $24 billion in annual sales, into a bellwether stock.

Cisco made its biggest push into the retail market so far in 2003, when it acquired Linksys, a big maker of Internet routers for the home, for $500 million.

Scientific-Atlanta, based in Lawrenceville, Ga., has 6,500 employees and $1.9 billion in annual revenue. Almost all its profit comes from sales of set-top boxes and related equipment. Cisco, which is based in San Jose, Calif., has 34,000 employees.

Telephony Magazine says the acquisition will put major pressure on other players in all segments of the industry, including Alcatel, Motorola and even Microsoft, as it positions its IPTV system. SA holds 40% of the U.S. cable set-top market, and has landed one major telco – SBC Communications – as an IPTV player.

Motorola said the deal “comes without surprise,” noting that Motorola “was early to recognize the opportunity for advanced video applications in a carrier’s service offering,” referring to Motorola’s purchase of General Instrument in 2000.

Big Band Networks, a leading provider of broadband multimedia infrastructure for video, voice and data, released this statement:

One of the interesting elements of this acquisition is the differences in each company’s approach. Cisco has consistently leveraged IP networking standards, while Scientific Atlanta has gained its market share through more proprietary, closed system practices such as its conditional access methodologies. Reconciling such ideological differences will be fascinating during integration efforts. We provide solutions based on industry standards including IP, MPEG and Gigabit Ethernet, and believe this commitment will be increasingly validated in the market. Overall, we see this as a positive milestone for the broadband multimedia infrastructure market.

Big Band is a proponent of switched video. Rather than direct all programs to all areas at all times, a switched broadcast system only provides those programs requested by STBs in each node, freeing dramatic bandwidth to expand programming and other service offerings.

A single head-end computer can monitor and manage all switched broadcast sessions in a cable system. The only significant new hardware requirement is deployment of switches capable of receiving abundant programs over existing high-capacity optical networks, and directing each program towards the appropriate node.

A cable or phone provider can virtually remove capacity limits with switched broadcast. IPTV can support scheduled programming, video on demand and a practically unlimited number of TV channels and video content. IP-TV also enables a range of interactive features, allowing viewers to purchase products shown in a TV program by using Web-browsing functions built into the TV programming itself.

U.S. cable operators have over 73 million TV subscribers, generating revenues of nearly $60 billion per annum,” says Analysys, a research firm. DirecTV, the nation’s largest satellite broadcaster, has more than 15 million customers while EchoStar serves more than 11.71 million satellite TV customers through its DISH Network. DirecTV could go with WiNetworks for a WiMax triple play.

SBC and Verizon plan an End Game, cherry picking FTTH subs and spending big on infrastructure (until the money runs out).

DTV is another area of potential growth. There will be 11.8 million holdout over-the-air TV households at year-end 2008 who will need DTV converters. The Senate Commerce Committee bill sets aside $3 billion while a separate House of Representatives bill allotted $990 million, or $830 million after administrative expenses for subsidizing DTV settops. The cost of the converters was pegged at $60/each with the subsidies covering only $40. Kagan reviews The State of HDTV.

C/Net, Cable Digital News, Om Malik, EE Times, Business Week, Infoworld, E-Week and Telephony have more.

Executives at the TechNet Innovation Summit in San Jose say this whole Internet thing is still just beginning. Faster access means more industry growth. Says Netflix CEO Reed Hastings: “Web 2.0 is broadband. Web 3.0 is 10 gigabits a second.”

Posted by Sam Churchill on Thursday, November 17th, 2005 at 4:50 pm.