Cable equipment supremo Arris and US cable company Charter said this week that they have jointly acquired cloud TV specialist ActiveVideo for $135 million. We already know that its patents are worth a whole lot more than that, after a single US operator, Verizon was forced by a court in 2012 to pay out $260 million to license its patents.
This becomes an Arris asset pure and simple and it will own 65% of the joint venture company and this is more about cable collectively (Comcast already owns a chunk of Arris and a seat on the board) buying the technology that it needs to run itself. Comcast and others already have their fingers into conditional access, recommendations, advertising, content management, set top middleware and the new CCAP IP architecture.
But there is something we do not like about this announcement. The company claims to have licensed its technology to Cisco, which should have paid a pretty penny for it, and it had deals with some of the largest cable operators in the world, including Liberty Global, Cablevision and Charter in the US, and unless all the money, including the patent settlement was taken out of the company by investors, it should have had no financial reason to be sold. It looks like investors have grown impatient with an asset that has been on its books for too long.
We have noticed that in subsequent deals where Cisco appears to use the technology, these have been characterized to Faultline as “working together” and it looks like perhaps Cisco did not have a license to the patents or at least had not paid the kind of money you would expect for them.
The key ingredient of what ActiveVideo does is called MPEG Stitching – taking apart a video stream and identifying where graphics or words or any kind of overlay that is used for the User Interface is, and layering it into the video stream itself. This is how it renders a User Interface in the cloud.
It doesn’t sound so difficult, in that a video frame is identified by each pixel and these pixels can simply be rapidly overwritten for segments that need to have UI information on them. There are other pieces of technology here that are contingent upon this, like how do you take a remote control click on a segment of the screen and make it responsive?
But essentially it offers a powerful technology where any device which is already capable of rendering video, can have that video constructed with a new UI in the cloud and have it sent to it as video that it already knows what to do with.
If you think about it, this is where the world of cloud is taking us. We saw the same thing happen in video games – where the game action actually occurs in the cloud and all that travels backwards and forwards is video of the outcome, plus movement vectors from the controller. Interestingly both of the big adherents to this are now at Sony – which bought Gaikai initially, and recently bought OnLive, which appeared to invent cloud gaming, from the man who bought it out of bankruptcy. The same thing can apply to advertising and to running apps in the cloud and sending just the video of the screens to a local machine.
The beauty of all this is that old hardware can give newer experiences and at least one generation (or every other generation) of CPE can be bypassed. Charter is today producing an experience like Comcast’s Xfinity but without a new X1 set top box, something that has likely cost Comcast hundreds of millions of dollars, so it’s easy to see why Charter wants to have a say in how the company develops.
In fact Comcast was a bit of a sticking point at ActiveVideo – and it may even be the silent hand behind this deal. Comcast may have said “We won’t use your technology until you are in the hands of someone we consider safe” and that was enough of a block on progressing sales that the main investor, Lauder Partners decided to take what it could.
Interestingly Gary Lauder the leader of that investment vehicle was the very same man who told us that Cisco had bought a license to the ActiveVideo technology. His investment arm Lauder Partners has made past investments in cable technology firms like BigBand Networks, which co-incidentally he sold to Arris for $156 million in October 2011. Other investments we can remember from him are companies like Aurora Networks sold to Pace in 2013 for $310 million and even V-bits which he sold to Cisco in 1999 for $128 million. Lauder was also the man who bought OnLive out of bankruptcy and sold it to Sony last week.
He held onto ActiveVideo for years, and changed its name from ICTV in 2008 to ActiveVideo in a last ditch attempt to get something out of the deal. As we said, perhaps he simply lost patience with one of his oldest investments and took what was on the table for it.
But to our mind this is something of a sellout – because we think he has sold it to the wrong company at the wrong time – and the message appears to be “Don’t worry there will be no cloud TV revolution after all.”
This is because Arris makes much of its money by selling cable infrastructure – notably CCAP, QAM and CMTS, but also set tops and home gateways. And buying a company that promises that you can bypass every other generation of these devices makes little sense. Operators only need to upgrade their CPE when they really need a change of video resolution – for instance shifting from HD to UHD. So this is maybe a way of simply taking a revolutionary idea out of the market.
Now we know people at Arris, and there is perhaps no single mind thinking like that – but this is about how an organization behaves collectively. One team may well welcome the cloud and try to dominate it. Others will try to unseat it and starve it of resources. Either way Arris stock should have gone up on this and its share price spiked on the news, and has since fallen back to earth somewhat.
Scale was the last question-mark that was held by detractors against ActiveVideo, but to us its technology seemed to scale well above 1 million active devices at a number of operators and it was a non-issue.
Whatever the reason for the sale of ActiveVideo, and as we say it may only be an impatient investor, we expect that reason to emerge during the coming weeks, but cannot expect a company like Arris to wheel out this technology for every occasion. It won’t become a strategic weapon in its armory to win key accounts, but will perhaps be brought out and dusted off to prevent Arris losing accounts. ActiveVideo’s CloudTV intellectual property (39 issued patents and 64 pending) – when added to Arris’s service provider relationships should be a powerful combination to push cloud to the masses, and that the message this seal is being sold on, but we shall see. The closing of the transaction is expected to occur in the second quarter, and regulatory approvals are among the things it needs out of the way before it closes.
The press release did say that the deal should accelerate adoption of ActiveVideo’s technology (not slow it down) but so far it has installations at Cablevision, Liberty Global, Deutsche Telekom, Time Warner Cable, J:COM, Philips, and Roku. What is does to Arris is make it more of a head to head player when up against companies the size of Cisco.
Charter says it expects to launch its Spectrum Guide based on ActiveVideo Cloud TV on its Worldbox, as well as on legacy boxes already deployed within the Charter footprint. ActiveVideo’s Jeff Miller is sticking around as CEO.