We’re not sure that it is a marriage made in heaven, but hardworking, no-nonsense US cable technology provider Arris, has acquired the dilettante, set top interface designer Digeo for $20 million in cash.
It barely touches the cash mountain that Arris has built up, almost half a billion dollars, around half of its annual revenues, and this is really about just what strategy it is adopting.
We can all say that the money is in software and intellectual property, but it is so much easier to build a concrete product like Edge QAM or VoD servers and ship them for a small margin, rather than become an all singing, all dancing, video technology provider for the wider broadcasting and MSO community.
The deal is easy to understand from Digeo’s side, a year and a half ago it started to look positively shaky and despite having Microsoft founder Paul Allen as its original investor, it clearly looked less and less like returning his investment.
In 2008 Digeo laid off 80 staff, about half its workforce, and scaled back on some of its more ambitious products, and took on a new CEO. Digeo is fairly famous for its Moxi DVR design, but although it managed to get a HD version of the product out of the door, it abandoned efforts to complete a multi-room version. Moxi already has built-in casual gaming, photos, news and stock tickers, and it all runs on Linux. When we last looked Digeo had 420,000 installations at Comcast, Time Warner Cable, and Charter, which, let’s face it, is not a huge percentage of their 40 million plus installed base.
As the Digeo acquisition deal was announced, the Arris share price fell about 6%, but this is on the back of a long recovery and it is about the same market cap now as it was a week ago, on $1.6 billion.
Digeo was revolutionary back in 2004, but today the design has become commonplace and other set top builders can do much of what Digeo has been preaching, and do it cheaper and on a larger scale. Perhaps with the intellectual property that Arris gets from this and its earlier acquisition of EGT, it can solve this problem.
One subject that we know has had the telephone wires jangling in the US for the past few months, is the fact that Cablevision has won its legal action for using network PVRs, and every supplier in this market is now starting to think about how it will adapt its strategy around this. Arris already acquired the C-Cor brand in this market, which in turn owns the VoD work of nCube
Digeo says that the acquisition, along with the recently announced acquisition of EG Technology (EGT), provides ARRIS with technical expertise in video networking and an innovative multimedia services delivery platform ‘ but right now what do you do with that kind of talent and service. If you don’t have a framework like Microsoft has within Mediaroom, Motorola has in cable, or that Alcatel has in other IPTV markets, how do you make money from that know-how? This is especially true in a DLNA world where intercommunication between digital home devices, comes pre-defined.
However, the Moxi interface is perhaps as different as an EPG was when that was invented, and like Gemstar, perhaps Arris wants to leverage the intellectual property and try licensing.
Digeo uses a series of customizable categories or filters and presents them in a horizontal band. Once the viewer selects a category, the various program options display in a vertical band. All options run over the existing content on the screen transparently.
Arris says that it will continue to develop the current line of Digeo DVR products and talked about aggressively pursuing end to end video delivery initiatives.
As a result of the transaction Arris will take on 75 employees which will add $3 million a quarter to its R&D costs. The transaction is expected to close early in the fourth quarter of 2009.
In 2006 Arris tried to buy Tandberg Television, a company that was actually bigger than itself, but was eventually outbid by Ericsson and instead paid $730 million for VoD specialist C-Cor. This meant the company only shrank revenues slightly last year, but only when the C-Cor revenues were added on, and organically it reduced in sized like everyone else in the business. However it did reduce its cost significantly during the merger integration and so actually improved its margins.
Earlier in the month Arris acquired key assets, including intellectual property from EG Technology, for $6.5 million along with patents and 20 staff.