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Cisco is selling its set-top box and cable modem business to double down on technology that delivers cloud-based video directly to televisions.
Cisco said this week that it would sell its customer premises equipment (CPE) business for $600 million in cash and stock to French company Technicolor S.A. The transaction is expected to close by the first quarter of next year.
Cisco sells CPE gear to cable operators and telecommunication companies that provide pay TV. Because the business is a drag on Cisco's gross profit margin, investors have been pressuring the company to sell it. Once the unit is gone, Cisco expects a 1-point increase in its non-GAAP gross margin, said Hilton Romanski, the company's chief technology and strategy officer.
Cisco entered the set-top box (STB) business 10 years ago to provide the hardware to cable companies and telcos that also used its networking gear. For the current fiscal year ending this month, the CPE business is projected to contribute $1.8 billion to revenues.
The fading set-top box
The use of STBs is expected to diminish once telcos and cable operators start moving the hardware's intelligence and functionality to the cloud. "STBs aren't the future, but technologies that enable cloud services are," said Greg Ireland, analyst for IDC, based in Framingham, Mass.
The transition will take a number of years. The STB market is projected to grow at a compound annual rate of 2% through 2018, according to research firm Technavio, based in Elmhurst, Ill.
In May, Cisco Chief Executive John Chambers hinted the company might not be in the STB business for much longer. During an earnings call, Chambers told financial analysts that "set-top boxes are tactical, but cloud [is] winning on video." He went on to say that cloud video is "strategic" to the company.
Cisco's IoT strategy
The sale fits Cisco's Internet of Things (IoT) strategy. Rather than focus on the STB, Cisco is more interested in developing networking technology that can connect any device to the cloud or a data center.
"Robust network-based solutions need to be client-device agnostic," said Ireland.
The deal with Technicolor has the two companies partnering on the development of "next generation video and broadband technologies, with cooperation on Internet of Things solutions and services," Technicolor said in a statement.
Absorbing Cisco's business is expected to increase Technicolor's global share of the STB market to 15%. The sale is also projected to double the revenue of the company's Connected Home segment.
Cisco exiting set-top-box manufacturing comes two years after Google sold its similar Motorola Home business. Video and broadband technology company ARRIS Group Inc. bought the unit for $2.2 billion.
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