Betting that video will drive the future of networking, Cisco Systems Inc. agreed Friday to buy the cable television technology company Scientific-Atlanta Inc. in a $6.9 billion deal that would create a one-stop shop for sending TV over the Internet.
The acquisition is expected to help fuel the revolution in how TV is distributed and watched — a change that’s accelerating as telephone companies barge into the domain of cable operators and begin offering programming over fiber-optic networks using the language of the Internet.
It also fits Cisco’s strategy of expanding into technologies that are moving away from their own networks to the standards-based Internet — a shift that creates an opportunity to increase revenue with new business and enhance sales its traditional routers and switches that direct data over the Internet.
“Over the next two or three years, we are going to see a dramatic change in the landscape, where video-over-broadband infrastructure becomes the centerpiece of investments that service providers make and the expectations that consumers have,” said Mike Volpi, a Cisco senior vice president.
For providers and consumers, Internet-based television promises expanded choices, lower costs and new services in the same way voice over the Internet Protocol has made phone calls less expensive and enabled features that were not possible with the traditional telephone network.
The deal also opens up opportunities for Cisco’s Linksys home networking division. Its products could be made to work seamlessly with Scientific-Atlanta boxes to distribute television throughout the home and combine them with other Internet-protocol technologies, including phone service.
“Today’s announcement represents much more than an exciting opportunity for Cisco,” said John Chambers, Cisco’s chief executive officer. “It literally completes a large part of our quadruple play as data, voice, video and mobility converge.”
It is Cisco’s largest acquisition ever in terms of head count and revenue. The San Jose company is paying $43 a share for Scientific-Atlanta — a 3.7 percent premium over its closing price on Thursday. The Atlanta company has about 7,500 employees and posted $1.91 billion in sales in fiscal 2005.
The deal, which was approved by the boards of both companies and still needs customary approvals, is expected to close by late April, in Cisco’s fiscal third quarter.
For Scientific-Atlanta’s business of supplying infrastructure to TV providers, Cisco’s position as the leading provider of network gear will help seal deals as cable, telephone and others build and expand their networks, said Jim McDonald, Scientific-Atlanta’s chief executive.
“These customers want more complete integrated solutions from fewer vendors,” said McDonald, who said he will remain with the company for two years.
Cisco also will help fuel Scientific Atlanta’s expansion beyond cable TV companies that have been relatively slow to introduce new technologies to customers, said Josh Bernoff, an analyst at Forrester Research.
“Cisco has struggled to succeed both with telephone and cable companies. Scientific-Atlanta is sort of in a position where innovation and capital push would be helpful for them,” he said. “We think this is going to make some real changes in the industry.”
Though known to consumers mainly for its cable boxes, Scientific Atlanta also offers the behind-the-scenes infrastructure and support to service providers.
In March, Scientific-Atlanta was awarded a contract to design, build and activate Internet Protocol video services for SBC Communications Inc.’s Project Lightspeed fiber-optic network deployment to customers in its 13-state service area.
“This acquisition not only brings Cisco access to the intellectual property of a long-standing set-top giant, but it now owns the SBC IPTV contract,” said Herve Utheza, director of IPTV Research at the Diffusion Group, in a note.
But the company also has a 40 percent share in the U.S. cable box market, second only to Motorola Inc. Cable operators are increasingly turning to IP networks to compete with phone companies in the area of high-speed Internet access, telephony and video on demand.
Comcast Corp., the nation’s largest cable company, currently works with both companies and will continue to do so after the acquisition, said Comcast spokeswoman D’Arcy F. Rudnay.
“It underscores what’s happening in terms of the convergence of entertainment, communications and technology platforms,” she said.
Some analysts see it as a potentially risky move for Cisco, which has traditionally acquired small, local and privately held companies since its founding in 1984. The closest, in terms of purchase price, was the 1999 purchase of Cerent Corp., also for $6.9 billion.
On Friday, Chambers said the deal does fit with the company’s belief that if it can’t internally develop an emerging technology it should either partner with or acquire a leader in the field.
“Video is way too important ... to do this in a partnership-type of arrangement,” he said.
Cisco said Scientific-Atlanta will become a division of its routing and service provider technology group, led by Volpi.
Cisco said it expects the deal to be neutral to its fiscal 2006 earnings, while slightly boosting its fiscal 2007 profit before items. Cisco said it will finance the transaction with cash and debt.