Market Insight

Pace looking past set-top boxes with Motorola acquisition

December 19, 2012

John Kendall John Kendall Associate Director, Research and Analysis, Service Provider Technology

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UK set-top box vendor Pace has submitted a non-binding bid to acquire Google's Motorola Home business unit. Motorola Home encompasses the division of Motorola that manufacturers STBs, IPTV distribution systems, broadband infrastructure platforms, and software solutions, principally aimed at cable and telco service providers.

With the size of the Motorola Home business unit being larger than Pace, the acquisition falls under UK listing rules as a "reverse takeover," resulting in the suspension of Pace shares from the London Stock Exchange on 10 December 2012 at the price of 185.30p. Trading will resume with more transparency on details of the possible acquisition or on proclamation that Pace is no longer in negotiations with Google with regards to the acquisition of Motorola Home. Details regarding the value of the proposal have not yet been revealed. Despite rumors, no other potential bidder has made a public statement to date.

Pace has already experienced competitive success in the North American set-top box market, increasing market share by offering innovation, and aggressively out pricing traditional suppliers Motorola and Cisco. As such, this proposal could be interpreted as a defensive gesture to prevent new entrants into the competitive landscape rather than merely a simple acquisition to increase share. Using 2011 data, the combined company would comprise 25.5 per cent of the global pay TV STB market.

However, it is important to examine the moves Pace has made from 2010 to 2012 in order to look at the potential of this acquisition in the proper context. In 2010, Pace's acquisitions of 2Wire and Latens allowed the company access to the broadband gateway, STB software and content security markets. Subsequently, in 2011 Pace developed and successfully marketed the Elements software platform, indicating a clear shift away from strictly offering CPE. The result of this can be demonstrated by tracking the company's financial results. In 2010, the set-top box business segment accounted for 93.8 per cent of Pace revenues. However, in 2011 gateways rose to 18.8 per cent of total revenues (up from 5.2 per cent), and was accompanied by strong growth in the software services business segment, which grew from less the 1 per cent of revenues in 2010 to 4.3 percent  in 2011. This product diversification represents recognition that the video delivery market is not simply served by the set-top box hardware any longer, and that the focus is now less about video delivery to a home and more about a complete consumer video experience. This quality of experience cannot be offered simply through traditional STBs, and Pace are one of a growing number of major STB suppliers that have accustomed themselves to this market reality.

Pace has been successful in winning market share for next generation STBs, multimedia home gateways (MHGs) in established pay TV markets. MHGs are devices capable of terminating conditional access and distributing video content in IP format via the home network to either operator-managed thin clients or third party connectable consumer electronics devices. Of the 11 announced Tier 1 MHG deployments, 3 operators, DirecTV, Comcast, and Get, feature Pace hardware. This technology further represents a shift away from the traditional, broadcast-centric TV delivery model to something much more IP-centric.

However, this transition to IP-centric in-home video distribution, combined with operator willingness to offer cloud-based services to unmanaged-devices via their own and third-party networks, is causing questions to be raised over the long term viability of the operator CPE business. As such, Pace's largest potential gain in this acquisition could stand to be not Motorola's set-top box business at all, but rather, a foothold into the infrastructure platforms market. Motorola's Converged Cable Access Platform could provide the necessary bridge allowing Pace access to every part of the value chain for next generation video delivery: infrastructure, gateway, set-top box, and software to tie it all together. Motorola Home's infrastructure suite could be the integral piece to a converged end-to-end turnkey solution, allowing Pace to remain competitive in an increasingly IP-centric pay TV market.

Google Inc. Motorola Pace
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