Market Insight

ARRIS consolidates market leading position with Pace acquisition

April 27, 2015  | Subscribers Only

Daniel Simmons Daniel Simmons Executive Director, Enterprise & Residential Communications Technology

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US Cable TV technology supplier ARRIS intends to acquire British set-top box (STB) vendor Pace, for USD 2.1B; valuing Pace’s business at 80% of its 2014 revenue. The acquisition will create the world’s largest supplier of set-top box (STB), broadband gateway and cable TV technology. Combined 2014 revenues of USD 7.9B make will it twice the size of its nearest competitor, Cisco’s Service Provider Video business unit. The deal is subject to regulatory approval, but the merged company will be incorporated in the UK, headquartered in the US and expected to list on the NASDAQ.

Our Analysis:

ARRIS’s business is largely US-cable-TV-centric and its recent growth is a direct result of its 2013 Motorola Home acquisition, which Pace also attempted to acquire. Future growth for ARRIS critically depends on it expanding outside of the US, where its current growth opportunity is limited by a stagnating pay TV market. Pace will bring ARRIS an expansion of width and scale that would be difficult for it to achieve organically.

Pace has a large portfolio of high-value pay TV operator clients in EMEA and APAC, a large scale satellite STB business, a strong play in DSL gateways, and a long-standing relationship with DirecTV; all things ARRIS currently lacks. Pace also bolsters ARRIS’s relationships with Comcast – ARRIS’s largest customer – and AT&T, where it’s also a key supplier.

However, Pace’s STB and broadband gateway business slowed in 2014, and is indicative of a global slowdown in this sector and reflected in ARRIS’s USD 2.1B or 80% of Pace’s 2014 revenue offer. It’s likely that we’ll see further consolidation in this sector in the near future.

Pace also provides gains for ARRIS’s infrastructure division, through Pace’s Aurora Networks – a supplier of HFC outside plant equipment, including optical nodes – acquisition. ARRIS is the current market leader in CMTS and CCAP and will become the global leader in HFC optical nodes after consolidating Aurora Networks with its existing optical node business. This will be important to ARRIS as its cable operator customer begin deploying DOCSIS 3.1 to increase broadband speeds, because an important part of this rollout is to upgrade the installed base of optical nodes to support digital optics. Beyond that, it’s also likely that cable operators will expand their optical node base to reduce the number of homes passed per node, thereby increasing the bandwidth they can make available to end customers. This would require a significant investment in new optical nodes, especially when aggregated across both North American and European operators – the most likely candidates for both short-term and long-term node expansion.

ARRIS’s largest opportunity will come from supplying the combined customer base of pay TV operators with products and solutions that help them succeed against competition from OTT video and television providers such as Apple and Netflix and content creators looking to use OTT as a means of bypassing pay TV to go direct to consumer. These solutions will only partially include STBs and will place greater emphasis on network and cloud technologies as well as software designed to optimise the user experience. The need to include these elements in a modern TV platform will drive ARRIS and its competitors to make further acquisitions.

Arris Pace
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