Arris/Pace Comes as STB Market Is Changing

The set-top box world that has a dominant player, Arris, in the process of buying another major player, Pace, is much different from a few years ago, said industry lawyers in interviews this week. The companies said Monday that the Justice Department has sought more information on the $2.1 billion deal.

"The current state of the market is considerably more competitive than it looked five, 10 years ago," said Davis Wright cable lawyer Paul Glist, not representing any companies in the deal. "There was a time when you could look at the U.S. cable market and say it was roughly divided between Cisco and Motorola, now [called] Arris. Now there are a lot of competitive suppliers in the market today. There are new entrants who have come in."

Arris/Pace would be incorporated in the U.K., have operational headquarters at Arris’ Georgia facility and use the Arris brand name. The companies have said they plan to close the deal by the end of 2015, with regulatory hurdles to be cleared with the SEC and in several countries. Such steps as DOJ's second request for information are commonplace in major deals, some said. "In this market, it should be taken as a good sign." Neither Arris nor Pace would comment this week. The DOJ didn't return messages seeking comment.

Given the security that has traditionally come baked into set-top boxes -- which often dictated that cable operators have to use compatible head-end equipment -- "I certainly understand why the Justice Department would want to look at this," said Steve Effros, a cable industry consultant and a principal at Beyond Broadband Technology, which specializes in downloadable security systems designed for cable set-top boxes. "I hope what they are doing is trying to understand what is a very complicated business, all tied up with security and control." The Arris/Pace combo "is going to make it that much more difficult for anybody else to compete," Effros said.

Built-in security is changing as a growing number of cable companies are turning to reference design kits for software updates of set-top boxes (see 1504070044). The set-top box market also is seeing new entrants, unlike the duopoly days when Cisco and Motorola Home -- which Arris bought in 2013 -- dominated, Glist said. "Samsung is a supplier of the cable market," he said. "There are a number of European companies getting more involved. The underlying security has evolved so that someone like Charter Communications can support a variety of conditional access systems." Glist pointed to its Worldbox -- done in partnership with Cisco, it employs cloud-based software updates and was unveiled earlier this year -- and to Comcast's cloud-based X1 platform. The set-top box world also is facing new financial challenges, as its volumes continue to grow, but competition has caused a price war that last year brought the first decline in industry revenue in more than a decade, according to IHS data (see 1506290026).