Will Cisco buy Scientific-Atlanta?; telecom’s week to remember; cable goes national.

November 3, 2005

Scientific-Atlanta has hired two investment banks to explore a sale that could cost a potential buyer more than $4 billion, according to the New York Post. The Atlanta-based company is the United States’ second-largest maker of set-top boxes after Motorola, and a major supplier for both Time Warner and Cablevision. The Post story has already stirred the company’s stock, which jumped $1.76 to $38.16 in recent trading. There are a number of changes taking place in the cable TV industry but the set-top box business has always been an insider’s game. This could be a grand opportunity for a company such as Cisco to get into the mainstream of the video/IPTV business. Cisco has been fluttering around the periphery of the video market, but it would need a Scientific-Atlanta to make a grand entrance. Scientific-Atlanta has those gold-plated relationships with Time Warner and Cablevision, and relationships of one sort or the other with SBC and Verizon. There are a handful of other firms that could move to block Cisco, like Alcatel, for instance. But there aren’t that many bidders that can digest $4 billion. Almost forgot, Microsoft would be interested, and it certainly has the coin to do the deal. Cisco and Microsoft did not immediately respond to a request for comment.

Telecom Changes

This has been a week to remember in the telecommunications industry. On Monday, the U.S. Federal Communications Commission placed its seal of approval on the mergers that would create two of the largest telecommunications carriers in the world in SBC and Verizon. Now SBC, a company barely known outside the western half of the U.S., will become the largest carrier in the U.S. and will adopt the best known name in the history of telecommunications, AT&T. Two days later, Sprint Nextel announced a joint venture with four large cable operators that could shape the delivery of services to 75 million U.S. homes for a long time to come. Until now, Sprint seemed to be picking its spots in its contest for subscribers with Cingular, Verizon Wireless and T-Mobile. But this 20-year deal gives Sprint access to development funds, millions of cable customers, and the assurance that for the cable companies, Sprint is the only game in town. The cable companies would not do deals with Cingular, which is owned by SBC and BellSouth, or Verizon Wireless. And T-Mobile’s network cannot support the kind of services they are planning.

Changing the Rules

One of the benefits of Sprint’s deal with the cable companies is it gives the cable operators a national presence. It allows these regional companies to gain the benefits of national coverage. “It also allows each of them to tap into the applications development which comes with this deal,” said Dominic Endicott, vice president of Adventis, a Boston-based consultancy. “And Sprint gets to develop once for multiple companies rather that working with five or six groups individually.” A joint national presence is a dynamic onto itself for the cable companies. It allows them to cooperate in a number of areas of technology and erases the technological limitations of their regional boundaries. “It’s all going nationwide. Both SBC and Verizon have gone nationwide and this pushes the cable industry in that direction,” said Mr. Endicott. Sprint has invested heavily in its cellular data network and it has done a few things on the wireless broadband front. “Sprint has a huge amount of spectrum that is still to be defined, so it has a lot of upside opportunities,” Mr. Endicott said. “There is a kind of Moore’s Law being applied to wireless spectrum. We are getting better at using spectrum so there are interesting possibilities for all the players in this deal.”