On 21st November 2011, Arris, a communication technology company, announced closure of the deal to acquire BigBand Networks, a digital video networking solution provider. Valued at $172m, the deal equates to a per-share price of $2.24.The acquisition will extend Arris' service provider solutions by aggregating its portfolio with BigBand's products, which are focused on processing, management and distribution of digital video content. BigBand's IPR - backed by 70 plus patents granted or in process - will allow Arris to focus on new opportunities such as the Converged Cable Access Platform (CCAP), targeted advertising, and broad-scope IP video distribution.
Analysis
One of the problems that cable operators face is limited space at the network edge, which accommodates components such as the CMTS - the IP Bridge between the core and access network - and edge QAMs, which modulates signals for video and data delivery. At present, QAMs are split between two discrete applications: those which modulate signals for video distribution, and those dedicated to downstream data distribution. As IP video-on-demand to the set-top becomes more prevalent, as more IP video is delivered to connected CE devices, and as the demand for higher average data speeds continues unabated, the need from downstream IP bandwidth, and QAM capacity, is growing tremendously.
These considerations led to the development of an industry standard, known as converged cable access platform (CCAP), a component to provide the combined functionality of a QAM and CMTS in a single architecture with greater QAM density and overall capacity, hence achieving the requisite number of downstream IP data channels.
The acquisition has two key benefits for Arris. Firstly, it allows Arris to cover both possible architectures of CCAP - integrated and modular. This can be achieved by combining its existing products with the range of products offered by BigBand, specifically its edge QAM product range that has higher density than Arris's QAMs and have additional video processing capabilities. Secondly, it also brings additional opportunities as BigBand provides its advertising products to IPTV customers including AT&T and Verizon FiOS TV. This is very much in line with Arris's strategy to consider opportunities in markets beyond cable.
As opportunistic as these new avenues are for Arris however, the acquisition will also necessitate a certain degree of cost control. In 2009 and 2010, BigBand made a consecutive net income of -$6.7m and -$31.5m, despite having about 50 per cent gross margin on sales. This is because, on average they have been spending almost over half of their gross profits in R&D, in fact in 2010, it was 90 per cent and there are some other costs including (sales, general and administration expenses) that were considerably higher. Managing these costs and taking advantage of the breadth of opportunities both in customers and products that BigBand offer will be vital to Arris extending itself against bigger competitors like Cisco, Ericsson, Harmonic and Motorola.
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