A proposed set of new set-top rules might not necessarily set the stage for a new (and much more vibrant) retail era for video devices that can support pay TV services from cable operators, telcos and satellite providers alike.

Though there’s still much work to be done, it’s crystal clear that Federal Communications Commission chairman Tom Wheeler and backers of the rules, such as Google, firmly believe that new regulations will open the retail floodgates.

On the other end, the cable industry, led by the National Cable & Telecommunications Association, claims that the market for retail video devices is doing just fi ne on its own, free of mandates and driven by an apps-based economy.

As for the retail device makers, Google, which is still trying to establish Android TV’s market presence, has been successful with the Chromecast streaming adapter. The $35 device accounted for 35% of the 42 million streaming devices shipped last year, followed by Apple TV, Roku devices and Amazon’s Fire TV products, according to Strategy Analytics.

Of that group, Roku is in trials with Time Warner Cable and Charter Communications on IP-based pay TV offerings that rely on retail streaming devices.

Comcast, meanwhile, has pushed its own leased products harder than ever — with about 40,000 X1 boxes being deployed per day at last count — as the MSO continues to accelerate the rollout of its next-generation video product, aiming to deploy it to about half of its video base by year-end.

But the new rules, if they come to pass, aren’t exactly trying to leap over the highest of bars.

By the National Cable & Telecommunications Association’s last count, the nation’s nine largest incumbent cable operators had deployed 55 million operator-supplied set-tops with CableCards, versus just 589,000 of the security modules in TiVo boxes and other devices sold at retail.

Industry observers and a CE company that’s been close to the retail set-top mix since the early CableCard days say it’s too early to know if the FCC’s new proposed rules will have a meaningful impact, given that they could change during the comment process and will require new standards. Plus, the FCC anticipates a two-year compliance window.

“This is going to take a long time to hash through — not only to set the technical standards, but to see if anything actually happens [amid] coming changes at the administration, and possible changes of the chairman and other members of the FCC,” Mike Paxton, senior analyst at SNL Kagan, said.

Assuming the rules are executed, Paxton doesn’t believe that they’ll have as big of an impact as Wheeler and others who desire a successor to the CableCard expect.

“Our feeling is this is only going to have a modest impact at most on how consumers access … and consume video,” Paxton said. “This is by no means a slam dunk … that millions of consumers in the U.S. are going to go out and do this.”

TiVo has championed the retail distribution model, but it’s had limited success in that area since the original CableCard rules took effect almost a decade ago. Of TiVo’s 6.8 million subs, 5.47 million come way of cable-operator partnerships.

“I think it’s too early to make a guess right now” with respect to the impact of the FCC’s rules, Matthew Zinn, TiVo’s senior vice president, general counsel and chief privacy officer, said. “I think things will change during the comment process.”

TiVo has plenty of questions about the rules, but it also has a goal in mind: “We are looking for something that is workable.”

By that, Zinn means a successor to the CableCard that uses standards, but doesn’t require TiVo and others to adhere to an excessive number of technical approaches.

A major challenge is for the FCC to balance MVPDs’ desire for flexibility while assembling standards with which to build a vibrant retail ecosystem that enables device portability across different pay TV operators, he said.

The FCC’s rules will aim directly at incumbent suppliers with plenty of turf to protect. The global set-top business is fragmented, with Technicolor, Arris, Huawei, Skyworth and Pace comprising 40% of the market, at the end of 2014, according to SNL Kagan (it hasn’t released 2015 market share data yet). Arris, which acquired U.K.-based Pace in January, is now the largest set-top box maker in the world and has a dominant position in the U.S., so it has the most to lose.

But it isn’t losing a lot of sleep — yet. “We’re not terribly concerned about this FCC drama,” Bob Stanzione, Arris’s chairman and CEO, said March 16 at the company’s investor day.

Should the rules establish a stronger retail market for set-tops, “it’s one we’re very well-positioned to support,” Larry Robinson, president of customer premises equipment at Arris, said, in a reference to Arris’s current retail efforts around cable modems and its previous (but brie_) experience selling set-tops at retail after buying Paul Allen’s Digeo in 2009. Paxton also said he doesn’t think Arris and other incumbents have a lot to worry about, viewing the proposed rules as “moderately negative” on their set-top box business. They could pose the potential for losing some business on the lower end of the set-top box market, Paxton said — the sub-$100 area where retail video products will generate the most success. Devices on the higher end of that range — DirecTV’s Genie and Dish Network’s Hopper 3, for example — will continue to be leased.

“I don’t think [the rules] will have a huge impact on Arris and Technicolor, but it certainly won’t have a positive impact,” Paxton said.

In addition to gunning for more global scale, the closure of Arris’s $2.1 billion acquisition of Pace last week will ensure that Arris retains global pole position in the increasingly tough cable set-top box market.

Arris held that slot following its purchase of Motorola Home in 2014, and will now expand its lead while also buying share among satellite-TV and telco service providers in key European markets. By most analyst estimates, Arris will be home to about 25% of global revenues in the set-top sector, staying ahead of such rivals as Samsung, Humax, Technicolor (which just bought Cisco’s set-top business), EchoStar and Advanced Digital Broadcast, among others.

Pace and Arris will also share some key clients. Both supply Comcast with the primary HD DVR that powers the operator’s next-generation, IP-based X1 platform. Comcast ended Q3 2015 with a 25% penetration of X1 while shipping about 40,000 X1 boxes per day.

Arris’s acquisition of Pace was opportunistic and, in some ways, necessary, SNL Kagan senior research analyst Jeff Heynen said.

“Pace was winning share at Comcast and DOCSIS CPE (consumer premises equipment),” he said. “I think that spooked Arris quite a bit. And financial analysts watch Arris very closely now.”

The deal also gives Arris a way to shore up its share in the optical node arena, and perhaps give the company means to balance things out amid a declining set-top box market. Arris is also somewhat insulated via its partial ownership of ActiveVideo, which virtualizes many set-top box functions in the cloud.

During the vetting process there were concerns that regulators might require Arris to divest part of its optical business, but the deal ended up sailing through without such conditions.

“I’m surprised the deal went through without more scrutiny,” Heynen said.

Arris now faces the difficult task of integrating Pace and achieving the deal’s anticipated financial synergies.

CEO: SMOOTH SAILING

Bob Stanzione, Arris’s chairman and CEO, believes that integration will be easier to achieve than the one Arris went through after it acquired Motorola Home almost two years ago.

“I think we’ll be able to move faster on this one than we did with Motorola Home,” Stanzione said. In the case of Motorola Home, Arris was not assuming the IT or the financial infrastructure, and had to build it all from scratch. Plus, there were some complicated transition service agreements in the Motorola deal that are not needed with the Pace merger.

Stanzione isn’t predicting when the Pace integration will be completed, but he does expect the “big milestones” to occur in the first half of 2016.

One area of early focus will be combining the sales teams. That’s already happening under the establishment of a new executive team that has former Pace executive Tim O’Loughlin now in charge of North American sales and Ron Coppock now running a new dedicated international sales organization.

“The first thing we’ll do … is combine the sales organizations,” Stanzione said. “We don’t want there to be any confusion in front of the customers; we’ll move most quickly on that.”

The longer-term focus will include back-office integration and the merger of product roadmaps where there are overlaps. In addition to the Comcast X1 example, Arris and Pace have also been supplying similar set-top products to AT&T.

“We will combine [set-top] product lines,” Stanzione said. “But it will take time, because we have to collaborate with customers … If they want us to manufacture two products for the next year, we’ll manufacture two products for the next year.” Those conversations just recently got underway, as they were restricted from occurring before the deal was consummated.

Overlaps in other areas will also force Arris to make some moves with respect to its employee base, which is now at about 8,000, Stanzione acknowledged.

“We have nothing to announce at this point,” Stanzione said in regard to that, but said Arris will update the market on those activities in February during its normal quarterly earnings call while also keeping employees up to speed.

EYEING OVERLAPS

“There are some overlaps and we’re going to work through them as quickly as we can and keep everyone in the loop as to what our thinking is,” he said.

Though the mergers with Motorola Home and Pace aren’t apples-to-apples comparisons, Arris reduced its workforce by about 500 employees about two months after closing the Motorola Home deal.

As for the grander strategy behind the deal, Stanzione still believe it “gives us an incredible boost in scale” and the opportunity to grow internationally, particularly in markets such as Australia, where Arris and Pace were working with different customers and can now combine those efforts.

“We’ll want to see both [the U.S. and international markets] grow,” he said. “But I think the opportunities for us to grow internationally are greater.”

Even though Arris has its hands full integrating Pace, don’t count out more M&A moves.

“We want to be prepared for that, we need to be prepared for that,” Stanzione said, noting that Arris closed the Pace deal with a strong balance sheet intact. “Any company that kinds of gets itself painted into a corner in this world and this environment that is fast-moving will regret it.”

Arris and Pace are expected to ring in the New Year by consummating their marriage.

Arris announced Thursday that its proposed $2.1 billion merger with U.K.-based set-top and video tech company Pace plc is expected to close on Monday, Jan. 4, 2016, noting that the High Court of Justice in England and Wales conditionally approved the Pace share scheme tied to the agreement.

Multichannel News has asked Arris and the Court for more information on those conditions and will update the story as those details become available.

Update: Regarding that condition, it's considered a mere formality. The U.K. court is awaiting preliminary approval from  Brazil’s competition authority, CADE, to become final. CADE was operating under a mandatory waiting period that's expected to end on December 22. 

If the closing occurs as anticipated, Arris said ordinary shares of Arris International, the new parent company of Arris, will begin trading on Monday, Jan. 4, 2016, on NASDAQ under the company’s current ticker symbol – “ARRS.”

Per the original deal announced in April, the newly combined company will be incorporated in the U.K., but operate its worldwide headquarters in Suwanee, Ga. Current Arris shareholders will own about 76% of the new company, while Pace shareholders will hold roughly 24%.

Word of the expected close comes soon after CADE provided preliminary approval of the deal without restrictions. That followed the closing of the U.S. Department of Justice’s investigation, which also did not apply any conditions.

Arris and Pace shareholders have already approved the deal, which was announced April , and has also been cleared by regulators in Colombia, Germany, Portugal and South Africa. 

Arris said Tuesday that the U.S. Department of Justice has closed its investigation into the vendor’s proposed $2.1 billion acquisition of U.K.-based set-top and access network supplier Pace plc. “without condition,” under the Hart-Scott Rodino Antitrust Improvement Act of 1976.

In June, Arris and Pace said they had each received requests for additional info from the DoJ in connection with the proposed deal. There were concerns that the DoJ could pin conditions on the deal that would call on Arris to divest part of the optical transmission business of the combined company.

Arris and Pace shareholders have already approved the deal, which was announced April and has also been cleared by regulators in Colombia, Germany, Portugal and South Africa. The transaction remains subject to approval in Brazil and other “customary closing conditions,” Arris noted.

Arris has been steadfast in its expectation that it will close the Pace deal in late December or the first quarter of 2016.

Once completed, the deal will result in the formation of  “New Arris,”  a holding company that will be incorporated in the U.K., and have its operational and worldwide headquarters based in Suwanee, Ga. Arris shareholders are to hold about 76% of New Arris, compared to 24% of Pace shareholders.

The proposed $2.1 billion merger of Arris and Pace Plc took a step forward after receiving unconditional clearance from The Superintendence of Industry and Commerce in Colombia.

Arris said that approval follows pre-conditional clearance in Germany, South Africa, and Portugal. Arris and Pace shareholders have already approved the deal.

Arris said completion of the deal remains subject to the expiration or termination of the waiting period under the United States Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the satisfaction of similar merger control requirements in Brazil, along with the satisfaction of other customary closing conditions.

Arris expects the deal to close in late December or or the first quarter of 2016 amid additional requests from the U.S. Department of Justicethat could pin conditions on the deal that call on Arris to divest part of the optical transmission business of the combined company. 

U.K.-based Pace has received the required shareholder approvals at the court and general shareholder meetings held Thursday in connection to its proposed $2.1 billion merger with Arris.

Arris stockholders holding 129,714,934 shares, representing approximately 88% of outstanding Arris shares as of the record date (September 10, 2015), approved the deal on Wednesday.

Arris sees the deal closing in “late December or the first quarter of 2016” amid additional requests from the U.S. Department of Justiceand regulators in Brazil and Colombia that could pave the way for conditions that Arris divest part of the optical transmission business of the combined company. 

Arris is confident that it will close its proposed $2.1 billion merger with U.K.-based Pace plc, but now believes it won’t be able to seal the deal until “late December or the first quarter of 2016” amid additional requests from the U.S. Department of Justice and other regulatory bodies that might create conditions that would require the companies to divest part of their business.

Arris and Pace have long expected to wrap up the deal by year end, but Arris said Friday (October 16) that the companies have received requests for additional information from the Antitrust Division of the U.S. DoJ as well as regulators in Brazil and Colombia. The DoJ put in its original request for more data from Arris and Pace in June. 

Arris said the Antitrust Division’s current focus “appears to be on certain optical transmission products of Arris and Pace,” adding that it it’s possible, as a condition to the approvals, that “the governmental agencies may impose requirements, conditions or limitations on ARRIS business after the completion of the transaction which may include a divestiture.”

Such a condition or requirement, Arris said, “could further delay the completion of the transaction could further delay the completion of the transaction or reduce the anticipated benefits of the combination.”

While the proposed merger would create a set-top behemoth that would enable Arris to expand much deeper into the satellite TV market and into new international arenas, the deal would also create a larger provider of access network gear.

Pace secured a stronger play in the optical transmission and cable access network market in 2013 when it acquired Aurora Networks, which had earlier picked up a cable access unit of Harmonic Inc. that made optical transmitters, amplifiers, receivers and nodes.

Arris was not overly concerned that the current focus on the pending transaction, which intends to create a “New Arris” to be incorporated in the U.K. but operate its worldwide headquarters in Suwanee, Ga.  The merged company would have pro forma revenue of roughly  $8 billion and 8,500 employees. According to an 8-K filing with the SEC, Arris is subject to a break-up fee of up to $20 million.

"While we are disappointed in the potential delay in the timing for completion, we believe that even if conditions are imposed, the transaction remains in the best interests of the shareholders," Bob Stanzione, Arris chairman and CEO, said in a statement. “Based on our current understanding of the Antitrust Division's areas of continued focus and given the opportunities for the combined business and the potential synergies, we believe that the non-GAAP EPS accretion ranges for the first 12 months following the combination, previously estimated and disclosed by ARRIS, continue to remain possible."

Regulators in Portugal, Germany and South Africa have already cleared the agreement.

Almost two years after sealing up $2.35 billion acquisition of Motorola Home, Arris is diving deeply into the M&A pool  again via a $2.1 billion deal for U.K.-based Pace plc, a deal that will give Arris a dominant share of the set-top box market.

Arris said the deal will accelerate its growth strategy and generate more scale, creating a behemoth with $8 billion in pro forma revenues (Pace had fiscal year 2014 revenues of $2.6 billion), 8,500 combined employees (Arris has about 6,500), and an enhanced international presence. Both Arris and Pace are positioned well at Comcast, as they both supply devices for the MSO’s next-gen X1 platform. The acquisition is expected to be accretive to Arris non-GAAP earnings per share in the first 12 months after the deal is wrapped. 

With respect to set-tops, Arris will gain ground particularly in the area of satellite, as the combined company will tout a customer base there that includes DirecTV, Astor, Foxtel, Canal+, MultiChoice and Sky. 

Arris said the deal, involving a mixture of cash and stock, will result in the formation of “New Arris,”  a new holding company that will be incorporated in the U.K., and have its operational and worldwide headquarters based in Suwanee, Ga. New Arris will continue to trade on the NASDAQ under the “ARRS” ticker, they said. In connection with the formation of New Arris, each current share of Arris will be exchanged for one share in New Arris. 

According to an 8-K filing with the SEC, Arris is subject to a break-up fee of up to $20 million. 

Pace shareholders will receive approximately 48.2 million shares of New Arris in aggregate. On a pro forma basis, current Arris shareholders will hold about 76% of New Arris and Pace shareholders will hold roughly 24% of New Arris. The transaction is expected to be taxable, for U.S. federal income tax purposes, to the shareholders of Arris, they said. 

Arris shares were soaring in after-hours trading Wednesday, up $7.56 (24.75%) to $38.10 each as of about 5:45 p.m. ET. 

Arris chairman and CEO Bob Stanzione will serve under the same title at New Arris, and the then-current Arris board of directors will serve as the New Arris board of directors.

The companies said the proposed transaction has been approved by their respective boards and expect the deal to close in “late 2015." 

"This transaction is another example of ARRIS's ongoing strategy of investing in the right opportunities to position our company for growth,” Stanzione said. “Adding Pace's talent, products and diverse customer base will provide ARRIS with a large scale entry into the satellite segment, broaden our portfolio and expand our global presence. We expect this merger will enable ARRIS to increase its speed of innovation.”

“While we believe that Pace is strongly positioned to continue to execute its strategy in the medium and long term, we believe that the combination of the complementary ARRIS and Pace businesses will create a platform for future growth above and beyond our standalone potential,” added Pace chairman Allan Leighton. “We believe this is a great fit for both companies, our employees, customers and trading partners.” 

Pace, primarily known as an international set-top box supplier, expanded into the access network technology business in the fall of 2013 via a $310 million deal for Aurora Networks, a company that has been operating as a strategic business unit of Pace. At the time of the Pace/Aurora deal, it was viewed as one that could help Pace counteract the competitive effects of the Arris/Motorola Home merger and ongoing competition with Cisco Systems, as both Arris and Cisco are strong in the set-top and access network side of the telecom and cable tech business. In December 2012, Pace put in a bid to buy Motorola Home from Google, but ultimately lost out to Arris. 

Under the terms of the deal announced Wednesday, Pace shareholders will receive £1.325 of cash and a fixed exchange ratio of 0.1455 New ARRIS shares for each Pace share, reflecting aggregate consideration as of April 21, 2015 of £4.265 per share, representing a 28% premium to the Pace closing share price as of April 21, 2015, the companies said.  The cash portion will be funded through a combination of cash and debt. 

Arris said it has secured a fully committed facility from Bank of America Merrill Lynch to meet the funding requirements. 

Developing…

Instead of figuring out who is developing a next-gen hybrid gateway for Comcast’s X1 platform, it might be a helpful exercise to determine who isn’t?

Offering more evidence that Comcast could be nearing the formal introduction of the mysterious “XG2” gateway, a version from U.K.-based set-top maker Pace recently passed through the FCC for testing.

The FCC test documents, first spotted by The Donohue Report, reveal some details on a the coming hybrid (QAM/IP) gateway device (a schematic of the unit is pictured above), with tests run on two boxes – one equipped with a CableCARD module from Arris, and another with a security module from Cisco Systems.  As The Donohue Report notes, it’ll also come with integrated WiFi, Bluetooth and ZigBee radios.

Pace already makes the XG1, an HD-DVR with six tuners that currently anchors the X1 platform, as well as a new IP-only Xi3 client device that Comcast is rolling out in select markets.

It’s also the latest vendor to be tied to the XG2. A model made by Samsung surfaced at the FCC in January, and a rendering of that model made by Cisco Systems has also appeared online. 

Comcast hasn’t revealed any other detail about the XG2, though a source familar with the model said it’s a headed gateway that that doesn’t contain a local DVR, making it a logical candidate for Comcast’s new Cloud DVR. FCC documentation of Samsung's XG2 also showed the presence of an SD card with the “Xfinity Instant Replay” label that will likely be used to buffer up to 25 minutes video – enough for subscribers, for example, to pause, rewind and fast-forward through recently-viewed linear TV programming. Comcast recently started to support that functionality in its Xi3 client devices.

Samsung and Cisco, meanwhile are also among the vendors working on the  Xi4, a smaller, next-gen version of the Xi3 that, a source said, will be capable of supporting 4K video. 

Pace announced that one of its new cable broadband gateways, the D5001 Ultra, has become the first DOCSIS 3.0 modem to receive Energy Star 1.0 certification in the Small Network Equipment category.

The D5001, one of a set of D3 gateways announced by Pace earlier this year, is capable of bonding 24 DOCSIS 3.0 downstream channels, enabling it to supply downstream bursts in the neighborhood of 1 Gbps. The model, which can bond up to eight upstream channels, is also equipped with 802.11ac WiFi and an integrated MoCA 2.0 technology for high-speed networking over a home’s coax network.

“As a company at the forefront of digital TV and broadband technology, being an environmentally responsible business is extremely important to Pace. We are delighted to be the first company to launch an ENERGY STAR qualified DOCSIS 3.0 gateway to add to our long list of ‘firsts’ in energy efficiency,” said Robert Turner, Approvals Manager, Pace Americas, LLC.

“Environmental responsibility delivers value to our customers and our business. We fully appreciate the partnership with the EPA, and look forward to continued collaboration to support energy-efficient design and innovation across our entire portfolio of products,” said Robert Turner, approvals manager for Pace Americas LLC, in a statement.

“The EPA congratulates Pace for continuing to put energy efficiency at the forefront of its product design,” added Una Song, Program Manager, ENERGY STAR Program. “Using ENERGY STAR certified products helps consumers reduce their utility bills and protect the environment.”

Pace’s certification comes as the cable industry moves forward on a larger project centered on energy conservation and reduction. The Energy 2020 initiative aims to reduce power consumption by 20%, drop energy costs by 25%, and lower grid dependency by 10%.

Pace is using this week’s Cable-Tec Expo in Denver to springboard a range of new DOCSIS 3.0-powered gateways, including a high-end “Ultra” model that can bond up to 24 downstream channels – enough to support bursts of 960 Mbps on cable systems that use 6 MHz-wide channels.

The new line of products, which are based on Broadcom silicon, also bake in dual-band 802.11n (2.4 GHz) and 802.11ac (5 GHz) functionality.

Here’s a snapshot of the models that Pace is debuting this week:

-D5001 Ultra Gateway – D3 gateway (24x8 channel configuration), with MoCA 2.0, and dual band 802.11 n/ac.     

-D3001 Max Gateway – D3 gateway (16x4), with MoCA 2.0, and dual band 802.11 n/ac.     

-D3003 Advanced Gateway – D3 gateway (16x4) with dual band 802.11 n/ac.  

Pace, which will compete in the gateway market against vendors such as Arris, Hitron, Cisco Systems and Netgear, said the full line is compatible with TiVo systems and integrated into Pace’s Whole Home architecture, which features the MG1 Multi-tuner Video Gateway and Mi3 client devices. The models also feature TR-069 and SNMPv3 for remote management.

“As a strategic partner of Pace for many years, we are very proud to be supporting them as they enter this sector of the market,” said Jay Kirchoff, VP of marketing, cable broadband at Broadcom. “With this range of products utilizing Broadcom silicon for DOCSIS, Wi-Fi and MoCA, Pace has created a very powerful gateway proposition for the cable industry.”

Pace said customer testing is underway with select, still-unnamed MSOs in North America, noting that the set of products will be ready for commercial field deployment in November. Further variants of the range will follow in 2015, the company said.