Staying on Top of the Set-Top Heap

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 Active-Video, 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.


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.


“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.”