Cisco Solidifies VOD Footprint Through Arroyo Acquisition

At Supercomm in June 2005, Cisco’s John Majors gave a rousing speech that, in essence, admitted that Cisco had stumbled along with the rest of the tech industry but was expecting video and rich media to be the catalyst that brought the company back.

Rather than only using its in-house solutions for IPTV, IP videoconferencing and on-demand delivery, Cisco began an acquisition spree shortly after Supercomm (now called Globalcomm) to build on its core competencies with devices that were more videocentric. Of these acquisitions, two stand out.

First, Cisco’s acquisition of Scientific Atlanta, maker of cable modems and set-top boxes, strengthened Cisco’s previous acquisition of home networking company Linksys. Scientific Atlanta is one of the foremost makers of the digital video recorders (DVRs) that cable television providers are pushing as a way to allow end users to both record content as well as retrieve on-demand content that is typically pay-per-view. Linksys, approaching the problem from the opposite perspective–the consumer’s home wired or wireless networking requirements–also offers several products designed to allow end users’ images and videos to be retrieved from a local PC and then broadcast to various TVs throughout the consumer’s home. Together with Linksys’s VOIP solutions, the two companies complement one another’s product offerings and provide Cisco an avenue into the consumer market, where it currently has little presence.

That presence is important, according to analysts. Besides adding to the bottom line–Scientific Atlanta contributed $407,000,000 or almost 5% to Cisco’s quarterly revenues in mid 2006–the acquisitions allow Cisco to heighten brand awareness in consumers’ minds. Already most of its Linksys gear sports a prominent Cisco logo, and the company has embarked on a campaign to raise awareness among average consumers who may purchase networking or video equipment.

The second acquisition, which happened just this week, allows Cisco to strengthen its offerings to telcos and cable service providers. On Monday, Cisco announced a definitive agreement to purchase Arroyo Systems for $92 million in cash. The company, founded by the likes of Drew Major and Paul Sherer, provides a core software middleware that addresses the needs of many types of time-shifted media, including video on demand. Major was an original founder of Novell with a long track record in network operating systems and content delivery network (CDN) designs. Sherer was a former chief technology officer at 3Com. Both will be joining Cisco.

Cisco, in a press release, provided a bit of detail behind the decision to purchase Arroyo Systems. The logic, first noted by analysts after the 2005 Supercomm presentation, assumes that cable service providers and telcos understand the need to upgrade their network fabric to take advantage of an impending wave of on-demand content delivery.

"The entertainment industry is going through a major shift while consumer desire for personalized on-demand service is on the rise. The industry is quickly evolving from pure video-on-demand to anything-on-demand, with any content delivered to any end device. Cisco’s next-generation network strategy offers service providers the ability to make this vision a reality," says Michelangelo A. Volpi, senior vice president and general manager of Cisco’s routing and service provider technology group. "With the addition of Arroyo’s innovative software, which offers flexibility in content delivery, service providers will be in a position to serve content how, when and where consumers want it."

The downside to all this, of course, is limited consumer demand. Studies and anecdotal evidence have shown that consumers are interested in on-demand video files, but want three distinct benefits.

First, the consumer wants the ability to choose what they want to watch. Fortunately, we’re seeing the end of limited and disparate agreements between cable service providers and the studios that own large content libraries, now being replaced by consistent contracts that allow access to a much wider array of content.

Second, consumers want to watch content when they want to watch it. They don’t want to wait for a file to download for 20-30 minutes before viewing it. Cisco’s video networking and end-device acquisition go a long way toward solving this issue, but the cable service providers and telcos must make the hard business decision to upgrade their networks prior to consumer demand.

Third, consumers want to choose where they watch their content. Cisco is on track here, with the ability to view content in various parts of the consumer’s home, but these Linksys devices have been primarily marketed as ways to show personal video clips or still images, not copyrighted content. Cisco will probably also have to enter the licensing fray, especially if it wants to stream content around the home and allow consumers to transcode it to formats that can play on portable devices.

In the end, though, Cisco’s biggest coup may be that, with proper licensing, it could have an end-to-end solution not just in hardware but in "software" or time-shifted entertainment programming, too.

Perhaps, as this latest acquisition is completed and the Arroyo team and product portfolio are integrated into the Cisco Cable & Video Initiatives Group within the Service Provider organization led by Volpi, we’ll see Cisco begin the battle for consumers’ hearts and minds in a way that rivals other consumer brands like Apple and TiVo. It may be a gamble, but Cisco has a significant amount of ongoing revenue from corporations and mid-sized network service providers, and so can afford to roll the dice on the VOD market.