12/5/2005 -- There’s a tremendous upside to Cisco Systems Inc.’s acquisition last month of cable set-top box giant Scientific-Atlanta.

For starters, analysts say, Cisco gains both an end-to-end video distribution solution and a presence in the digital home. This helps to set it apart from competitors Fujitsu and Motorola, among others. The deal also makes Cisco the instant leader in the multiple system operator (MSO) market -- ahead of Motorola.

“[T]his acquisition gives Cisco what it needs to put together a single-vendor video distribution solution. In addition, it strengthens Cisco’s competitive position in the MSO markets, where it will now be the leading equipment provider, and strengthens its competitive positioning as a triple play-enabling vendor in telcos as well as MSOs,” says Dave Dunphy, a principal analyst for optical infrastructure with consultancy Current Analysis. “Cisco also gains set-top boxes to strengthen its positioning in the digital home market, complementing its LinkSys acquisition, increasing its addressable market opportunities and focus on areas more likely to drive future profitability than will transport alone.”

Dunphy sees what he calls a “compelling strategic rationale” behind Cisco’s move. Cisco, he says, needed (a) a more compelling differentiation for its video distribution solution, (b) to shore up its presence in the digital home to take advantage of next-gen market opportunities, and (c) needed a way to stymie competitive video distribution solutions from rivals such as Fujitsu. “Cisco has had successes with the ONS 15454 ROADM, but has been aggressively marketing that solution, and MSO and Tier 1 telco service providers have not necessarily been the strongest component of that platform’s success to date,” Dunphy points out. “Cisco has made increasing inroads into MSOs overall, but Scientific-Atlanta’s strong presence there accelerates this significantly.”

In no way is the deal a slam dunk for Cisco, however. Dunphy cites competitive pressure from an equally large player in Motorola, which has a relationship with Verizon and -- of crucial interest to Cisco -- is the second of two suppliers to SBC. (The other is, of course, Scientific-Atlanta.) In addition, Dunphy points to Motorola’s strengths in video distribution, Fujitsu’s expertise in ROADM, and competitive bluster from Siemens, Alcatel and others, who have hooks into the large telcos. “Meanwhile, Cisco will have some work ahead of it integrating Scientific-Atlanta’s portfolio into fully open, standards-based solutions -- and Scientific-Atlanta, though giving it a solution that can be used to address both MSO and telco markets, does not give Cisco comparable support in telcos to what it offers in MSOs,” he notes.

Nevertheless, Dunphy gives the acquisition a (mostly) unqualified thumbs-up. What’s more, he thinks Cisco might soon need to make a related acquisition. “[T]his was a smart move for Cisco. This may not be the end of acquisitions for Cisco, either, as it may need to acquire (if not partner) to gain a PON solution as the GPON market takes shape, and could use a relationship to gain access to DSLAMS as well, to round out the broadband access part of its solution.” -Stephen Swoyer