11/4/2008 -- Cisco Systems Inc. became an overnight sensation in the IPTV segment two years ago, when it ponied up about $7 billion for the former Scientific Atlanta.

It was a savvy investment. IPTV helped Cisco simultaneously line its purse and raise its profile, involving as it did sales of consumer front-end gear -- the ubiquitous set-top box, which gave Cisco primacy of place in the digital home -- but back-end infrastructure gear, too. Call it a win-win for the networking giant.

Until now. Surprisingly, sales of IPTV and switched digital video (SDV) gear fell off by 5 percent in the second quarter of this year, spurred by a precipitous decline in North American revenues which offset growth in Europe, Asia and other regions.

Market watcher Infonetics Research ascribes the setback to a slowdown in IPTV and SDV subscriber traffic, principally in North America and other regions that have been hit hardest by an uncertain economic climate.

"In environments where the future of the economy is unknown, IPTV and SDV subscribers are more apt to stay with their current provider, rather than look for a new provider with whom they may have to invest in new equipment and other upfront fees; this is especially true in North America and Western Europe right now," said Jeff Heynen, directing analyst for IPTV at Infonetics Research, in a statement.

What's true in North America isn't necessarily true for the rest of the world, Heynen stressed: "[S]ervice providers around the world -- particularly in Asia, Europe and Latin America -- are still investing in IPTV equipment because offering video service is increasingly becoming a requirement to increase revenue per user. Operators will continue to add IPTV and SDV subscribers, just not at the fast clip they previously expected."

Just how bad are things in the North American IPTV and SDV segments? Pretty gloomy. In Q1, North American sales of IPTV and SDV gear accounted for nearly half (47 percent) of the worldwide tally; in Q2, that figure had dropped to just over a third (38 percent) of the global total.

The news was particularly glum for Cisco and other purveyors of STBs. In Q2, sales of set-top boxes dropped by 10 percent, chiefly as a result of slowing subscriber growth. On the other hand, sales of hardware video encoders -- a still-incubating market segment -- surged by 8 percent. Motorola is still tops in the global STB segment, although Cisco is fast "coming up on its heels," according to Infonetics. Going forward, STB revenues could flat-line (or even drop) as, absent strong subscriber growth, new system-on-a-chip (SoC) designs permit Cisco and other manufacturers to develop cheaper set-top boxes. --Stephen Swoyer