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Cisco's $5.3 billion bet on TV
Scientific-Atlanta deal could make Microsoft's forays into TV land more complicated.
November 23, 2005: 4:00 PM EST
By David Kirkpatrick, FORTUNE senior editor

NEW YORK (FORTUNE) - Microsoft's forays into TV land just got more complicated. Cisco Systems' recent deal to buy cable television set-top box maker Scientific-Atlanta for $5.3 billion may disrupt the software giant's partnerships with television providers and spark another round of fisticuffs between Microsoft and Google.

At least, that's how Mike Volpi sees it. As senior vice president for Cisco's routing and service provider technology group, Volpi will oversee the company's acquisition of Scientific-Atlanta.

Cisco's purchase, which still needs SEC and shareholder approval, will bring a brand new type of end-user product -- cable TV set-top boxes -- to the networking-equipment company. Volpi, in his first interview since sealing the deal, told me where Cisco sees online video going, how the deal fits into the company's strategy, and what he believes it may mean for Microsoft.

Microsoft would love to provide the software for the world's Internet-protocol television video, or IPTV, which is delivered to you when you want it over the net. The software giant has made progress selling its software to telcos like BellSouth, AT&T (SBC Communications changed its name after it completed its merger with the long-distance telecom provider), and Verizon. And Scientific-Atlanta has been working with Microsoft -- its IPTV boxes at AT&T, for example, run Microsoft's code.

But until now Microsoft's partner in IPTV has been Cisco rival Alcatel. Microsoft sells its software alongside Alcatel's routers. Volpi sees the Scientific-Atlanta acquisition as a way to potentially disrupt that partnership, pull Microsoft closer to Cisco, and sell more of Cisco's own routers to telcos.

"Now," he said, "we offer a better end-to-end platform for video rather than just the pure play in routers like we were before. That means Microsoft is probably more inclined to work with us."

Is there any sphere in which Microsoft is not butting heads with Google?

If Microsoft demurs on partnering, Cisco has a fallback position. There are plenty of other potential partners. "When you do video-on-demand, somebody needs to create the user interface," Volpi explained. "Microsoft provides that, but if Microsoft chooses not to partner with us, my sense is that many others would like to do that, like either Yahoo or Google."

The set-top box is a fast-evolving product category. Even Volpi is not sure where it's going. "There are two schools of thought," he said. "One is that there will be a completely different paradigm for watching TV, where everything is on-demand on whatever device you want. The other, more traditional view is that on-demand remains more of an adjunct to traditional broadcast television."

With the acquisition, Cisco has a hedge, because set-top boxes will play a central role in either scenario. In the aggressive new-paradigm one, the box becomes the gateway to all the devices in the home and runs what Volpi calls "the all-important electronic programming guide." But if IPTV becomes another channel on cable TV, Scientific-Atlanta is also well positioned. Its products are already in close to half of all American homes that have cable service.

Volpi noted that the three major types of video service providers view IPTV differently -- depending on their infrastructure. Satellite companies say on-demand TV is unnecessary; cable players say it's important alongside traditional TV; and telcos -- working to disrupt the cable guys -- believe IPTV and on-demand video is everything. To that end, telcos are building high-capacity fiber networks. But with Scientific-Atlanta's boxes, Volpi believes Cisco can serve all these companies.

The deal has other benefits for Cisco's business. "Once the set-top box is in the home, it's a hub to connect other devices," said Volpi. Eventually, the company plans to incorporate the set-top box with its Linksys home networking products.

As he studied the online video market, Volpi was surprised to discover just how challenging it really can be to deliver television seamlessly. "Video is still a fairly nascent technology over IP," he said. "It's hard to get the whole system to work properly -- getting the feeds into the satellite and transmitting them, making sure the signal plugs into a bunch of different types of TV sets, insuring it doesn't take too long to switch channels, and making sure that you don't drop too many digital bits."

Yet, for all the allure of the PC, Volpi believes mainstream Americans will be more comfortable getting their IPTV where they got plain TV--on good old-fashioned TV sets. And Scientific-Atlanta has the tools to make it happen.  Top of page

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