Betting that video will drive the future of networking, Cisco Systems Inc agreed on Friday to buy cable-television technology company Scientific-Atlanta Inc in a US$6.9 billion deal that would create a one-stop shop for sending TV over the Internet.
The acquisition is expected to help fuel the revolution in how TV is distributed and watched -- a change that's accelerating as telephone companies barge into the domain of cable operators and begin offering programming over fiber-optic networks using the language of the Internet.
It also fits Cisco's strategy of expanding into technologies that are moving away from their own networks to the standards-based Internet -- a shift that creates an opportunity to increase revenue with new business and enhance sales its traditional routers and switches that direct data over the Internet.
"Over the next two or three years, we are going to see a dramatic change in the landscape, where video-over-broadband infrastructure becomes the centerpiece of investments that service providers make and the expectations that consumers have," said Mike Volpi, a Cisco senior vice president.
For providers and consumers, Internet-based television promises expanded choices, lower costs and new services in the same way voice over the Internet Protocol has made phone calls less expensive and enabled features that were not possible with the traditional telephone network.
The deal also opens up opportunities for Cisco's Linksys home networking division.
Its products could be made to work seamlessly with Scientific-Atlanta boxes to distribute television throughout the home and combine them with other Internet-protocol technologies, including phone service.
The announcement represents "much more than an exciting opportunity for Cisco," said John Chambers, Cisco's chief executive officer.
"It literally completes a large part of our quadruple play as data, voice, video and mobility converge," he said.
It is Cisco's largest acquisition ever in terms of head count and revenue. The company is paying US$43 a share for Scientific-Atlanta -- a 3.7 percent premium over its closing price on Thursday.
The Atlanta company has about 7,500 employees and posted US$1.91 billion in sales in the current fiscal year.
The deal, which was approved by the boards of both companies and still needs customary approvals, is expected to close by late April, in Cisco's fiscal third quarter.
For Scientific-Atlanta's business of supplying infrastructure to TV providers, Cisco's position as the leading provider of network gear will help seal deals as cable, telephone and others build and expand their networks, said Jim McDonald, Scientific-Atlanta's chief executive.
"These customers want more complete integrated solutions from fewer vendors," said McDonald, who added that he will remain with the company for two years.
Cisco also will help fuel Scientific Atlanta's expansion beyond cable TV companies that have been relatively slow to introduce new technologies to customers, said Josh Bernoff, an analyst at Forrester Research.
"Cisco has struggled to succeed both with telephone and cable companies. Scientific-Atlanta is sort of in a position where innovation and capital push would be helpful for them," he said. "We think this is going to make some real changes in the industry."