Arris, the leading global supplier of cable voice over IP (VoIP) devices and the second largest supplier of cable broadband access platforms known as cable modem termination systems (CMTSs), made an all-cash bid valued at US$730 million for C-COR, of State College, Pennsylvania, this week. The deal has been approved by the respective boards of directors, but first requires approval of both companies' shareholders. Closure of the deal is expected in the beginning of 2008.

The combined revenues for the two companies for the last 12 months to June 2007 was US$1.229 billion. The new company will have 2,000 employees, of which 850 are engineers; continued global reach; and slightly overlapping, but expanded sets of customers in the worldwide cable market. Top customers will continue to be Comcast, Time Warner Cable (TWC), Cox and Liberty Global, with better revenue diversification at TWC.

C-COR has competencies in three main lines of business: on-demand technologies, such as video on demand (VOD), advertising insertion, and switched digital video (SDV) systems; access and transport technologies, including cable access and optical transport systems; and operational support systems (OSSs) for cable network service assurance, workforce and policy management. Access and transport systems represented 78% of C-COR's revenues for the past 12 months to June 2007.

Unlike Arris, however, C-COR is not first or second in its respective markets for its lines of business and competes with a host of top players in all its segments, including SeaChange, Concurrent, Motorola, Cisco, Ericsson/Tandberg Television, BigBand Networks, Thomson, and Harmonic in SDV, VOD, and ad insertion systems; Cisco/Scientific Atlanta, Motorola, Aurora Networks and others in the access and optical transport space; and numerous players in the OSS segment.

Gartner believes, however, that the acquisition does strengthen Arris against its main competitors in these various segments, and gives a major boost in overall competency in the video processing space. Arris failed to acquire Tandberg Television earlier this year when it was outbid by Ericsson - a move that would have enabled a strong presence in the video processing market with digital video MPEG encoder, VOD and SDV markets. The main Arris video technology product is the D5, a universal edge QAM technology that cable operators will use in next-generation networks for processing VOD transactions as well as for switched digital video implementations. Comcast, which is using a best-of-breed approach, has already selected Arris edge QAM technology for its upcoming SDV rollouts.

The rationale for the acquisition is quite simply cable's competition from telco video and satellite TV providers. The combination goes to the heart of what cable network operators are dealing with in terms of fine tuning their networks to support the triple-play bundle of services:
• Creating extra capacity to accommodate bandwidth-hungry applications and services over broadband access networks
• Supporting the video capacity and switching requirements for "everything on demand" content
• Accommodating the transition to all-digital networks by "recapturing" bandwidth by transitioning analog channels to digital, or using switched digital video systems
• Expanding capacity to enable transmission of tens, if not hundreds, of TV channels in high definition
• Enabling network operators to further monetize their platforms with targeted digital interactive advertising

Taken together, Arris and C-COR create one of the largest pure-play cable technology companies in the world. The combined company still has a few holes to fill in its technology portfolio and still lacks video encoder and statistical multiplexing technologies, as well as set-top boxes for cable, IPTV or satellite providers. Gartner believes that it is probably more important for them to acquire the encoding/stat muxing capability than a set-top play, given the crushing competitiveness and margin shaving that's going on in that market.

Suggested Reading:

Hype Cycle for Network Service Provider Infrastructure, 2007

Market Share: Cable Customer Premises Equipment and E-MTAs, Worldwide, 2006

Market Share: CMTS, Worldwide, 2006

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Vodafone and Orange announced today that they are planning to merge radio elements of their U.K. mobile phone networks in a deal designed to cut costs and bring new 3G services to a greater proportion of their combined 32 million U.K. customers. There are differing levels of equipment sharing in the Radio Access Network (RAN), from basic tower site sharing (where the physical towers are shared) through to sharing of common electronics.

Although network sharing is not new in the U.K., it is not particularly widespread yet. The U.K. regulator Ofcom provides information about radio sites, including GSM, UMTS and the Public Mobile Radio (PMR) Tetra sites (single-operator/Tetra-only sites account for 6% of total sites).

Single-operator/GSM-only sites represent the majority, with 46% of all U.K. sites, while single-operator/UMTS-only sites represent 18%. The remaining 30% of sites are multi-operators, or they house more than one technology.

There is plenty of scope in the U.K. for more site sharing, especially in rural areas, and it seems like a logical move in light of the mounting costs of 3G networks, which are now upgrading to HSDPA and even HSUPA. Because the sought-after new revenue stream from data-related services is not as large as expected, the only way forward is to cut costs.

Last year, as HSDPA rollouts were gathering pace, Gartner warned that the build-out in HSDPA added significant opex costs to the network - while the killer app, if any, remained elusive. Costs of upgrading to HSDPA could never be directly passed on to subscribers. The average large European mobile operator would need to increase the data ARPU by at least 25%, up to 85%; based on the increasing amount of extra backhaul capacity. Cellular backhaul costs are high already, and typically account for about 70% of transmission opex (see "Hidden Costs and Performance Issues in HSDPA May Surprise Mobile Operators"). With HSUPA becoming available in 1H07, the opex costs are set to rise even further.

Therefore, anything that reduces the cost structure of the radio network must be a good thing. However, the synergies depend on how much exactly you are sharing. Company spokespeople Craig Tillotson, director of strategy for Vodafone UK, and Marc Overton, VP of strategy for Orange UK, confirmed that the number of cell sites will be approximately 12,000 per company. They also said that this arrangement is only for mobile 3G and 2G RAN and does not extend further. With the targets for capex and opex, in the longer term, assuming full 2G and 3G consolidation, potentially being 20% to 30% of RAN capex and RAN opex.

Now, if you merge your radio network with your competition, there is also a trade-off: How do you differentiate if you share part of the production facility? Coverage, reception, call quality and so on used to be differentiators; they will now need to compete on other attributes if the radio capabilities are equal and they roll out radio network improvements at approximately the same time.

In addition, new challenges arise: How will support be provided objectively? Which operators' equipment does a support engineer fix, or does the RAN become managed by a third party, as happened with 3GIS in Sweden? Which vendor's hardware will they use? Many more questions will emerge as well. In theory, this strategy appears solid, but the implementation will be harder.

What's next: Vodafone already indicated that network sharing with rivals will be considered on a country-by-country basis, with an eye on the impact to its investment budget. In November, the company struck a deal with France Telecom-owned Orange to share third-generation (3G) network infrastructure in small Spanish towns to speed up the rollout of mobile broadband, sharing 1,000 3G transmission towers by 2007 in towns of less than 25,000 inhabitants. In the next three years, that number is expected to rise to 5,000 towers. So, Vodafone already has network-sharing arrangements with Orange in rural Spain and Deutsche Telekom's T-Mobile in the Czech Republic. However, the announcement on Thursday, 8 February, is a more comprehensive deal, which could eventually extend to other markets even beyond Europe. An example might be India, where Vodafone is considering a 67% stake in the country's fourth-largest operator Hutchison Essar (up for sale by parent Hong Kong's Hutchison International).

As long as compelling new services, which end users are prepared to pay a premium for, are not widespread, operators should certainly consider any initiative that reduces their overall production costs. But they should also carefully examine additional upgrades to their networks, if they are made in the hope of securing some new revenue stream. Operators can deliver many exciting services without incurring the cost of unnecessary upgrades aimed at higher data rates.

For example, there are existing, proven new services that do not require a very high bandwidth at all: live video streaming for mobile TV has been available for a few years over a GPRS network; similarly, premium, targeted video podcast and media content can be pushed to end-users' phones, also over GPRS.

The site-sharing theory looks good and, if successful, will help address the cost issues these two operators face. The challenge now is to boost the revenue from applications and services.

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BT recently agreed to acquire International Network Services, a U.S.-based provider of IT consulting and software solutions. This acquisition builds on BT's existing strategies for U.S. growth. Preceding this announcement, BT had already acquired other key U.S. assets, including:

• Radianz - a provider of connectivity to financial services sector
• Counterpane - a provider of managed security services
• Infonet - a provider of managed network services

The key to BT's buying spree in the U.S. has been a focus on layering "value-add" on top of its legacy and emerging network services capabilities. Gartner sees the INS acquisition as positive for BT and its customers; in addition, the acquisition is a catalyst that will most likely set off a wave of acquisition in professional and support services related to enterprise networks by competitive carriers (U.S. and global), integrators and outsourcers. Network equipment manufacturers may also get into the bidding war because they are increasingly relying on higher-level margins generated by delivering IT services to supplement lagging equipment and software margins. A good example of past activity is Cisco's acquisition of NetSolve.

So what does the growing competition between different types of services providers mean for enterprises and vendors? The likely first impact will be a reduction in market prices. During the past three years, network consulting and integration have risen as companies looked to roll out complex IP telephony solutions from an increasingly shallow pool of resources. The market for automated monitoring and management has already seen a rapid decline in pricing for network element (or node) management.

The second impact, or casualty, in the anticipated rush to market will be IT service delivery quality. Pricing pressures generally cause a reduction in service levels as many companies are forced to reorient resources to more-profitable projects or to reduce the number of resources dedicated to projects in general. However, Gartner believes that the major source of service level declines will be based on a lack of deep market knowledge required to transition accounts to an all-IP-communications infrastructure. Knowledge management databases have few case studies about medium to large enterprises that have standardized on IP communications. Many companies will be learning on the job. This market factor is the primary reason why network equipment manufacturers are competing for IT services revenue.

Bottom Line for Vendors: Accelerated pricing competition is a race to the bottom. It not only threatens adoption rates for using third-party services providers, but also hurts the adoption rates of technology. Vendors should work to identify their niche in the market: as a low-cost provider or as a differentiated value provider.

Bottom Line for Users: Companies looking for external IT services to plan, design, implement or operate their corporate networks should be vigilant to test their potential providers' capabilities (technology), reference accounts and business acumen to ensure the relevance of the technology rollout to their business drivers. Risk analysis is crucial to success. What is your company's exposure if your IP communications initiative falls behind schedule or doesn't meet technological or business requirements? Remember, you get what you pay for.
See "Network IT Services Worldwide: Forecast Database Market Statistics" for more information.

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One of the themes of the Nokia World conference last week was market segmentation and how its use will drive competitive differentiation going forward. Nokia and a guest speaker from Telefonica Spain demonstrated their segmentation models for customer acquisition. Both models had similar spreads of customer types - ranging from older groups less interested in technology to young social groups and technology adopters.

However, the ease of translation from segmentation to acquisition strategy appeared to differ between the two companies. It is fairly straightforward to create a stylish, yet cost-effective phone for a young segment, but what does it mean to cater to this segment when designing carrier offerings? Carriers have a dilemma - creating offerings to anything but very broad segments is expensive - and their customer bases have a tendency to regard them as trying to hide something beneath the complexity of multiple tariffs and offers.

Telefonica demonstrated one approach to this dilemma - a combined campaign of relevant device and suitable advertising for the segment. Although attractive to the segment, it was quite tactical in nature and not about creating a long-lasting strategy of differentiated products and experiences for the segment.

Perhaps the work done by the likes of Nokia on segmentation will be something that carriers can use going forward to develop their own acquisition offers - for example, creating segment-specific areas for their retail stores with their own tariff sets, developing offers attractive to particular segments and customizing customer experiences by mirroring the types of targeting strategies used by the device manufacturers.

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