Pace plc , the UK-based manufacturer of television set-top boxes (STBs) , has said it is bidding for the Google -owned Motorola Home business, and the sale could be finalised by end - 2012. The business was already expected to fetch between US$1bn and US$2.5bn, dwarfing Pace ' s market capitalisation of appr oximately US$950mn. Thus, the offer is viewed by BMI as a high-risk move , from a financial perspective , but would at least give Pace the scale needed to thrive amid heightened competition from over-the-top (OTT) video platforms such as Netflix .
Google acquired the STB business when it bought Motorola for its handset division and smartphone patents earlier in 2012. With Google TV and YouTube applications , and content access clients becoming embedded into a broadening range of smartphone, tablet and connected TV platforms, it was always expected Google would quickly offload the low-margin hardware business while there was still demand for STBs from traditional cable, satellite and IPTV operators worldwide. However, if (as has been suggested by some financial analysts) Google were to provide Pace with the financial assistance needed to complete the deal, it would represent a remarkable - and somewhat questionable - reversal of that strategy.
|STB Sales Shrinking For Pace|
|North America Sales By Category (US$mn)|
Pace is already one of the principal suppliers of STB s to pay-TV providers worldwide . Motorola Home has long been a bitter rival, particularly in the Americas, where the two vie for large-scale hardware upgrade and expansion contracts . However, due to the advent of internet-hosted OTT video services such as Netflix, HBO and Lovefilm , which consumers can access through non-dedicated devices such as games consoles, computers and mobile phones ; subscriptions to traditional pay-TV platforms are falling . This is leading to lower STB supply requirements, while falling pay-TV revenues prompt operators to push for lower STB prices, eroding STB manufacturers ' margins. Consolidation in the STB market is therefore to be expected , and the combination of Pace and Motorola is a logical fit.
Pace restructured earlier in 2012 as it sought to cut costs, tighten its focus on its remaining markets and develop more compelling products. In February 2012, it established a partnership with digital video recorder (DVR) vendor TiVO and is integrating TiVO software into its next-generation STBs from 2013. This will potentially make these products more compelling to consumers and pay-TV partners.
Were Google to accept Pace's offer and transfer Motorola Home to Pace in exchange for partially financing the transaction, Google would keep an indirect presence in the traditional STB market, contrary to its strategy to focus on software-based applications with regards to video delivery. BMI assumes the combined STB business would remain publicly listed, keeping it at arms' length from Google's software business, and centred on the Android operating system (OS) and the Google Play/Google+ content and social media platforms. Google would thus not be directly affected by any acceleration in the decline of the STB market and would be able to divest its stake in Pace if needed.
Google increasingly sees value in having its own branded hardware to boost use of its software solutions and content. Having bought Motorola's mobile handset business, the company has just launched its own-brand tablet computers (the well-received Nexus family). Google is also looking to exploit the potential of wireless broadband in the UK and the US as a means of delivering content and services direct to consumers, while its experimental metropolitan fibre-optic broadband project in Kansas City move ahead. In both of these initiatives, STBs would provide the leverage it needs to pique the interest of mass market consumers.
The emergence of the Connected Home concept, which would require the deployment of a so-called 'god box' overseeing the routing of discrete streams of data traffic between multiple end-user devices and the primary internet access point, would likely be Google and Pace's ultimate goal if they were to agree to a deal. However, margins on such terminals would need to be slim to achieve mass market adoption and it is doubtful whether Google would want a direct presence in this business. It is equally doubtful an enlarged Pace would be a financially viable standalone business in the Connected Home ecosystem.