Mar 26, 2007 12:00 PM,

IPTV faces vertical integration

By Ed Gubbins

Ericsson's recent $1.4 billion acquisition of Tandberg TV could prompt a wave of vertical integration in the video encoding space that some say could reduce carriers' equipment choices. Where Ericsson has gone, Alcatel-Lucent might follow, as well as Huawei Technologies, Nokia-Siemens, Nortel Networks — perhaps even Arris, which tried to acquire Tandberg before being outbid by Ericsson — and Tellabs might look for a replacement as well.

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Large vendors previously partnered with several encoding vendors, offering their customers a choice of different gear. But more acquisitions in the space might constrict those choices. “It could be the equivalent of Microsoft acquiring Dell and potentially refusing to sell its operating system to Gateway, Sony, Toshiba and others,” analysts for Think Equity Partners said in a recent research note.

Harmonic would likely be one of the most prized acquisition targets, as it has built market share overseas. Ericsson offers Harmonic's gear to its customers, though its acquisition of Tandberg may change that. If an Ericsson rival buys Harmonic, customers might even less likely have that choice. Privately held Modulus, another possible acquisition target, had success selling MPEG-4 HDTV encoders last year. Its partnership with Motorola, which has already bought Tut Systems, could evolve into something more.

If large system integrators acquire encoders, it will be the latest sector within the IPTV space to fall prey to a growing trend of vertical integration. The same phenomenon has already affected video-on-demand server suppliers. Last summer, Cisco Systems acquired Arroyo, and Motorola acquired Broadbus. Ericsson also acquired access equipment vendor Entrisphere.

“Is Ericsson pulling an Apple?” the analysts for Think Equity Partners asked. “Apple combined hardware and software for the PC. It combined hardware, software and a whole service model for the iPod. Will this become the new telecom equipment model as well?”