Motorola closes in on cable duopoly

RiverDelta's death tied to a weakened economy, consolidating industry

When RiverDelta Networks last week succumbed to Motorola's $300 million overtures, it became another victim of a slow economy and a consolidating cable industry.

One of a handful of vendors that popped up in the last half-decade to chase cable's high-speed data business, RiverDelta developed a cable modem termination system (CMTS) that the larger, more established cable vendors couldn't quite get right for CableLabs' rigorous DOCSIS approval.

Thus, although both companies now sport DOCSIS' seals of approval, the deal still makes sense for Motorola, said a cable system executive.

“Motorola really needed somebody like RiverDelta because their CMTS product the kindest thing I can really say about it is it really sucks,” the executive said.

RiverDelta's saga
Q2 1999	RiverDelta Networks founded
Q3
Q4	Closes $10 million in 1st round funding
Q1 2000	Closes $36 million in 2nd round funding
Q2	Introduces Broadband Services Router 64000 Introduces compact BSR 1000
Q3	Introduces RiverGuide service creation system Receives CableLabs DOCSIS 1.0 qualification
Q4	Introduces optical services router 2000
Q1 2001	Begins shipping to customers Receives EuroDOCSIS qualification
Q2	Collaborates with Siemens
Q3	Motorola to acquire
Source: RiverDelta Networks

On the other hand, the deal may not be the best thing for a cable industry that prides itself on moving fast and innovating products with an entrepreneurial flair.

“If you looked at DOCSIS, the number of competitors that were supposed to be there, at the end of the day you're looking at a duopoly again: Motorola and Cisco,” said Michael Harris, president of Kinetic Strategies. “With the strength of Motorola's product offering and sales channels and the strength of Cisco, I don't know how much more room there is.”

Not much, said Jeff Walker, a former Motorola executive who is RiverDelta's marketing vice president.

“Customers liked the technology that RiverDelta was doing, but at the end of the day they're looking for a financially stable, long-term financially viable company that can provide end-to-end solutions,” he said.

The CMTS consolidation trend began last year at the height of market exuberance when ADC paid $2.225 billion for Broadband Access Systems. The shrinking economy, no doubt, had something to do with Motorola's diminutive $300 million stock offering for RiverDelta.

“Quite a few folks [at RiverDelta] are quite annoyed at the fact that this is where they ended up, compared to the northbound numbers they were looking at,” said an industry source.

This is especially because, according to several sources, ADC had proffered a $300 million offer last fall, which RiverDelta declined.

On the other hand, $300 million is better than nothing. RiverDelta recently completed a series of layoffs as business flattened, but it was prepared to go forward with funding. The new funding, however, would have required the company to relinquish too much equity and give in to Motorola's $300 million deal that was deemed the better option.

“I thought it was a lot of money for RiverDelta,” said Jay Rolls, vice president of business development for one of the remaining start-ups, Pacific Broadband Communications, which is in a strategic relationship with Scientific-Atlanta. “It just shows that this really is a very strategic space.”

Harris disagreed. “If that's as high as it goes, some folks out there are going to have to re-evaluate their thinking in terms of what their companies are worth.”

As it is, the entire cable industry must re-evaluate the high-speed data vendor space and potential dominance of one player. “Motorola… could really do some damage with a good product, which they now have,” Harris said.

The generally tight-knit cable industry may not necessarily pursue that strategy though.

“Not everyone will want to buy from Motorola and ADC,” said Tim Doiron, marketing director for Cadant, another independent CMTS provider. Cadant, which is just starting to deploy product, has “the flexibility to pursue distribution alternatives.”

“If the situation was such that these companies were gone and we weren't seeing opportunities for distribution, that's a different story, but we're seeing a lot of opportunities for distribution,” he said.

Pete Sherlock, vice president and general manager of Motorola's Network Infrastructure Solutions, into which RiverDelta will be folded, is realistic about the CMTS market.

“Can a small start-up come in and take over a huge portion of that cable business?” he said. “That's not likely, but there are an awful lot of companies out there doing some innovative stuff.”

Some, no doubt, are biding their time waiting to be bought.

“The big issue is the downturn of the technology IPO market. These guys have nowhere to turn. They have to get acquired,” Harris said.

The problem is, the bigger the acquiring company, the more slowly the wheels turn when it comes to product development.

“BAS got slowed down by the ADC acquisition, just through the retooling and the process flow,” Rolls said. “It's inevitable that this is going to cause some interference with the short-term execution.”

Motorola will undoubtedly try to avoid the same fate.

“I was afraid Motorola was going to take the ADC route,” said one cable executive. “When ADC took them over, you saw some of the lead engineers take their options and go. They slowly put a good team back in there and they're starting to come around.”

Meanwhile, Motorola now seems to have the upper hand because “it's the only company that has every DOCSIS network element,” Harris said. “They have everything cable IP.