Scientific Atlanta Acquisition Sets Stage for Multimedia Future

Feb 27, 2006

On February 27th, Cisco System completed the purchase of one of the largest acquisitions in its history. For $6.9 billion the world's leading vendor of Internet protocol networking technologies bought Scientific Atlanta, the world's leading provider of equipment for running large-scale video networks. Together, the two aim to reach the long-sought goal of creating true multimedia communications services, complete with high-fidelity video integrated with voice, data, and graphics in any conceivable combination. News@Cisco spoke with one of the architects of this landmark deal, Dan Scheinman, Cisco's senior vice president of corporate development. The text is part of a News@Cisco Podcast interview with Scheinman, available at http://newsroom.cisco.com/dlls/podcasts/audio_feeds.html.

How did the Scientific Atlanta acquisition come about?

Dan Scheinman: We began this process three-plus years ago in 2002. At the time, I personally felt that the market for video was really going to be the next big thing. That led us to look at Scientific Atlanta, since they were the clear leader in video networking technology. We weren't quite sure what to expect, because we were going to a company literally on the other side of the continent from us that was in a completely different place in its lifecycle than we were. We walked away very amazed at the similarities between the two companies. Both of us have fallen from the same tree. Jim McDonald [CEO of Scientific Atlanta] has an IBM background. John [Chambers], of course, has an IBM background. And we spoke the same language, maybe a little bit differently, different dialects, but, most importantly, we thought the same way. Customers are our passion. I remember boarding the plane as a cynic, and I came back a believer. After that, I wanted to find a way to get this done. Then it was a matter of waiting until the door opened on our side and waiting until the risk was a little bit less. We wanted to make sure that Scientific Atlanta could be a major vendor to telcos, and that they weren't going to get squeezed by unforeseen technology changes and new competitors. Once we saw that risk was passing, I began to say it's time to pound the table. This is how I spent my summer vacation.

In any $6.9 billion acquisition, there is always going to be a lot of debate and skepticism. We always liked Scientific Atlanta but as we spent more time with the company, we increasingly grew to respect and understand what phenomenal business people they are and what a phenomenal company they've built. For us, the issue was: whether or not we believed that Scientific Atlanta was going to be the kind of company that we could successfully integrate and whether or not we believed that the market for video was at an inflection point. We had a lot of healthy debate internally about that. In the end, I think the more we learned and the more due diligence we did about Scientific Atlanta, the more comfortable we felt.

Why did Cisco think now was the right time to acquire Scientific Atlanta?

Dan Scheinman: We knew that Scientific Atlanta was very strong in the cable market, but there were a number of questions. The first was, as video began to transition to IP, would Scientific Atlanta be disrupted by a new entrant? The second question was: as traditional telecom companies began to build video networks to compete with cable companies or, in Europe, to compete with satellite companies, would those companies turn to Scientific Atlanta or would they turn to a new entrant? Over the summer, what became clear was that, in fact, cable companies were going to stick with Scientific Atlanta. Scientific Atlanta was gaining market share on its competitors in cable. In telephony, there was some very exciting news over the summer as Verizon and SBC [now AT&T] announced plans to build their own video networks. They selected Scientific Atlanta to be a key partner in building those networks. Because the telcos were moving so fast, they needed the expertise that Scientific Atlanta had in order to build video networks to millions and millions of customers. So that was really exciting and definitely was a signal that the market was ready.

How does Cisco hope to capitalize from the acquisition of Scientific Atlanta?

Dan Scheinman: We think that by combining Scientific Atlanta's industry-leading video networking expertise with Cisco's IP networking expertise, we are going to be able to offer unique technologies to both consumers and communications service providers. To service providers, we'll be able to build networks which will allow them to maximize their assets and allow them to deliver video, Internet, and voice services to customers efficiently and effectively by using a single, IP-based network infrastructure, rather than having to run multiple separate networks for each type of communications service. For consumers, we hope to create home networking technology that makes it possible for people to get the content they want-voice, data, or video- where they want, on the device they want.

How does Scientific Atlanta fit into Cisco's plans to develop technologies for the "digital home?"

Dan Scheinman: We're particularly excited by the integration potential between Scientific Atlanta and our Linksys home networking products division. Today, it's very tricky to integrate the PC and the TV, the two great bulwarks of home entertainment. With Scientific Atlanta, we hope to make it easier for consumers to integrate their entertainment needs so that they can watch what they want on their big screen TVs, and that they can get content off the Internet through whatever device they prefer. E-mail and electronic text-based communications, for example, have evolved from something that only happened on desk-bound computers to today where e-mail and text communications are available on mobile phones and Blackberry-type devices. Video is going to go through a similar evolution. It will go from something that appears on your TV to something that also appears on your PC to something that will also be available on devices that you carry around and that you plug into your car so your kids can watch a movie or that you take outside on the patio. And the home network will coordinate the connections between the content delivery device-the computer or a set-top box-and the various viewing devices. That's where Cisco and Linksys step in to provide the technology that will tie all of these different options together and give the home network a common infrastructure.

How does the Scientific Atlanta acquisition fit with Cisco's overall acquisition and business strategy?

Dan Scheinman: Cisco was founded by two Stanford professors who wanted to improve how organizations and individuals communicate, and it became the largest networking and communications company in the world. Today we serve large and small businesses, governments, telecommunications service providers, and individuals around the globe who want to use IP networks to communicate more effectively. For various historical, market and business reasons, video was the weakest part of our multimedia portfolio, and, increasingly, the next generation of growth in the Internet is going to involve video, both for communications and entertainment. Scientific Atlanta gives us a world-class platform with which to address our customers' needs to communicate with video.