The following post is from an article written in November 2016, prior to the announcement on February 22, 2017, that Arris will be purchasing Brocade. For further information on Kagan research, a group within S&P Global Market Intelligence, and its industry projections, please request a call.
ARRIS Group Inc. could take a big step toward its goal of moving into the top tier of networking equipment suppliers by acquiring Brocade's IP networking division. Broadcom Corp., which announced on November 2 its plan to acquire Brocade Communication Systems Inc. for $5.9 billion in cash and debt, plans to divest Brocade's IP networking division, because it includes products that are competitive with Broadcom's network infrastructure customers. That division includes carrier- and enterprise-class routers, software-defined networking (SDN) products, network functions virtualization (NFV) products, and application delivery controllers, as well as the carrier Wi-Fi and mobility portfolio of recently-acquired Ruckus Wireless.
All of these products would go a long way in helping ARRIS expand beyond its core strength of providing broadband and video infrastructure and CPE to cable and telco operators. The product portfolio it would acquire would help the company compete more effectively with its chief rival Cisco Systems among cable operators, and also position it to take advantage of three major network transformations:
* The transition from networks based on proprietary hardware implementations to networks based on a combination of commodity hardware and software-defined workflows
* The transformation of traditional cable headends into data centers
* The shift to carrier Wi-Fi and 5G and the entry opportunities these offer cable operators to become mobile network operators
The shift in focus from proprietary hardware platforms is already well underway throughout enterprise and carrier data networks, but also in content delivery networks (CDNs). It won't be too much longer before this transition impacts broadband access networks, where ARRIS derives nearly 30% of its revenue. The impact of virtualization and SDN on the product mix and margins for access equipment vendors is still unknown. However, every vendor must at least acknowledge the trend and have a well-defined roadmap in place for the transition away from proprietary hardware platforms to a mix of commercial off-the-shelf (COTS) platforms and open software engines.
A large part of ARRIS' success and market share gains among cable operators over the years has been its focus on providing solid converged cable access platforms (CCAP) with hardware and software tightly coupled to ensure uptime and the resiliency of features such as digital voice. But with broadband consumption and overall bandwidth requirements increasing at 40% annually, cable operators face significant space constraints in their headends and are looking to distribute the CCAP functions throughout their network and closer to subscriber endpoints.
By doing this, cable operators will free up valuable rack space in their headends and hubs and will replace the proprietary CCAP platforms, which occupy an average of 16 rack units of space, with COTS-based switches, routers and servers all operating as part of a single, software-defined workflow to aggregate, route, process, cache and store data and video applications and traffic. In essence, the cable headend of the future will look exactly like today's data centers. The headend of the future will be measured in terms of total compute and processing power, with cable operators able to allocate processing horsepower to the applications needing it most at any given time.
As ARRIS has been a dominant presence in the headends and hubs of cable operators around the world, they are unlikely to relinquish this position and sacrifice additional market share and revenue gains. Thus, acquiring a networking equipment portfolio designed for application delivery and management from data centers makes a lot of sense for a company whose existing networking and cloud product portfolio will be distributed throughout the network and centrally-coordinated by SDN hypervisors.
This transformation will take years of incremental steps for cable operators. In the meantime, the acquisition of Brocade's IP Networking division would open up new vertical markets to ARRIS, just as the Pace Plc and Motorola Solutions Inc. acquisitions exposed ARRIS to more telco and direct broadcast satellite (DBS) customers. ARRIS could complement its heavy focus on service providers with a focus on large enterprise data centers and governments, taking a page out of Cisco's book on diversification.
Wireless networking platforms a key component
Speaking of expanding into the enterprise space and complementing existing service provider assets, the acquisition of Brocade's IP Networking group would presumably include Ruckus Wireless, which Brocade acquired for $1.2 billion in April 2016. Ruckus has been a leader in both enterprise and carrier Wi-Fi endpoints and infrastructure for some time. Prior to the acquisition by Brocade, nearly two-thirds of Ruckus' revenue came from equipment and software sales to enterprises, which remain a critical target market for cable operators as they look to increase their commercial services revenue.
But mobile services, in general, are going to be a critical revenue source going forward for cable operators, a customer set ARRIS knows very well. The problem for most cable operators globally is that carrier-class mobility services have only been available to them through the use of Wi-Fi, as most do not own blocks of licensed spectrum.
Ruckus provides ARRIS with a number of interesting technology options which address enterprises, building owners, cable operators and telcos by allowing them to use a flexible combination of carrier Wi-Fi, licensed LTE and unlicensed LTE in the 3.5GHz wireless band. That particular block of unlicensed spectrum is ideal for indoor use because the signal tends to stay indoors.
Ruckus, along with its partner Qualcomm Inc., is advocating a solution called OpenG, which allows its partners to provide LTE networks indoors using unlicensed spectrum, as a complement to more traditional licensed LTE and carrier Wi-Fi solutions. OpenG would allow enterprises — and potentially cable operators — to deploy cellular networks just like they do Wi-Fi. LTE is obviously more ideally-suited to handle voice calling, text messaging and roaming, while Wi-Fi is more adept at handling best-effort data traffic. Both are equally important to enterprises and service providers. Both will continue to converge as complementary technologies, according to Ruckus.
Ruckus has also been an advocate of LTE + Wi-Fi Link Aggregation (LWA.) With LWA, the LTE data traffic is split between a tunneled Wi-Fi connection and natively over LTE. Effectively, a Wi-Fi access point extends the LTE network so that the LTE data traffic looks just like any other Wi-Fi traffic. It's an ingenious solution and one that appeals tremendously to cable operators who are searching for ways to expand their mobility offerings through a combination of LTE and carrier Wi-Fi. For enterprises, building owners and large venue operators who are concerned about the potential for unlicensed LTE eating up spectrum already allocated to their own Wi-Fi networks, LWA splits the transmission of data traffic across both, so that the unlicensed spectrum isn't impacted.
A costly, but lucrative expansion
If ARRIS wants to expand into the areas of SDN, NFV, data centers and mobility, the entry won't come cheap. Brocade's IP Networking group has been valued at anywhere from $2.3 billion to $2.5 billion. ARRIS is still processing the $2.1 billion acquisition of Pace, which was completed in January 2016, and it spent $2.35 billion to acquire the Motorola Home division from Google Inc. back in 2013. With such large, transformative acquisitions having only recently been concluded, ARRIS might be hesitant to spend again, especially to enter markets in which it has little experience.
But since 2012, ARRIS has shown a consistent focus on scaling up and moving from the ranks of mid-tier technology suppliers to the top echelon of networking equipment companies. It's a path of consolidation that mirrors what's going on among its own customer base.
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