RE:Comscope Home Services evolving. Part II (or part 1 as it goes - this was part of yesterday's news). The set top business is diminishing so the businesses have to try and morph into something new:
"CommScope isn't expected to lay out the full plan until it announces its Q1 or Q2 results, but Treadway did hint in February that CommScope businesses that are viewed as "more commoditized" will either be managed for cash or, where appropriate, be evaluated for alternative ownership structures "that can unlock greater shareholder value."
CommScope's ongoing evaluation has kicked up speculation that the result will determine the fate of a set-top business that continues to throw off cash but is shrinking in the shadow of a cord-cutting trend and a pivot to less expensive streaming devices that are carving into the traditional set-top box market.
And it's a scenario that CommScope has been grappling with ever since it acquired Arris, a top supplier of set-top boxes and cable network infrastructure, in the spring of 2019 for $7.4 billion. According to industry sources, CommScope tried to shop the CPE business after the Arris deal was done, but was unable to find any takers or at least any potential suitors that were willing to pay CommScope's price.
With the set-top market in decline and CPE no longer a good fit for its business, Cisco Systems saw the writing on the wall in 2015 when it sold its set-top and modem business to Technicolor.
Changing CPE market landscape
CommScope's set-top business is part of a Home Networks unit that saw sales drop 31%, to $571 million, in Q4 2020. CommScope laid off a part of its Home Networks unit roughly a year ago.
Word of a coming transaction also arrives amid a big change in the CPE market landscape. Notably, the margins on CPE products are getting squeezed as the software piece of that puzzle gets extracted by open source platforms such as the OpenWrt and the Reference Design Kit, a joint venture of Comcast, Liberty Global and Charter Communications. That's also starting to drive the CPE market toward ODMs that possess manufacturing capabilities, and further away from original equipment manufacturers (OEMs) such as CommScope that typically provide a management layer function between the service provider customer and the companies that actually manufacture the final products.
Arris used to have that manufacturing piece. Prior to being acquired by CommScope, Arris sold its set-top and modem manufacturing facility in Taiwan to Pegatron in February 2018.
Should CommScope, which counts Comcast as one of its largest customers, look to establish a CPE-focused joint venture with an ODM, it may be able to reduce operating costs and raise margins and effectively get a troublesome piece of its business off the books. In turn, an ODM partner could be in a position to add manufacturing volume, secure more share and influence of the cable CPE market and gain critical knowledge about CommScope's service-focused role with major operators."