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Cable Operators

Arris Buys Paul Allen’s DVRs

9/26/2009 2:00 AM Eastern

Arris agreed to buy Paul Allen’s Digeo digital video recorder venture for about $20 million in cash, a move the cable-technology supplier expects will speed up its efforts to deliver video-based home gateways.

The deal was considered quite a bargain for Arris, given that Digeo’s revenue run rate is about $20 million per year (around $5 million per quarter, Arris executives told investors) and that Allen reportedly sank more than $110 million into Digeo.

Arris said that Digeo, along with the recently announced acquisition of encoding-systems vendor EG Technology (EGT), will give it a “multimedia-services delivery platform” that the company will use to develop next-generation Internet protocol-based consumer video products and services. The new products will let cable operator customers integrate and distribute new forms of personalized multimedia and Internet content throughout the home, according to Arris.

“The Digeo acquisition, along with our acquisition of EGT last month, has enhanced our ability to aggressively pursue end-to-end video delivery initiatives,” Arris chairman and CEO Bob Stanzione said in announcing the deal.

Analysts see the move as a long-term play, rather than a short-term win.

“We believe it makes sense for Arris to increase its strategic position in video networking,” Jefferies & Co. analyst George Notter wrote in a research note. “Nonetheless, the Digeo and EGT deals won’t significantly move the needle relative to Motorola, Cisco and the consumer-electronics companies which are well positioned for the emerging IP gateway space.”

Arris will acquire not only Digeo’s products but also its intellectual-property portfolio in technologies covering DVR, home networking, e-commerce and multimedia. Digeo has been granted 130 patents and has 58 pending, according to the companies.

Virtually all of Digeo’s revenue comes from cable-operator customers, including Charter Communications, which represents Allen’s biggest investment, as well as Time Warner Cable and Comcast. Around 300,000 Moxi DVRs to date have been deployed with seven operators.

Founded by Allen in 1999, Digeo originally aimed to distribute DVRs through cable operators, but has found limited success. The company staffed up to expand into retail, but in January 2008 Digeo laid off half its workforce of 160 and canceled plans for two other retail products to focus on the direct-to-consumer Moxi HD DVR.

Arris said it will continue to develop and market the current line of Digeo DVRs, including the Moxi Cable DVR and consumer HD DVR.

The transaction is expected to close early in October. With the acquisition, Arris will gain approximately 75 employees located in Kirkland, Wash. The addition of the Digeo engineering team will raise Arris’s research and development spending by approximately $3 million per quarter.

September