Pace CEO Explains Rationale Behind Philips Acquisition

[Satellite News – 3-06-08] Pace Micro Technology boosted its competitive position in the set-top box market with its December acquisition of the set-top box and connectivity solutions business of Royal Philips Electronics.
    The acquisition has boosted Pace’s position in the market, where it already is a key supplier to operators such as DirecTV and BSkyB. Pace CEO Neil Gaydon discussed the acquisition with Satellite News and how the deal will position Pace to better serve its satellite customer base.

Satellite News: How did the Philips deal come about?

Gaydon: When Philips approached us last summer about the idea of acquiring their set-top box and connectivity solutions business we were very interested in how their business could strengthen Pace’s position as a global leader in digital TV technology. When we looked closer at the range of customers and products each had, it was exciting to see that the two businesses were entirely complementary. There were no duplications whatsoever. Philips is strong in regions that we currently are not and vice versa. We only share two customers and supply different products to each. The fit made good industrial logic.
    Philips has a good position in the set-top box business and we believe we can help them improve their operating margins and product time to market through the operating model we have spent the past 18 months building at Pace. With improved business performance across the combined group, greater technological expertise, a wider customer base and tremendous industry knowledge, we believe we can build an extremely strong business that will reward customers and shareholders alike.

Satellite News: You mentioned that there was not much overlap in terms of customer bases. In which areas does this deal particularly strengthen Pace?

Gaydon: Philips is a market leader in mainland Europe with customers such as Canal+, Numericable, Telefonica and Sogecable. They are also strong in Latin America and the [United States]. This supports our position as market leaders in Scandinavia, Western Europe, Africa and Australasia. In America we work with over 40 cable customers, including Comcast, and with the leading satellite operator DirecTV, which Philips also supplies. Philips also has a number of IPTV customers and they have a strong retail arm where we will continue to use the Philips brand for three years.

Satellite News: Has Pace’s mix of satellite, cable, IPTV and terrestrial technologies changed as a result of this deal?

Gaydon: We will be able to add customers and technologies to our strong portfolio of cable and satellite customers as well as some leading IPTV operators. Philips also operates in the home gateway market, which is a new area for us. In addition we will be able to expand our retail business with the addition of the Philips retail products and distribution.

Satellite News: What are your plans to move Pace into the retail arena?

Gaydon: With the Pace brand we are expecting to move back into retail this year with an advanced hybrid high-definition product. I can’t give you any more specific information on it just now but it is a design that will deliver pay-as-you-go services for many European markets and will offer consumers a single box solution.

Satellite News: How do you see this deal strengthening your position in terms of your satellite customer base?

Gaydon: It gives us more satellite customers than we have today. For example, Philips supplies satellite products into Brazil and Mexico and in Europe to operators such as Canal+, who are not currently Pace customers.

Satellite News: What can we expect to hear from Pace in terms of new technologies and offers to satellite customers such as high-definition personal video recorders (PVR)?

Gaydon: Outside of the [United States], high definition is very much in its infancy. Although some initial launches in Europe are going well (BSkyB for example), the penetration of pay-TV digital subscribers for high definition in this region is tiny. In many territories, high definition is still yet to launch despite the fact that many millions of consumers in those countries already have high definition-ready flat panel TVs. I expect the majority of deals we make this year with satellite players will be for high-definition PVRs. I also think we will start to see MPEG-4 on standard definition emerge as a new trend for 2008 as operators look for ways to improve their broadcast efficiencies and deliver more channels to subscribers.

Satellite News: What trends do you see emerging in the set-top box business over the next two years?

Gaydon: This is still such a long way to go with PVRs and high definition. So the big next thing is still high-definition and PVRs. Although the technology has been around for a few years now – we demonstrated our first MPEG-4 high-definition PVR in 2005 – operators are only just starting to deploy units in the field.
    Looking further ahead, our [research and development teams are looking at a number of exciting technologies such as the networked home, wireless, and TV over broadband, but it is important that consumers first get a PVR and high definition. For instance, multiroom makes much more sense to consumers once they have PVRs in different rooms and want to be able to access the content of one PVR in another room but can’t. Unfortunately, most people do not know what a PVR even is right now. It has proven to be a notoriously difficult technology to sell to the average consumer and has largely relied on word of mouth. The exception is probably the [United States], where operators have virtually given PVRs away in order to secure long-term subscribers. But not many markets are as affluent as the [United States] with the [average revenues per user] to support that approach.

Satellite News: We are seeing a number of low-cost satellite pay-TV platforms emerge in markets such as Romania, Poland, India and Africa. Do you think markets will ultimately be able to sustain a number of different DTH players?

Gaydon: If history is anything to go by, these markets will eventually end up with one or two leading operators. Consolidation tends to come about as a result of getting the right economies of scale, being able to secure the content rights and getting the amount of [average revenue per user] needed to support the system as well as a large subscriber base. As we have seen in the past, it can take a number of years to come to that conclusion.
   

Satellite News: Because of the ubiquitous nature of satellite, do you believe satellite players still have a strong competitive advantage over their pay-TV competition?

Gaydon: The most efficient way of delivering pay-TV services, if there isn’t an infrastructure already built for cable or IPTV, is certainly satellite. Satellite offers the broadest audience reach for an operator and it is easier to offer high-end services like high definition very quickly. It is also generally quicker to upgrade services than on a cable delivery network. However, satellite isn’t always the dominant platform. In the [United States], for instance, more people watch their TV via cable than satellite. The advantage satellite operators have is down to how quickly they can roll out services and whether they have the right mix of content on offer to subscribers.

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