The satellite set-top box market is a very competitive arena dominated by players such as Thomson, Pace Micro Technology and Philips. But these players received a surprise in August when regulators approved BSkyB’s acquisition of Amstrad, a set-top box vendor based in the United Kingdom.

This acquisition means that BSkyB will play a closer role in the development of set-top boxes for its platform and could have long-term consequences for other companies that supply the devices to BSkyB.

“I think the whole industry was surprised — the city, the market and all of the suppliers,” Stuart Hall, Pace’s CFO said to      Satellite News. "Some customers are vertically integrated and some are not, but generally, due to how the products are advancing, the trend for many operators is to outsource or rely on third-party suppliers."

Andre Roy, U.K. Country Manager, Premises Systems, Thomson, said, "BSkyB and Amstrad, being publicly listed companies, did a very good job in respecting confidentiality in the early negotiations. So it did come as a surprise to us when this was announced. Does it make sense for BSkyB? It certainly strengthens their internal technical capabilities in an area that is central to their business and in an area where there is a fair amount of innovation,” he said.

Will Others Follow?

BSkyB has long been an innovator in the pay-TV arena, and the question is whether others operators may look to make a similar move and try to do more of their own product development.
“There are some examples where operators manage the end-to-end value chain in the pay-TV industry, but these are few and far between,” said John Blackett, director of strategy at the set-top box group of Philips. “One example is DishTV/Echostar, but most operators do not operate in that way, so it is unusual for an operator to integrate the set-top box development into their operations. Additionally, the increased investments required for more advanced set-top box developments that are seen now requires a certain scale. This is another reason why the in-house route will not be possible for all operators to achieve due to the economics of developing complex set-top box propositions.”
Hall believes the BSkyB-Amstrad deal will remain a unique industry arrangement, as Amstrad relied on BSkyB for the majority of its revenues, while other set-top box manufacturers are more diversified with customers located around the globe. “The market is pretty dynamic right now, particularly with the growth of [high definition] and analog switch off,” he said. “There are some very complicated solutions that we need to deliver. We believe that our focus and experience in set-top box technology and work with the major conditional access, middleware and silicon suppliers provides us with experience right across the board.”

Roy, however, believes more operators could follow BSkyB’s example “Fundamentally, anyone looking at this from the outside who knows the industry would have to say that there would be some change of the dynamics between BSkyB and its suppliers, given that BSkyB has become a supplier itself,” he said. “Fundamentally, based on the announcement by BSkyB, the Amstrad acquisition will allow them to supply themselves by Amstrad. So, yes, in that sense, we would be competing with BSkyB for Sky’s set-top box business. To what extent that competition is, that is one of the big open questions.”

Stan Schatt, vice president, broadband and wireless networks at ABI Research, believes BSkyB’s deal could allow the operator to adopt a tougher approach with other set-top box and technology vendors, although he does not see other operators following the same route. “I don’t see this as a major trend, although that’s not to preclude an operator from filling in a necessary piece of intellectual property that could give it a unique advantage,” he said. “One thing to keep in mind is that the company BSkyB bought relied on it for 75 percent of its sales. That means that it was in a precarious position should its major customer go away for any reason. On the other hand, BSkyB only bought 30 percent of its boxes from Amstrad. It sounds to me like BSkyB not only wanted to be more nimble, but it also thought it could save some real money and still absorb the 30 percent of sales the Amstrad division is likely to lose now that it is owned by a competitor to other operators. I think the threat of buying more internally rather than from companies such as Thomson will permit BSkyB to demand lower prices.”

While some companies could follow this route, the major set-top box manufacturers believe their ability to innovate and provide new technology and services will help keep them in business.
“We see pay-TV getting stronger. The need for sophisticated set-top boxes is going to increase and analog switch-off is also a strong driver,” Hall said. “It’s worth mentioning the HD flat panel itself — one is sold every 30 seconds in the U.K. There are going to be hundreds of millions of [high definition]-ready TVs in the market over the next few years and together with new concepts such as multiroom it is creating a good environment.”

Roy added, “We don’t see the standard set-top boxes disappearing. It has reached a point where it is very cost-effective. But we also see a strong cost reduction on those products and leaping to next-generation technology, which keeps the silicon suppliers quite happy. … Home networking will be key. Hybrid set-top boxes will also be a key, particularly IP and terrestrial, which forms a potent combination.