The Television industry is drifting towards the internet. Traditional broadcasting is being replaced by a number of other means including digital TV, Internet Protocol television (IPTV) and mobile TV. The demand for high-definition TV channels creates a huge opportunity for companies to address the rapid change in customers' needs. The Swedish maker of telecommunication equipment, Ericsson (NASDAQ:ERIC), is acquiring Mediaroom business from Microsoft (NASDAQ:MSFT). In this article I am going to analyze the impact of the acquisition on Ericsson.
Microsoft's Mediaroom is a fully featured digital video platform for operators to deliver an IPTV-based Pay-TV subscription services including DVR, video on demand, and applications. These services are delivered to the consumers on a range of devices inside and outside the home, including wired and WiFi set top boxes, Xbox 360, PCs, tablets, Smartphones and other connected devices. The company is currently providing TV services to more than 11 million household consumers, totaling more than 22 million set top boxes, through more than 40 of the world's leading operators including AT&T (NYSE:T), Deutsche Telekom (OTCQX:DTEGF) and TELUS (NYSE:TU). These operators give their subscribers the freedom to watch television in a way they want. According to Microsoft Corporate Vice President, Tom Gibbsons, Mediaroom reported annual sales of around USD 350 million last year and the sales are expected to rise over USD 1 billion.
IPTV is a popular platform for internet television with very high growth. According to a Media Research Group, the number of global IPTV subscribers will grow 26.7 million in 2009 to 81 million in 2013, a compound annual growth rate of 32 percent. The global IPTV market, in term of revenues, will grow to USD 32 billion in 2013 from USD6.7 billion in 2009. The researchers further estimate that the market will grow to 105 million subscribers, with USD 45 billion in revenue, by the end of 2015. The research reports also cited that Europe will be the largest region in 2013 with around 35 million subscribers, or around 43 percent of the total global IPTV subscribers. Asia is expected to rank second with around 27 million subscribers in 2013 or 34 percent of the global subscribers.
The impact of acquisition
Ericsson provides communication solutions and services with the help of its four segments including Networks, Global Services, Support Solutions and Joint Venture ST-Ericsson. Ericsson has already achieved higher ground in its Networks and Global Services segment by dominating the global market. This can also be evident by the fact that the company has a No. 1 position in radio access (Networks) and telecom services (Global Services).
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As you can see in the table, Ericsson has a tremendous growth potential in its Support solutions segment, which is in early growth stage. The acquisition of Mediaroom will complement its portfolio of products and services and will align its existing customer base with 11 million Mediaroom's customer base. With this acquisition, Ericsson will become a leading player in innovative video distribution with a market share of more than 25 percent. The acquisition will help the company to achieve a leading position with more than 40 customers. In addition, the company will grow its workforce with skilled and talented people in the field of IPTV. As I mentioned earlier, global IPTV has a growth of 40.63 percent from 2013 to 2015, this figure also depicts the growth potential for Ericsson.
Another synergy for Ericsson is that Mediaroom platform is customizable and configurable. This means that subscribers can easily access customizable television and video services across TV, PC, Smartphones and tablets. This will allow Ericsson to fulfill their customers' needs at any place and at any time. The rapid increase in the usage of Smartphones, tablets and high-speed LTE networks will also help Ericsson to achieve higher growth.
Apart from higher growth prospects, Ericsson will also have the opportunity to generate revenues from rental and sales of movies and entertainment using its IPTV platform. The Advertising platform, using IPTV, will generate additional revenue opportunities that enable target delivery of advertising content to subscribers across multiple devices.
The IPTV industry is a high growth industry with a lot of potential. The change in customers' preference from cable TV to digital TV clearly indicates the increasing demand for internet television. The acquisition of Mediaroom is beneficial for Ericsson because it currently has some experience in this sector and it also has specialized equipment and resources to minimize its cost. In addition, this acquisition will open new doors of growth for Ericsson. On the basis of my analysis I think this stock is good to buy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.