Middleware is the software that allows set top boxes and cable operators to talk to each other. While I won’t pretend to understand the intricacies behind the technology, I do know that it typically involves coordinating DRM, electronic guide data and the software interface on a DVR, with the back end cable and IPTV systems that are required to bring television into your home. By bridging the gap between the home users and the cable operator, middleware providers allow cable and IPTV services to seemingless communicate with the signals that you receive to that hot new HDTV DVR that sits on top of your big screen TV.
While I’m not exactly sure why there have been so many underlying issues, middleware has turned out to be a pretty tricky business for most tech companies. Siemens has done the best job of providing reliable middleware and currently leads all middleware providers in the number of households served. Microsoft has made IPTV a big focus for their company and has done an excellent job of getting IPTV contracts, but several companies have already complained at their inability to deliver on their promises, due largely to middleware issues.
DirecTV (DTV) hired NDS to build and support their set top boxes, but they’ve had one set back after another and while their product is now in the wild, some still consider it to be in beta testing, even though it’s been publicly released.
With Motorola currently partnering with Microsoft for their IPTV solutions, and TV Guide for their cable offerings, it would be a natural fit for them to acquire a middleware solution, that they could then bundle directly into their hardware. By supplying both the software and the hardware to the telcos, it would make for a much more compelling sales pitch to the telecoms, who have been locked in a death match with the cable companies that are now attacking their core telephone customer base. As Light Reading points out, in their article on the rumor, “middleware alone isn’t a cash cow, but has a lot to do with owning the service and selling other equipment as part of the larger IPTV investment.”
When I think of middleware solutions the first two public companies that jump to my mind are TiVo (TIVO) and OpenTV (OPTV). While both could meet Motorola’s middleware needs, I don’t think that either would make for a likely acquisition by Motorola.
TiVo has set the gold standard for seemlessly integrating their software with cable and satellite video streams and they are currently in beta testing for a TiVo software download to Motorola boxes, but the company has been reluctant to sell out to other partners and they don’t have any experience building an IPTV solution for the phone companies. To top it all off, TiVo currently has three different poison pills in place, which would make a hostile takeover nearly impossible. The first prevents any company from buying more then 15% of TiVo in a hostile transaction, the second two are embedded in their contracts with Cox and Comcast which allow both cable partners to back out of their agreements, if TiVo changes hands.
OpenTV has been working on their own Motorola download solution and they recently struck a less then lucrative agreement to provide an OpenTV software download to Motorola Time Warner subscribers. While OpenTV would make a nice fit for Motorola, their capital structure would make them less then ideal as an acquisition canidate. Recently, the Kudelski group took a controlling stake in the company and while they could always flip the company to Motorola, the acquisition made more sense as an addition to their own middleware business then as a short term investment. Motorola could try a hostile takeover of OpenTV but it would be pointless because Kudelski owns preferred shares that gives them super voting powers over the company. The shares were originally issued to Liberty Media, in exchange for financing when the tech bubble burst, and it gives Kudelski a 74% voting stake and a 25% economic stake in the company despite their holding a minimal position in the common shares.
NDS Group could also sell out to Motorola, but with a current market cap of $2.75 billion and Rupert Murdoch’s interest in the company, this also seems like an unlikely target for Motorola to go after.
With several of the major public companies in this space being a less then perfect acquisition target, I think it’s far more likely that Motorola would seek to buyout a private company, if the middleware rumor turns out to be true. Light Reading lists the Espial Group, Orca Interactive and Minerva Networks as all being possible canidates.
The Espial Group currently has a relationship with Motorola and has direct experience in the IPTV space. They also have business relationships with Tandberg, Thomson, Broadcom and IBM to name a few. The company focuses on enabling VOD, EPG data caching, & interactive television functionality for an open system that is then skinable depending on the telco provider being served. The company started in 1997 and is based in Ontario Canada.
Orca Interactive also has a relationship with Motorola. They count Humax, C-Cor, Nagravision, and NDS Group all as business partners. Recently they partnered with Ruckus to help create a wifi solution for their customers. The company trades on the London stock exchange, but they’ve been losing money since going public and their stock has taken a nose dive as a result.
Minerva Networks is located in Santa Clara CA and while they have experience deploying IPTV solutions it hasn’t been without hiccups. According to Hancock Telecom, a small IPTV customer, the Minerva software has had problems with freezing up and “subtle incompatibilities between the middleware and set-tops.” Minerva has primarily been backed by venture capital firms, including Cypress Ventures and US Ventures. Because of the VC backing, Minerva would likely be more open to selling to Motorola, but it would need to be at the right price.
Whether or not Motorola’s middleware ambitions are merely industry chatter, or a more legitimate direction they are taking, in my mind, it seems like a logical step for the company to take. Microsoft has gotten a good head start on the market, but the more that Motorola ties themselves to Microsoft, the greater the disadvantage they are at when it comes to offering a complete and compelling solution to their IPTV partners.
With as much difficulty as Microsoft and other middleware providers have had in deploying an IPTV solution, Motorola could fill an important void in the market. If they can produce a compelling end to end product it would make them all that much more appealing for the telecoms that are so desperate to get a piece of the TV market.
While the companies mentioned would all make interesting acquisition canidates for Motorola, it is worth noting that they are not the only options for Motorola. Recently ABI Research listed the following middleware providers as the top ten middleware providers in this space:
While some of these companies would obviously be too large of a fish for Motorola to swallow, there are several very well run companies on and off of this list.
If Motorola moves forward with a middleware acquisition, it would be interesting to see if Cisco would follow suit or continue in their middleware agnotic approach to the market. It would also be interesting to see if a Motorola acquisition would lead to consolidation in a very crowed industry. Only time will tell how things unfold, but I sense that it’s a very crucial time in the middleware industry and with as many middleware providers fighting for the telcos attention, Motorola likely faces a sellers market when it comes to this technology.