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'Taking a Lot Longer'

Arris/Pace Seen Clearing Regulatory Hurdles Despite Delay

Arris' planned buy of Pace faced more opposition than anticipated but still is expected to get regulatory approval without major conditions, said industry watchers and Arris' CEO. That it faces any regulatory pushback is somewhat surprising given the numerous other set-top box market players, said ABI Research analyst Sam Rosen. He pointed to Cisco, Samsung, increasing participation by LG in the area and "a whole host of vendors" in Europe that could decide to enter the U.S. market.

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Arris said last month that regulatory review issues are likely pushing back the closing date on the $2.1 billion deal from Q4 to early 2016 (see 1510190008), with Justice Department concern about optical transmissions products being a particular hurdle. Neither Arris nor DOJ commented Friday. If Arris does have to sell off fiber-related assets, that isn't a significant revenue stream for the company, "but significant from technology," Rosen said.

The regulatory oversight is almost superfluous given the rapidly changing market, said cable consultant Steve Effros, who also works with and has a stake in Beyond Broadband Technology. Pointing to growing set-top box competition from the likes of Apple TV, Chromecast and Roku, "I'm not sure what more competition you need in the set-top box market," he said. "If we call set-top boxes just things that deal with cable TV, they may be a thing of the past." Whether that attitude carries over to regulators is tough to say, Effros said.

"We like to say the set-top box market has been ready to disappear for 10 years," Rosen said. Though there are reasons to eliminate set-tops, there has been no appreciable movement from it yet, and there's increased interest in having some form of box termination point in homes that would potentially integrate services from cable to smart home functions, Rosen said.

Regulatory approval "is taking a lot longer than we thought it would or that we hoped it would," Arris CEO Robert Stanzione said Wednesday in a conference call on the company's Q3. Both Arris and Pace shareholders approved the transaction last month. Much of the Justice Department questioning involves headend optics and optical nodes, said Stanzione: "They're asking many, many questions about that." He said the company "is still optimistic we're going to get a clean go ahead" from DOJ, and even if conditions are put on the deal "we would still be very, very enthused over doing this deal. So it's just a matter of time -- I think we'll be there soon, just not soon enough to suit me."

Stanzione said the increasing focus by AT&T -- which had been one of its larger customers -- on satellite delivery of video via DirecTV, "has definitely hurt our business because we were the primary provider of those video products into AT&T." But the Pace acquisition will give Arris entry into the satellite business, he said.