Cisco’s set-top box business is in a decline
A set-top box is a device that converts signals transmitted by IP, cable, satellite, and digital terrestrial (or DTT) to the output content that we see on TV. Cisco (CSCO) sells set-top boxes under the “service provider video” segment. However, this business continues to decline fast. As the chart below shows, Cisco’s service provider video revenue continues to decline over the last few quarters. This business declined by a year-over-year rate of 19% in fiscal 2Q15.
Although Cisco’s set-top box business is in a decline, the overall set-top box space is still showing positive growth. According to a report from Infonetics, set-top box revenues increased sequentially by 4% from calendar 1Q14 to 2Q14, reaching $4.8 billion. ARRIS Group (ARRS) is the leading player in the market, followed by Cisco. Pace, Technicolor, and Echostar are the other smaller players in this market.
Demand for hybrid set-top boxes should increase
According to a report from ABI Research, the future demand for the set-top box industry will come from mega mergers between cable and satellite providers—such as AT&T’s (T) acquisition of DirecTV (DTV). The demand will come from hybrid set-top boxes, which will offer features catering to cable and satellite providers’ needs. Last year, AT&T agreed to acquire DirecTV for a valuation of $67 billion. However, the Federal Communications Commission (the FCC) has put this transaction on hold for now.
The overall growth of the set-top box market should help Cisco stop the declines of its service provider video segment. To gain diversified exposure to Cisco, you can invest in the Technology SPDR (XLK). XLK invests 3.6% of its holdings in Cisco.