This article originally appeared in the May 2012 issue of INTERNET TELEPHONY magazine.

The set-top box space used to be a very predictable one.

You had Motorola, and you had Scientific Atlanta. And, for the most part, that was it. These companies, and a few smaller names, sold boxes that gave consumers access to a variety of standard and premium broadcast and on-demand programming. And, for the most part, that was about as exciting as these things got.

Then along came IP and over-the-top services, and they turned the world of TV upside down. In the process, the set-top box space has seen its fair share of changes as well.

In terms of the boxes themselves, we’re seeing a lot more in the way of functionality.

“STBs are becoming gateways, combining the traditional STB function with a modem, Wi-Fi or fixed (MoCA, HPNA, HomePlug) access, more open conditional access software, as well as higher-performance processors to handle traditional broadcast/multicast, OTT, and transcoding  capabilities for delivery to tablets and mobile devices in the home,” says Jeff Heynen of Infonetics (News - Alert) Research.

A June 2011 story in The New York Times reports that there are 160 million set-top boxes in the United States, one for every two people, and it says that number is rising. Heynen of Infonetics says the two primary reasons for that are the transition from analog to digital, which requires some sort of set-top box, and digital video recorders.

“The STB market is not going to just disappear, even with all of the other threats,” Heynen says. “They provide a valuable connection to your video content.  They might not be required at every TV set in the home in the future, but they will be a necessary tool at your living room set.”

Still, over the next few years, sales of set-top boxes are expected to be flat to slightly down, Heynen adds.

“It isn't the horrible market people are making it out to be,” he says. “For example, we're expecting CY11 revenue to be around $13.6 billion worldwide, decreasing to $13 billion in CY15. North America will be about $6 billion in CY11 and $5 billion in CY15.”

Cisco (News - Alert), which bought Scientific Atlanta in 2006 for $6.9 billion, holds what Infonetics says is “a commanding lead in both revenue and units for IP STBs.” Motorola, meanwhile, leads in cable STB revenue, the research and consulting firm reports, which adds that Pace overtook Motorola just slightly in overall set-top box revenue – for cable, telco and satellite operators – in the second quarter of 2011. Skyworth Digital leads in cable STB unit shipments, according to Infonetics. ADB, Echostar, Humax and Technicolor are some of the other larger players across satellite and cable, Heynen tells INTERNET TELEPHONY. And, he adds, ARRIS and Samsung are also pushing their home devices strategies, which address the set-top box space.

Of course, the fate of Motorola’s set-top box assets remains to be seen given Google recently bought them and is reportedly already looking to sell them off. Meanwhile, rumors persist that Cisco wants to get out of the set-top box business, although the company says such reports are unfounded.

Google apparently has hired investment bank Qatalyst Partners LP to find a buyer for the Motorola set-top box assets that it got as part of the $12.5 billion purchase of Motorola Mobility. That deal was primarily driven by Google’s interest in Motorola patents related to wireless technology, so it doesn’t really come as no surprise that Google wants to get rid of the Motorola set-top box business. Heynen adds that the set-top market is not a core one for Google and thatit may not be a particularly attractive area to enter at this point given it’s a shrinking opportunity.“It is still a high-revenue business, but the margins keep getting lower as new entrants like Samsung and others continue to eat into share, particularly in emerging markets,” he says. “In North America, where Motorola has dominated for years, the plan for cable operators is to move away from proprietary conditional access systems at the headend and STB levels, which means Moto won't have a lock on that business. Instead, more competitors will enter the market, driving down already low margins.

“For Moto, the STB revenue used to be helpful in propping up the struggling wireless handset division,” Heynen adds. “But with Google, that doesn't matter.”

Shrinking margins in the set-top box business, Cisco’s elimination of 6,900 jobs at a Mexico-based set-top facility, and that fact that Cisco has dialed back its consumer-focused aspirations has also led some to question John Chambers’ commitment to this part of its business. The theory that Cisco is considering selling off its set-top box business recently resurfaced in a spate of articles. But a Feb. 20 blog by Cisco’s John Earnhart aims to dispel this thinking.  

“Every few months there seems to be a rumor or speculative comment about our commitment to our set-top box business,” he writes. “Let me be as clear as I can: we love set top boxes.”

Earnhart goes on to reiterate Chambers’ comment in Cisco’s second quarter fiscal year 2012 earning transcript, which says: “In terms of set-top boxes, we are very much committed to this marketplace. Our SP customers asked us to partner with them as they move from traditional set- top boxes to IP set-top boxes to the cloud, our Videoscape solution. Receptivity so far has been very, very good in terms of our strategy.”

Cisco did not respond to INTERNET TELEPHONY’s mid-March request for an interview on its set-top strategy. A few days later, however, Cisco announced plans to buy video software and content security outfit NDS (News - Alert) Group Ltd. for $5 billion. Cisco said the acquisition will help it “accelerate the delivery of Videoscape.”

Of course, Cisco is not the only one looking to overhaul completely the idea of the set-top box. Apple TV, and smaller outfits like Boxee and Roku, did that long ago (long ago in Internet time time, that is). Google more recently joined the fray with its Google TV offer. And now even Intel (News - Alert) is reportedly working to get in on the act.

Intel “has for several months been pitching media companies on a plan to create a ‘virtual cable operator’ that would offer U.S. TV channels nationwide over the Internet in a bundle similar to subscriptions sold by cable- and satellite-TV operators,” according to a report in March 13’s issue of The Wall Street Journal. The piece goes on to say that the launch of the service, which reportedly will rely on Intel-created set-top boxes, is expected by the end of this year.

That could further morph the definition and market share of the set-top box. But, for now, Apple TV leads the over-the-top set-top box market, according to a report put out in December by Strategy Analytics (News - Alert). Apple, which in early March upped the ante with its set-top box play by introducing a high-definition (1080p) version of Apple TV, now owns 32 percent of the external connected TV device market, according to the research firm.