Ericsson AB (ERICB) is in talks to buy Microsoft Corp. (MSFT:US)’s IPTV business, which makes software used by phone companies such as AT&T Inc. (T:US) to deliver television over the Internet, people with knowledge of the matter said.
The deal could be announced in a few weeks, said one of the people, who asked not to be identified because the discussions are private. Annual sales at Microsoft’s IPTV business, called MediaRoom, have stayed near $350 million for the past three years, according to Raymond James & Associates, and the unit could fetch more than $1 billion, Cross Research says.
Ericsson, the largest maker of wireless networks, is seeking to cater to carriers that are competing with cable, satellite and Web-based providers. The move will also help Ericsson step up its emphasis on software and services amid accelerating competition in hardware. Microsoft, the biggest software maker, intends to focus on delivering TV through its Xbox game console, a person familiar with its plans said.
“This would make sense for Ericsson as it provides for a more complete offering,” said Alexander Peterc, an analyst at Exane BNP Paribas. “Still, the technology started to get hyped about 10 years ago and may have reached its peak already, so I don’t see this as a growth market.”
IPTV technology helps telecom carriers bundle voice, broadband and TV products that can compete with cable companies and Web-delivered services like Netflix, which are increasingly popular for broadband users, Peterc said.
$44 Billion Projection
More than 100 million people will get TV service via IPTV from phone companies this year, up from 46 million in 2010, with much of the growth in China and Japan, said Guillermo Hurtado, an analyst at Pyramid Research. The number of subscribers will increase 17 percent a year through 2017, while revenue will rise about 16 percent to $44 billion in the period.
MediaRoom may sell for 2.5 to 5 times sales, according to Richard Williams, an analyst at Cross Research in Livingston, New Jersey. That indicates a price of $875 million to $1.75 billion.
Yvonne Edenholm, a spokeswoman for Ericsson, declined to comment, as did Melissa Havel, a spokeswoman for Redmond, Washington-based Microsoft at Waggener Edstrom.
Microsoft became a leader in the market for Internet-TV software in the past decade as phone companies ramped up efforts to woo TV subscribers to grab share from cable companies, such as Comcast Corp. (CMCSA:US)
The sale of MediaRoom marks a strategic shift, said Colin Dixon, chief analyst at nScreenMedia, a digital media consultant.
“MediaRoom has gone from being a centerpiece of Microsoft’s TV strategy to a kind of sideshow,” Dixon said.
AT&T, the largest U.S. telephone company, uses Microsoft’s IPTV in U-Verse, which combines television with other communications services, such as Internet access. AT&T had 4.5 million U-Verse video subscribers at the end of 2012.
Microsoft has focused in recent years on delivering TV- related entertainment services via its Xbox console, striking distribution deals for Xbox Live with such partners as Viacom Inc. (VIAB:US) and Walt Disney Co.’s ESPN.
Ericsson shares were little changed at 81.40 kronor at the close in Stockholm, after rising as much as 0.9 percent. Microsoft added less than 1 percent to $28.37 at the New York close.
Separately, Ericsson said today it finished a planned reorganization in Sweden. It eliminated 1,399 positions, according to the statement, and the 1.5 billion kronor ($231 million) in restructuring costs will affect the company’s first- quarter results.
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