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Cisco Systems Monday night announced it has acquired Arroyo Video Solutions, a maker of video networking software, as it develops a major video strategy. Cisco is paying $92 million in cash for the privately held company, which was founded by Novell Networks founder Drew Meyer and former 3Com CTO Paul Sherer.

“I think they are getting a great company--Arroyo has great technology,” said IDC research manager Eve Griliches.

In particular, the video software company has excelled in creating video server software that can run on standard server hardware to provide video-on-demand and time-shifted video programming in a manner that is scaleable and has high service availability, said Kip Compton, senior director of IPTV/video development for Cisco Systems.

“Service providers are looking at how they are going to deploy content to set-tops, PCs and mobile phones--they are looking at doing separate server infrastructures for those things despite the fact they are delivering similar content and services,” Compton said. “We want to provide a converged content delivery system to handle multiple different formats and devices. We want to enter this market and help with today’s on-demand services not only to help with that but to offer a platform suited to go forward to everything on-demand to all devices. Arroyo is the best fit for that strategy because their solution is very software-centric. It has a very high-performance software architecture that runs on high-performance hardware. That makes it easy to add new devices and media types because it is software, not hardware.”

In addition, Griliches said, by creating a virtual service platform, Arroyo allows the video servers to be distributed in such a way that “you can use the storage capacity of servers in different areas, and in addition, have incredible redundancy and reliability because when one goes down, another takes over.”

The Arroyo software will be integrated into Cisco’s Next Generation Network platform, the company said, and both Meyer and Sherer will become part of Cisco’s service provider organization, headed by Mike Volpi.

The Arroyo technology will enable a nationwide distribution network to be built on a distributed basis in a way that not only limits the backhauling of traffic common to centralized video server strategies but also enables other efficiencies, Compton said.

“We have some internal technology already that we plan to integrate with this in the area of content networking,” he said. “It involves content routing, or really content request routing. When a device requests a piece of content, the system, on a nationwide or global scale, can ID the best cluster to deliver that content.”

Cisco expects to integrate the Arroyo software into other devices, Griliches said.

“That software will be transformable into other Cisco applications--routers, switches--all you have to have is sort of a general processing blade that goes into switch or router and can port this type of software over to it,” she said. On top of all of that, Cisco is getting considerable talent in the deal--talent that may be willing to stick around.

“Both Meyer and Sherer worked for large companies before, which could work in favor [of Cisco],” she said. “It’s not like they are entrepreneurs who haven’t worked in a corporate setting. This is a really great team.”

The deal is expected to close in the first quarter of 2007.

Cisco hasn’t specifically articulated a consumer video strategy, Griliches said, but more than likely the company has just such a strategy.

“They are being very smart by not talking real directly about what their consumer strategy is,” she sad. “I think they are doing that on purpose.”

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