Tuesday, August 1, 2017

Two long-term rivals in network policy control reach a merger agreement

by James E. Carroll

Broadband network policy control has often been a somewhat contentious issue in the U.S. and other western markets. Everyone agrees that good network management is essential and often that means prioritising valuable packets over others that are deemed to be lower value, not time dependent, or possibly malicious. On a private network, the good traffic can be sorted from the bad. Enterprise networks, for instance, are under no obligation to carry gaming traffic during business hours. Large academic networks, including those operated by universities and school districts, have legal responsibilities to filter the traffic and ensure that student have access to learning resources but not adult content. Broadband operators and ISPs have similar motivations for performing network management but must balance freedom of speech and other civil liberty interests.

The question of Net Neutrality has been debated for years. As a matter of public policy, the FCC under the Obama administration sought to enshrine several 'bright line' rules for net neutrality:

1.  No blocking. If a consumer requests access to a website or service, and the content is legal, an ISP is not permitted to block it.

2.  No throttling. ISPs should not intentionally slow down some content or speed up others based on the type of service or your ISP’s preferences.

3.  Increased transparency. The connection between consumers and ISPs - the so-called last mile - is not the only place some sites might get special treatment.

4.  No paid prioritisation.

These Open Internet Rules of 2015, which were adopted by 3-to-2 vote along party partisan lines, were based on the FCC's authority under Title II of the Communications Act of 1934. The rules allowed some leniency for reasonable network management, especially for mobile networks and unlicensed WiFi public services.

Under the Trump administration, the new FCC Chairman, Ajit Pai, has moved quickly to reverse these bright-line rules, giving broadband network operators and ISPs much more leeway to implement more robust network policy controls. There have been numerous voices raised in opposition to this Pai reversal, including various online attention-getting statements last week from major tech companies such as Amazon, Google, Facebook and Netflix, but so far, we have not seen many serious cases of legitimate network traffic being blocked or put into a slow lane by major ISPs. One of the most vocal supporters of Net Neutrality under the old rules has been Netflix, whose traffic has continued to surge. The bottom line, at least for now in the U.S. market, is that more network policy enforcement may come into play. On the global stage, many countries explicitly allow network operators to segment and prioritise traffic for a variety of reasons.

The Sandvine Procera deal

Numerous network equipment vendors, including all the big players, have long offered policy enforcement solutions for public network operators. Two of the leading specialists in this domain have been Sandvine and Procera Networks – rivals for over a decade. This week, the companies announced a merger agreement. Under the deal, PNI Canada Acquireco Corp. (PNI), an affiliate of Francisco Partners and Procera Networks, will acquire all the issued and outstanding common shares of Sandvine for C$4.40 per share in cash. The price per share implies an aggregate fully-diluted equity value for Sandvine of approximately C$562 million ($440 million). The cash purchase price represents a 40% premium to Sandvine's closing share price of C$3.15 on May 26, 2017 and a 61% premium to the cash-adjusted closing price on May 26, 2017. Simultaneously, a previous acquisition deal between Sandvine and Scalar Acquireco Corp. has been terminated and Sandvine has agreed to pay C$16.9 million to an affiliate of Scalar.

Sandvine, headquartered in Waterloo, Ontario, was founded in 2001 by a team that had worked together on a previous start-up called PixStream, a video networking start-up that Cisco acquired that same year for C$554 million. Sandvine's core expertise is in network policy management, including the control of spam, usage-based billing, quality of service, and P2P throttling over any type of access network, including cable/DOCSIS, DSL/FTTx, Satellite, 3G, LTE, WiFi, and fixed wireless. In 2006, Sandvine completed its IPO and shares are now traded on the Toronto Stock Exchange under the symbol SVC.  Sandvine said its solutions are deployed by more than 300 CSPs worldwide.

For its second quarter of 2017, Sandvine reported revenue of US$27.5 million, net income of $1.1 million, or $0.01 per diluted share, and EBITDA1 of $3.1 million, or 2c per diluted share. Overall revenue declined by 18% compared to a year earlier. Highlights included:

•   Revenue by access technology market: wireless 55%; fixed telco 26%; fixed cable 17%; other 2%.

•   Revenue by geography: EMEA 37%; NA 29%; APAC 17%; CALA 17%.

•   Revenue by sales channel: direct 55%; reseller 45%.

Procera Networks, based in Fremont, California, was founded in 2002 and includes significant operations in Sweden. Its PacketLogic platforms use deep packet inspection (DPI) to deliver analytics, traffic management, and enforcement use cases for broadband network operators, mobile operators and the academic institutions. In 2007, Procera completed an IPO and in 2013 bought Vineyard Networks, a Canadian DPI company, for C$28 million. In 2015, private funds managed by Francisco Partners Management, a technology-focused private equity firm, acquired Procera Networks in an all-cash transaction valued at approximately $240 million.This represented a premium of approximately 21% over the closing price of Procera's common stock on the previous trading day of April 21, 2015, and a premium of approximately 32% over the unaffected closing price from January 22, 2015, the last day prior to an article reporting the potential sale of the company. At the time its privatisation deal was announced, Procera was reporting quarterly revenue in the range of $19.5 to $20.5 million.

The new company

In announcing the deal, officials from both companies said the combined entity will retain the Sandvine name. It will serve over 400 communications service provider customers, with over 1 billion subscribers in more than 100 countries, as well as over 500 enterprise customers and more than 100 OEM and channel partners. It will be led by Procera's CEO Lyndon Cantor, and Procera CFO Richard Deggs. The mission is to be the 'premier provider of network intelligence solutions to communication service providers around the world'. Both companies have developed NFV-based implementations for network policy control, so we should expect to see further rollout of virtualised policy enforcement solutions.

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