Despite the lack of volume shipments in 2005 and 2006, the market for IP set-top boxes already has started consolidating, according to a recent study from The Diffusion Group.

Last week’s announcement from Motorola that it acquired Swedish vendor Kreatel and last year’s acquisition of Scientific Atlanta by Cisco Systems is an indication that “the 500-pound gorillas” have arrived in the market, Colin Dixon, senior analyst and director of TDG’s IPTV Practice wrote. For remaining vendors such as Amino, Thomson, Entone, and Humax, the arrival of both traditional large players into the IP side of the market adds credibility to their efforts. However, they also are going to command a significant market share.

“If you look at the classic set-top box market, there’s the two 500-pound gorillas, there’s Pace, there’s Thomson and there’s almost no one else,” Dixon said. “Typically in this sort of market [IP set-top boxes], there’s room for a couple gorillas, a couple of chimpanzees and no one else.”

Smaller vendors have dominated the early IP set-top market, but that will change. Dixon points to AT&T’s use of SA set-tops as evidence that the largest carriers likely will stick with the same incumbent vendors being used by cable operators.

“The best thing for [smaller players] to do would be to get bought,” Dixon said.

Who acquires those companies, though, is uncertain. Pace potentially could be an acquirer, Dixon said. More intriguing would be a consumer electronics vendor that could integrate the technology into other devices. As the U.S. transitions to digital terrestrial television (DTT), there will be a market for integrated boxes that blend off-air video with broadband content from Internet-based video providers.

“That market is a super market if you want to head to niche land,” Dixon said. “I would let Motorola and SA fight over the big telco customers and I would go produce a DTT/broadband box for the U.S. market.”