With growth in the networking market slowing, Cisco is looking to video and other businesses to help push revenues.
Cisco Systems' decision to buy NDS Group for about $5 billion
illustrates the vendor's desire to become a major player in the video space,
not only to tap into what is expected to be a booming market but also to offset
the slowing revenues in the maturing networking business.
With the acquisition
, announced March 15 and expected to close in the second half of this
year, Cisco will bolster its Videoscape servicewhich enables consumers to find
and watch pay TV content, not only on their televisions but also PCs and mobile
devicesand become a dominant presence in the video delivery market.
part, NDS offers video software and security solutions that enable service
providers and media companies to bring video to a host of devices beyond traditional
televisions, in particular PCs, smartphones and tablets. NDS counts many major
service providers and media companiesincluding Cablevision and DirectTVas
customers, both in the United States and abroad.
The merger makes sense for Cisco, according to analysts.
Video has been one of the key pillars for Cisco, Zeus
Kerravala, principal analyst for ZK Research, told eWEEK
. This [deal] fits nicely with that.
In a report March 16, analysts with Jefferies & Co. said
NDS' reach into markets outside the United States makes the deal even more
While there are a number of benefits to this deal, we
believe the deal was really done to expand Cisco's worldwide footprint in video
delivery, the analysts wrote. Cisco is largely a North American player, and
NDS has a valuable footprint in fast-growing emerging markets. We think
acquiring NDS is the most efficient way for Cisco to penetrate these markets.
Video is one of Cisco's priorities. The company, which made
its name selling switches and routers into data centers, several years ago
began an aggressive push into more than two dozen new markets, with the belief
that the common thread in all these markets was the need for intelligent
However, Cisco suffered through a difficult 2010 that
included disappointing financial results and incursions into its dominant
networking market share, as rivals such as Hewlett-Packard, Juniper Networks
and Huawei began making gains by selling solid products at lower prices. Some
analysts questioned whether Cisco had lost its focus on networking as it
expanded into other spaces, giving its competitors a window of opportunity to
chip away at Cisco's market share.
President and CEO John Chambers last year moved to correct
problems, getting rid of some businessincluding most of its consumer
productsand focusing on five key markets, including core networking and video.
The argument for video is obvious, Chambers has said, pointing to Cisco studies
that say that within the next few years, video will account for 90 percent of
all Internet traffic, and that by 2015, there will be 3 billion connected
devices, from laptops to smartphones to tablets.
Video will be the new voice, Chambers said during a March
15 Webcast discussing the NDS deal. It will be pervasive, on any device ¦ any
Cisco already has been pushing in that direction. In 2006, it
bought set-top box maker Scientific-Atlanta for $6.9 billion, and in 2010
bought rival video collaboration vendor Tandberg for $3.3 billion. There also
have been smaller deals$99 million for video
delivery software maker BNI Video
and internal development.
And the video business has been good to Cisco. According to
fiscal 2012 second-quarter numbers released last month, Cisco saw revenues in
its service-provider video business jump 23 percent, to more than $1 billion.
In addition, revenues in its collaboration businesswhich also includes
videogrew 10 percent, also to more than $1 billion. According to market
research firm IDC, Cisco continues to grow its lead in the video collaboration
space, with 54.3 percent of the market in the fourth quarter 2011.
Cisco still makes most of its money through its networking
businessswitches generated $3.6 billion in sales during the last quarter, and
routing more than $2 billion. However, revenues for both grew only 8 percent,
and Cisco is looking to video and other markets to help grow overall revenues
more quickly, ZK Research's Kerravala said.
He also suggested that the NDS deal may give Cisco the needed
window to get rid of the set-top box business it inherited with
Scientific-Atlanta. Chambers had said NDS will enhance that part of Cisco's
business. However, Kerravala said the set-top box business made little sense
for Cisco, which pushes innovation that separates it from its competitors.
There's not really a lot of differentiation [in set-top boxes], he said.
Some analysts questioned the amount of money Cisco is putting
out for NDS. According to NDS executives, the private company made $252 million
in 2011 on $1 billion in revenue. However, Jefferies analysts said the $5
billion price seemed high.
While we think this is a good strategic move for Cisco, we
wonder if they are paying a little too much for it, they said. We calculate
that Cisco needs $500 million worth of synergies to break even, which seems
like quite a bit.
Brian Marshall, analyst with ISI Group, said in a March 15
note that NDS will bolster Cisco's video business, but that given the price,
job cuts may be one of the ways the networking giant makes it pay off.
While we view the price as rich for a company growing sales
¦ we believe it addresses a large opportunity in enabling service providers to
offer comprehensive digital media and integrated video offerings, Marshall