NDS Deal Highlights Cisco's Focus on Video

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 of NDS, announced March 15 and expected to close in the second half of this year, Cisco will bolster its Videoscape service€”which enables consumers to find and watch pay TV content, not only on their televisions but also PCs and mobile devices€”and become a dominant presence in the video delivery market.

For its 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 companies€”including Cablevision and DirectTV€”as customers, both in the United States and abroad.

The merger makes sense for Cisco, according to analysts.

€œVideo has been one of the key pillars for Cisco,€ Zeus Kerravala, principal analyst for ZK Research, told eWEEK. €œThis [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 attractive.

€œWhile 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. €œCisco 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 networking technology.

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 business€”including most of its consumer products€”and 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.

€œVideo will be the new voice,€ Chambers said during a March 15 Webcast discussing the NDS deal. €œIt will be pervasive, on any device €¦ any time.€

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 business€”which also includes video€”grew 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 business€”switches 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. €œThere'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.

€œWhile we think this is a good strategic move for Cisco, we wonder if they are paying a little too much for it,€ they said. €œWe calculate that Cisco needs $500 million worth of synergies to €œbreak 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.

€œWhile 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 wrote.