Cisco this week made its most strategic acquisition in years when it bought video software titan NDS for $5 billion. The acquisition is in keeping with Cisco's strategy to drive video into as many markets as it can in order to create demand for its routers and switches.
But the NDS deal is more than that. Cisco has made no bones about the fact that it is looking to deepen its software and services expertise in order to drive more revenue streams for the company and grow in areas aligned with its router and switch hardware focus - as opposed to trying to grow in areas non-aligned with its core competency.
NDS develops software designed to create pay TV video offerings for service providers that enable subscribers to view, search and navigate digital content on any device. Its products include set-top/DVR, program guide and digital-content software, and video headend systems. Customers include Cox, Cablevision and DirecTV, among many others.
Software is 80% of NDS' revenue and the remainder comes from integration services. Cisco officials were just as enthused about the talent it is acquiring in NDS' 5,000 employees as it is with the product line and customer base.
"This is one of the most strategic acquisitions we've done," said Cisco CEO John Chambers during a webcast overview of the deal. "This one might be the best talent acquisition we've done, the most strategic by a long way. "
NDS has 475 patents issued and another 500 pending, Cisco officials say.
That NDS plays well with satellite service providers and in emerging markets doesn't hurt Cisco either. Cisco officials acknowledged that its Videoscape cloud-based TV offering hasn't resonated with satellite TV providers. That should change with the inheritance of NDS' installed base.
"We're not a strong player on the video side with satellite service providers," said Pankaj Patel, senior vice president of Engineering and general manager of Cisco's Service Provider Business, who noted that none of the service providers present at Cisco's Videoscape announcement at CES early this year were satellite TV companies.
NDS also has a strong presence in emerging markets like the Asia Pacific, India and China. Of the 125 million homes worldwide where NDS is present, 20 million are in India and 15 million are in China. The penetration in India was achieved in three years, said NDS Executive Chairman Abe Peled.
And the impact on Cisco's set-top box business, which it acquired with 2005's $7 billion purchase of Scientific-Atlanta? Cloud-based TV/video entertainment like that targeted by Videoscape has led to speculation that the functionality of set-top boxes could be subsumed into the cloud, making them obsolete for the home. Indeed, Verizon and DirecTV seem to be moving away from set-top boxes altogether for their respective TV services.
And Cisco has had to recently fend off talk that it was shopping its Scientific-Atlanta assets around. Add to that the fact that NDS is "set-top agnostic," according to Cisco, and that would seem to de-value Cisco's Scientific-Atlanta products.
Not so, Cisco officials say. Chambers says the NDS deal is a "logical evolution" of moving TV into the cloud, and that the NDS software adds value on top of set-top boxes.
Chambers said he met with Cisco's Scientific-Atlanta team last week to brief them on the impending deal.
"This is something Scientific-Atlanta will understand and that I shared with them," he said.
Patel says NDS's set-top agnosticism will actually add value to the Scientific-Atlanta product line.
"You still need a set-top box as an access device and with rich middleware, an electronic programming guide" and other features, he says. "(NDS) really gives us the ability to combine the technologies, integrate them in a unique way. It increases the value of the set-top box."
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