Cisco Acquires NDS, Beefs up its Video Portfolio

Five reasons the NDS acquisition was a smart move for Cisco.

On Thursday March 15th, Cisco announced its intent to acquire privately held, U.K.-based NDS for $5 billion in cash - the company’s largest acquisition since it paid $3.4 billion for Tandberg back in early 2010.

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The NDS Group makes software that is used to develop interactive applications for the secure delivery of TV content and other entertainment to TVs, set top boxes, mobile phones, tablets and other endpoints. The acquisition will complement and speed up the delivery of the company’s “Videoscape” platform that enables service providers, cable companies and other media companies to deliver advanced entertainment experiences.

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I think this was a great acquisition for Cisco for a number of reasons, including:

  • Giving Cisco a strong multiscreen strategy. The video industry is in the midst of transitioning from broadcast to multiscreen. With NDS, Cisco can offer Videoscape, a turnkey solution, to its service provider customers. The company has made a killing in the past catching market transitions at the right time and the company should be able to take advantage of this one with this acquisition.
  • Strengthening Cisco’s overall video strategy. At its last user conference, video was listed as one of the five main focus areas for the refocused Cisco. This certainly strengthens its overall video strategy. More video equals more bandwidth used, which correlates to more router sales, the strength of Cisco since its inception.
  • Improving the company’s software positioning. Cisco has long talked about being a software company, but the bulk of its sales still comes from hardware. It’s been well-documented that the hardware business has come under some pricing pressure and the likes of Huawei are expected to keep driving the downward pricing pressure. NDS software can be used to increase the functionality of the end-to-end Cisco story faster than with hardware alone. This should help Cisco keep other competitors at bay, at least for the near term.
  • It’s bought with overseas cash. The majority of Cisco cash is held outside the U.S., meaning that for Cisco to make a big U.S. acquisition, the company would have to pay a hefty tax bill to repatriate the cash. Cisco CEO John Chambers has been crystal clear in declaring that the company will not pay this and would rather invest outside the U.S., making the U.K.-headquartered NDS an ideal target for Cisco. Hopefully, the Obama administration will do the right thing and grant the repatriation holiday soon (with a number of caveats to ensure the money is used to invest in jobs, etc).
  • Adding a large recurring revenue stream to the company. A significant chunk of NDS revenue, about half, if what I read was correct, is recurring revenue based on five-year contracts. This creates a stable, predictable revenue stream with margins that are in line with current Cisco margins.

Increased usage of video is literally changing the way we work, live and play as we speak. Enabling its service provider customers to deliver highly customized content to any device securely needs to be near the top of Cisco’s priority list, and the NDS acquisition goes a long way to help Cisco accomplish this.

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