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Cisco's Video Game-Changer

9:40 AM -- Cisco Systems Inc. (Nasdaq: CSCO) is trying to change the rules of the game.

Its $5 billion play for NDS Ltd. , announced Thursday, would accelerate the deployment of Videoscape and boost Cisco's expansion into international markets -- if Cisco can pull it off (expect some serious opposition to emerge). (See Cisco Bets $5B More on Video With NDS.)

After giving it some thought, here's a breakdown of the deal's implications and how it might alter the domestic and international pay-TV markets.

Bolstering the U.S. duopoly
With NDS entering the mix, Cisco's half of the U.S. cable video security (notice, I did not say set-top box) duopoly it shares with Motorola Mobility LLC would be significantly strengthened, particularly as MSOs advance their TV Everywhere strategies. The PowerKEY conditional access system Cisco got in the Scientific Atlanta Inc. deal gave Cisco a lock on a chunk of the U.S. cable video encryption market, but the addition of NDS would give it a software-based approach and digital rights management (DRM) components that extend beyond traditional QAM cable boxes and into IP-connected gateways, tablets, smartphones, PCs, TVs and other devices that service providers will support as they apply much more focus on delivering subscription video services to a variety of screen types. Without NDS, Cisco doesn’t have an answer for this new market dynamic.

On the flip side, NDS's downloadable security approach gave MSOs such as Cablevision Systems Corp. (NYSE: CVC) a wedge to split up the duopoly and create a potential new security option: It had been rumored that Time Warner Cable Inc. (NYSE: TWC) was among some larger operators that had given NDS a close look. But the threat of being unseated by NDS is gone if NDS is in Cisco's hands. If you're an MSO that's been trying to break Cisco's grip on conditional access, is this deal a good thing? (See Is the Set-Top Duopoly on Its Deathbed? )



The set-top box
As the key functions of the set-top get integrated into those devices, now would be a great time for Cisco to sell that low-margin component, despite the company's insistence that it's "committed" to the box business. I still think it will remain committed to supplying and designing boxes ... until it's not. And that will be when it finds a willing buyer. (See Why Cisco Wants Out of Set-Tops (Or Not).)

In the U.S, Samsung Corp. is doing some serious competitive damage by applying price pressure on everyone. Why not sell it to them? Samsung clearly wants that business and can live with the margins. And it's good at consumer electronics. Cisco, despite many valiant attempts, simply is not.

Perhaps Cisco will take a cue from NDS -- which has done just fine integrating its software onto boxes from more than 50 manufacturers without owning the hardware. The business is changing. So change.

The Motorola situation
The deal should give Google (Nasdaq: GOOG) further cause to sell Motorola Mobility LLC 's cable business, and not just the set-top box part of it. Google probably won't put the kind of focus on that business that will be required to be successful long-term. MSOs should be hoping that Google sells it to someone that won't let Cisco and NDS run away with the market and hide. (See Why Google Will Dump Moto's Cable Biz.)

The UI
Cisco designed its own user interface for Videoscape, but the interactive program guide has never been Cisco's strong suit. NDS has Snowflake, an increasingly popular cloud-based interface that extends a common feel across set-tops, tablets and smartphones -- the sort of thing operators want for their TV Everywhere offerings. NDS is already making hay with it internationally, but Cisco, if it successfully integrated it into Videoscape, would be positioned to put pressure on products such as Rovi Corp. 's TotalGuide.

Expanding in the U.S. and beyond
The deal would give Cisco some important, new U.S. accounts, such as DirecTV Group Inc. (NYSE: DTV), and shore up its position at Cablevision Systems Corp. (NYSE: CVC) and Cox Communications Inc. , where NDS has made serious inroads.

But NDS would also boost Cisco's international service provider business. For example, it would put Cisco in the catbird seat at Liberty Global Inc. (Nasdaq: LBTY), where NDS has been a key integration partner for the ambitious Horizon gateway project. Cisco would also find itself slotted in at Sky . And those are just two high-profile examples. On the other end, the deal would also extend Cisco a bridge to emerging markets such as China and India, where NDS already has a solid base of customers.

Those are just a few areas of impact that I see as I get my head around this deal. What are some other major implications? Chime in on the message board to share your thoughts.

— Jeff Baumgartner, Site Editor, Light Reading Cable

alongard 12/5/2012 | 5:39:12 PM
re: Cisco's Video Game-Changer

I like the insight from the writer, but why is it in almost every article there is some comment about STBs dissapearing.  That shows a fundamental lack of understanding of the cable equipment business.  STBs are absolutely necessary because MSOs cannot guarantee the kind of service level and A-V quality out of consumer devices.  MSOs expectations of service level far exceeds anything consumer devices can be expected to do because consumer devices are not designed with the complexities of a cable system integration.


Now to the articles real point, this acquisition of NDS by Cisco is a big threat to MSOs and equipment suppliers.  Cisco has been known to be a difficult supplier to manage.  The threat from MSOs to keep Cisco manageable is that MSOs would dump Cisco and PowerKey.  Now Cisco has killed one of the most viable alternatives. 


MSOs should consider this purchase of NDS an attack by Cisco designed to block out the other equipment suppliers to keep prices high.

Light-bulb 12/5/2012 | 5:39:11 PM
re: Cisco's Video Game-Changer I think you may be a bit biased in your thought. But regardless what you said flies in the face of reality.
The consumer has changed. It started back with the acceptance of mobile telephony solutions vs quality. The consumer cares more for being mobile and having access to content vs a locked in box at home. STBs serve a legacy market much like how Tellabs keeps hanging on to M13 DACS. There is still a market for each, but there is no denying that the world is changing.
Cisco sees the change, and realizes that while content is king, mobile access with a consistent experience is key to grab the emerging markets.
Focus on emerging markets here, Cisco is betting the take-up of video in India/China will dwarf the small build-outs in the saturated US market etc.
It's a great move, but it's no attack on legacy MSOs, it's a strategic play to position for experience everywhere.
Jeff Baumgartner 12/5/2012 | 5:39:10 PM
re: Cisco's Video Game-Changer

Terrific comments. And I totally agree that the set-top is not going the way of the Dodo anytime soon, but the total reliance on them is going to shrink  as more of those functions get handled in software in connected TVs, tablets, etc., or put into a gateway that can deliver services to other screens without the need for other STBs.


But this isn't about me stating something that came to me in a dream.  Here's what a Cisco exec said about a trend  that the company itself had identified:


"Set-tops are clearly moving to the point where they are either a piece of software that lives in another device, or they're virtualized totally in the cloud," Ken Morse, CTO of Cisco's Service Provider Technology Group said, during his keynote address.


 JB

GunnyGooGoo 12/5/2012 | 5:39:07 PM
re: Cisco's Video Game-Changer

I have seen lots of comments from Cable Execs and heard several direct comments from high level MSO product managers about STBs dissapearing.  I think it is more a dream than any approaching reality.  The MSOs key decision makers can't seem to get out of their own way with the way they design their product specs.  It is a cultural problem on top of a massive legacy technology problem on top of a massive capital investment problem. 


I do agree that STBs could possibly be diminished in favor of a Gateway that would allow other tasks to be offloaded onto more consumer friendly devices.  But the problem is MSOs constant push to drive margins to zero results in a product line only good enough to make the next minor  evolutionary step.  Meanwhile each small step becomes a monumental journey due to MSOs bloated over-reaching specifications.


So STBs or CPE will pretty much be here to stay so that they can serve each evolutionary step to provide less than desired performance.

GunnyGooGoo 12/5/2012 | 5:39:06 PM
re: Cisco's Video Game-Changer

The vision of mobile video is a geeks view shared by MSO insiders.  There is a market for mobile video, but it is a heck of a lot smaller than market for fixed service to the premises (at least in the US).  Voice is totally different than video.  The shift in cord cutting on voice is because it greatly improves peoples ability to communicate.  Mobile video greatly enhances what?  Peoples ability to vegetate? 


The reason consumers are cutting the cord on video is because it is ridiculously expensive and consumers can no longer justify the added entertainment value of "100HD channels". 


As for mobile  video in emerging markets I suppose it is a different animal.  I'll admint ignorance outside the USA.  Good luck accessing markets in China.  In emerging markets maybe mobile wins because most customers only end up with a single end point that they move from room to room in their homes.  Anyways NDS was a pretty darn good bet for multiple reasons, but it isn't necessarily a sure bet.


I'll be interested to see how it turns out.  Hard to bet against Cisco.

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