Cisco's Video Game-Changer
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.)
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