Cisco’s $5 billion acquisition of UK-based NDS came as some surprise, but the move was quite well received by analysts and financial markets even though it begs as many questions as answers over future strategy for both parties.
At first sight, it seems a lot to pay for one of the established conditional access and pay-TV middleware vendors with limited direct prospects for growth, but for Cisco it meets several key objectives. First, it bolsters its Videoscape multi-screen platform, which has failed, so far, to set the market alight or stand out from comparable offerings from rivals like Ericsson and Alcatel-Lucent. It has seemed rather intangible and failed to register spectacular customer wins, especially among the big Telcos that are a prime target.
Second, it finally scotches persistent rumors that Cisco was about to get out of set top boxes and sell the rump of its last really big acquisition related to pay TV, Scientific Atlanta, which it purchased for $6.9 billion in 2006. There would little point having set top box software coming in through one door and the hardware it would run on going out the other.
Third, it shows Cisco’s strong commitment to markets outside the US for pay TV and broadcast services, given that NDS has a big presence across Europe as well as both China and India. The NDS acquisition shores up Cisco’s position in these markets and also either gives it access to, or strengthens an existing presence within, some key NDS customers. These include BSkyB in the UK, Canal Plus in France and Liberty Global’s UPC present in several other key European countries including Germany and the Netherlands. In Asia key NDS customers include Chinese Central Television (CCTV), the dominant state broadcaster there, and in India quad play provider Bharti along with satellite operator Tata Sky. Its biggest customer in North America is DirecTV.
NDS is based in Staines near London in the UK, but has its research and development in Israel, and has major offices in both China and India, with most of its 5000 employees located in those four countries. This leads to a subsidiary reason for Cisco’s choice of NDS rather than a U.S.-based pay TV software company, which is to save federal tax. Cisco now has around 90 percent of its investment portfolio abroad, amounting to around $45 billion, in order to finance foreign acquisitions without having to pay tax to the US government.
NDS has an unusual history in that it was an Israeli start up acquired in 1992 by News Corp to protect its newspaper content, but grew to become a major player in pay TV Conditional Access with its Video Guard, and later also middleware, called Media Highway, that runs in the set top box to control service delivery and the EPG. News Corp cashed in by floating NDS during the dotcom boom, but then took it back into private ownership in 2009 with backing from the private equity firm Permira, before finally selling to Cisco. With the backing of both boards and no obvious regulatory or competition hurdles, despite the power of the combined company in pay TV, the deal looks set to go ahead.
Because of the NDS history as a News Corp company, Cisco now has the entire Murdoch pay TV empire in its customers base, but there is one aspect of its new subsidiary’s past that may cause some headaches. NDS had two separate lawsuits against it rumbling on through 2011, both involving alleged hacking of rivals’ CA smart cards. Vivendi, the French media conglomerate, accused NDS of stealing its smart card code and posting it on the Internet, enabling unauthorized free access to its broadcasts. Then, in an unrelated case, EchoStar accused NDS of intercepting one of its satellite television broadcasts illegally, and obtained a court injunction preventing it from doing so again without authorization.
NDS denies the accusations as groundless, but they have been costly both in legal fees and in damage to its reputation. When the whole of News Corp became embroiled in the unrelated telephone hacking scandal involving its News International newspaper subsidiary, the negative publicity associated with the NDS cases was amplified by association. But this has not put Cisco off, which regards these as minor difficulties that can be laid to rest now that NDS has been severed from News Corp.
There are, though, other challenges of the sort that occur when a company loses its status as an independent operator in a market. A number of NDS clients are rivals to Cisco’s set top box business, and may therefore reassess their strategy if they consider that they will now be treated less favorably or have poorer access to relevant expertise and technology. On the other hand, the set top box itself is really a commodity product only as good as the software that drives it. Being aware of that, pay TV operators tend to choose their infrastructure on the basis of the software and the CA, with the set top having to dovetail into that. Therefore, rival set top box vendors may have to continue working with NDS, whether they like it or not.
In any case, while on one hand its NDS acquisition means Cisco is staying in the set top market, on the other it suggests that it is no longer interested just in shifting low-volume hardware. The whole set top market is on the verge of a radical shake up and consolidation anyway in the face of the multiscreen revolution sweeping through the broadcast industry. Against this background, Cisco’s greatest interest in NDS is in turning its Videoscape into the world’s top multiscreen delivery platform. Even before the takeover, there were signs of Cisco’s determination on this front, as fortunes for Videoscape started to improve after a lackluster year in 2011.
Early in January 2012, Cisco announced enhancements extending Videoscape beyond being just an IP video distribution platform to support cloud based delivery to multiple clients, including as it happens legacy set top boxes from other vendors. This is achieved by Videoscape Voyager Virtual, which solves the problem of updating the EPG on such legacy boxes by delivering it effectively as another channel.
Other enhancements were the Cisco Media Processor and Transcode Manager for delivery to multiple devices with automatic execution of adaptive bit-rate technology, and Cisco Conductor as a unified control plane for delivering multiple video services. The announcements together enable Videoscape to deliver consistent look and feel across PC, MAC, iPad, iPhone and Android devices, as well as some legacy set tops.
At the same time, Cisco was at last able to announce some significant customer wins for Videoscape, including Rogers Communications of Canada, YES of Israel and Numéricable of France. Another bonus has been the effective withdrawal of one major competitor, Nokia Siemens, from the broadcast infrastructure market, to focus on its core mobile broadband business.
For Cisco, Videoscape is now much better placed than it was, but it still faces the challenge of defining clearly its marketing and development strategy for the platform in a fast moving arena that does not allow any vendor to settle down at the moment.