Cisco’s NDS Acquisition Taps Video Demand To Boost Network Equipment Business

by Trefis Team
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Cisco (NASDAQ:CSCO) recently announced the completion of the $5 billion acquisition of NDS Group, merely a week after receiving final approval from the European antitrust regulators. [1] Acquiring a U.K.-based company gives Cisco the opportunity to put its huge overseas cash hoard to use without having to pay taxes in the U.S. Plus, it gets to keep NDS’s services-based business model that brings in steady, recession-proof revenues on a recurring basis with a strong presence in emerging markets. But, more importantly, it helps Cisco incorporate a proven video technology in its Videoscape platform and drive video consumption, in turn increasing demand for its routers and switches in the long run.

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The networking giant has of late tried to scale back its ambitions to diversify into 30 new businesses and instead focus on those areas that add value to its core routing and switching businesses. As a result, it has restructured its operations and continues to cut jobs in areas that are not its core focus, making the organization leaner and more efficient. We believe the company is going in the right direction since the move not only allows it to innovate faster, but also streamlines its businesses around its core networking products that contribute almost 35% to our estimated $23 fair value for Cisco, with cash contributing another 25%. Our price estimate is about 45% ahead of the current market price.

Burgeoning video demand

Video is one among the five pillars identified by Cisco as its key focus areas, going forward. The NDS acquisition is very important in this regard since it bolsters Cisco’s overall video strategy. With booming demand for video not only among enterprises but also consumers, Cisco is looking to enable service providers as well as media companies to securely deliver TV content to multiple devices through the cloud.

A growing number of users are increasingly accessing video on mobile devices such as smartphones and tablets, and the video industry is undergoing a transition from broadcast to multi-screen. Incorporating NDS’s technology into its cloud-based Videoscape service will therefore allow Cisco to efficiently deliver pay TV content not only to televisions, but also PCs and mobile devices, and address the changing trend.

Cisco’s belief in the growing demand for mobile video comes from its own research that predicts mobile video to “grow at a CAGR of 90 percent between 2011 and 2016, the highest growth rate of any mobile application category,” and account for about 70% of the total mobile data traffic by 2016. Mobile data, as a whole, is expected to grow a phenomenal 18-fold in the same time. [2]

Most of the mobile data growth, Cisco expects, will come from emerging markets of the Middle East, Africa and Asia-Pacific, with annual growth rates in excess of 80%. Hence it bodes well that NDS has a strong presence in the nascent growing markets of India and China. Out of 125 million homes worldwide that NDS serves, 20 million are in India and 15 million in China.

Fueling demand for routers as well as video software

By focusing on the primary growth driver of data, i.e. video, Cisco hopes to increase the sales of its routers and switches, which service providers will be required to install in large numbers in order to support the huge demand. In addition, it will help Cisco position itself better as a software provider and shift some of its revenues to a service-based model. For long, Cisco’s primary source of revenue has been its hardware sales but diversifying into software will help it provide an end-to-end solution, and decrease the pricing pressures that players such as Huawei and Juniper have been exerting, at least in the near term.

This means service providers that choose to buy Cisco’s routers can also use its Videoscape service, integrated with NDS software, to deliver device-agnostic video to consumers and be able to monetize it. Not only does this differentiate Cisco from the rest and drive video demand but also brings in stable revenues on a recurring basis due to the shift to a services-based business model. More than half of NDS’s revenues come from recurring sources, making its future growth less uncertain and more recession resilient. [3] Cisco has learnt the importance of having a steady source of income in this slow economy where service provider spending as well as enterprise spending on network infrastructure have declined heavily.

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Notes:
  1. Cisco Completes Acquisition of NDS, Cisco PR, July 31st, 2012 []
  2. Cisco Visual Networking Index: Global Mobile Data Traffic Forecast Update, 2011–2016, February 14th, 2012 []
  3. Cisco To Acquire NDS Group, WSJ, March 16th, 2012 []
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