Another Dumb Cisco Buy
Mar 15th 2012 11:51AM
Updated Mar 15th 2012 12:04PM
In case you haven't heard, going big into video is all the rage today. Intel (NAS: INTC) is looking to create an Internet television service, possibly with its own set-top box. Google flopped with Google TV, but is even looking to become a pay-TV operator itself thanks to its fiber project in Kansas City. Microsoft (NAS: MSFT) has made overtures to cable companies and deals for its Xbox 360 to serve as a set-top box. And Apple's (NAS: AAPL) readying its Asian supply chain to build a television, but the company's stuck on the hard-nosed content negotiations.
TV: The feel-good story of 2012
Is there room for one more in the pool? This morning, Cisco (NAS: CSCO) announced its intent to purchase NDS, a company that has software solutions in the pay-TV space. While NDS provides a host of services, Cisco's statement that NDS allows subscribers to "intuitively view, search and navigate digital content anytime, anywhere, and on any device," highlights which NDS feature really gets them excited: delivery technology for next-gen devices.
This is all part of Cisco's grander Videoscape pitch, in which it's attempting to "reinvent the television experience -- together." More broadly put, it's the tagline at the end of Cisco's minute-long Videoscape intro, which promises amazing next-generation features like the ability to grab shoes out of televisions. The future sure is neat!
The Apple factor
Therein lies the problem. This is like a flashback to 2006, when Cisco promoted that with AT&T (NYS: T) it was redefining video in mobile devices. While at the time that may have seemed feasible, a year later the iPhone would be introduced and we'd realize it was the software layer, not the service providers that created an environment in which mobile video was popular. AT&T didn't drive the growth of mobile video -- it just laid the pipes.
Similarly, digital television is teetering on an inflection point of its own, not too dissimilar from where the mobile industry sat in 2006. If a company like Apple manages to strike a deal in which cable companies begrudgingly cede the television's user interface to Apple or manages to strike a content deal with a group of powerful cable channels, the direction of next-generation video could be tilted away from service providers once again and into Apple's (or less likely, into another tech giant's) court. In this situation, an Apple TV could effectively consolidate many of the features of a set-top box, and integration with other devices like tablets could be run on Apple's terms.
Cisco's Videoscape vision: Trouble ahead
Simply put, the software that companies believe will enable next-generation video could dramatically change from what's available (or envisioned) today. Cisco's placing a big bet that it can win business from today's service providers, but my bet is that these service providers will lose control of the television interface over time.
This situation doesn't leave NDS valueless to Cisco; it still has a series of long-term contracts with pay-TV operators and provides a variety of solutions between the cable headend and your set-top box. However, the company becomes far less interesting to Cisco and its sweeping Videoscape dreams, ending up a costly distraction.
The hype over next-generation video is warranted
And I get the idea -- I really do get the interest in redefining how television is delivered. The tech world can't help but salivate at the ability to become a central player in the reshaping of a pay-TV industry that generates $150 billion per year. One of these tech giants is going to make a fortune.
However, I hate seeing Cisco chasing risky buys in an area that once again whips management's head in a new direction. This is precisely what got Cisco in trouble in the mid-decade; it took its focus off core networking technologies and tried pushing into new turf. Cisco already gets one-third of its revenue from service providers -- predominately from its bread-and-butter networking products -- without a need to buy a costly distraction like NDS. Cisco doesn't need this acquisition to find its own niche in the next generation of video technology.
John Chambers, put down the elephant gun. I know you've got a bunch of overseas cash burning a hole in your pocket, but this isn't the way to get rid of it.
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At the time this article was published Eric Bleeker owns shares of Cisco. The Motley Fool owns shares of Cisco Systems, Intel, Apple, Google, and Microsoft. Motley Fool newsletter services have recommended buying shares of Intel, Microsoft, Apple, and Google. Motley Fool newsletter services have also recommended creating bull call spread positions in Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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