Why Cisco Paid $5 Billion for NDS

On Thursday, Cisco Systems announced its intention to pay about $5 billion, including assumption of debt, for the   NDS Group, a British software company that serves the cable television industry. Underlining its intentions, Cisco also published a blog post about the acquisition.

John T. Chambers, Cisco’s chief executive, said in an interview that “this aligns 1:1” with one of Cisco’s major businesses, video, and customer segments, large service providers. He said it also aids Cisco in providing more products and services in cloud computing, and in “moving Cisco to a more software-centric company.”

While Cisco is better known as a maker of network switches and routers that rely on custom-made semiconductors, this business has been under pressure from new competitors that sell machines built with commodity chips. The move further into software, which was always much of the value in Cisco’s boxes, is intended to make Cisco more competitive against those companies.

While Cisco is positioning NDS as a maker of “video software and content security solutions,” NDS describes itself on its Web site as a company that allows pay television companies to deliver all kinds of content to all kinds of devices. Cisco very likely plans to have NDS make more software for mobile devices, particularly tablets, as well as for business-friendly features, like distance learning and video conferencing. In either case, the aim is to help phone and cable companies store and deliver more of their content through huge data centers, where it can be fetched and shown more easily.

Without wanting to shake up its big service provider customers too much, Cisco is also signaling deep changes within the television industry, as consumers and businesses come to expect high-quality video entertainment of all kinds, any time, any place. “That TV experience is going to any device,” Mr. Chambers said. “The user interface on this is unbelievable.” He singled out viewing NDS-delivered video on Apple’s iPad.

This week, my colleague Nick Bilton wrote about the problems of traditional television makers and content companies and how they had to adapt to a world of mobility and apps. There was a big reader discussion, with many readers commenting that Apple might solve this problem with a decisive move into television. Perhaps it will – by making more iPads and causing companies like Cisco to enable more cloud-based television to those tablets.

Cisco plans to pick up the company’s 5,000 employees and make them part of Cisco’s overall video business. Mr. Chambers, who used to pride himself on small acquisitions and say he did not know how to do large ones, characterized the NDS deal as “medium-sized, less than 10 percent of our population.”

In dollar terms, it is Cisco’s third-largest acquisition ever. Cisco paid about $6.9 billion for Cerent, a maker of optical switches, at the height of the 1999 dot-com boom, not long before Cisco’s soaring stock price made it the highest-valued company in the United States. That deal is regarded as largely unsuccessful, as the technology could not find its anticipated market.

Cisco also paid $6.9 billion in 2005 for Scientific Atlanta, a maker of set-top boxes. That deal, which was intended to deepen Cisco’s commercial relations with video service providers, led to a large number of layoffs at Scientific Atlanta, but it probably succeeded in its aim.

In size and intention, the NDS deal is more like Cisco’s 2007 purchase of WebEx, a maker of videoconferencing software, for $3.2 billion, or its 2010 buy of Tandberg, which is also in the videoconferencing business.