Cisco Says It’s Moving Away From Low-End Set-Top Business

Norway’s GET will use Videoscape to create a flexible TV platform that allows viewing of programming across devices and access to video-on-demand and DVR functions. Belgium’s Telenet will deploy Videoscape’s Snowflake user interface -- technology Cisco acquired in buying NDS for $5 billion last year -- to spread its Yelo TV service across products. Telenet has 4.4 million subscribers. Both deployments will start this year.

Cisco had gained Videoscape customers in Rogers Communications and Telus in Canada prior to buying NDS, but the purchase was seen as quickening the pace of developing the platform by two to three years. Cisco unveiled Videoscape Unity, an expanded version of the original platform, at CES in January built around a multiscreen cloud DVR concept that would allow users to restart programs and catch up on past shows from multiple devices. NDS has given Cisco a range of software options including smartcards, VideoGuard digital rights management (DRM), XTV DVR, MediaHighway middleware and Snowflake interface. Cisco expects to finish integrating NDS within three months, completing an acquisition that brought it $1 billion in annual revenue, 5,200 employees and an R&D center in Israel, De Beer said.

Cisco has been able to keep NDS major customers British Sky Broadcasting, DirecTV and Sky Italia, “growing those relationships and making them more strategic,” De Beer said. In doing so, Cisco is shifting NDS from a business that generated 80 percent to 90 percent of its sales from software customized for cable and satellite operators to one that relies on cloud-based software delivery, De Beer said. About 40 percent of NDS revenue will come from customized software “over time,” he said. Cisco won’t narrow NDS’s software assortment, but “productize it better,” creating a range of “offers that are pre-tested, pre-packaged solutions that customers can easily absorb and deploy,” De Beer said.

"What we are going to do increasingly is to deliver those capabilities” like DRM and DVR software “from the cloud to these pay-TV operators,” De Beer said. “We won’t go direct or over-the-top and we will enable pay-TV operators to offer a new range of services. It’s going to transform the entertainment experience and the more video we drive the better it is for our networking business."

Cisco is moving away from lower margin set-tops, those that fell “significantly below” the corporate average of around 60 percent. But it remains committed to the business as part of a broader video strategy, company executives have said. Cisco, which entered the set-top business in buying Scientific-Atlanta in 2006, will continue providing “traditional” standalone set-tops for emerging markets, but “support these opportunities as a step in the migration to a gateway/client and cloud-based solution,” said Joe Chow, general manager of Cisco’s connected devices business, in a company blog.

Cisco’s commitment to set-tops was questioned after CEO John Chambers said in a conference call in February that the company “passed on deals that were not profitable,” largely in Europe, that included set-tops and cable modems. Cisco’s fiscal Q2 set-top sales in Europe declined by $100 million, Chambers said. “If we can’t establish our value and integrate architecturally within that area then we are not going to bid,” Chambers said.

Cisco sold its set-top box plant in Juarez, Mexico, to Foxconn several years ago, but continues to source product from the company, De Beer said. The sale enabled Cisco to focus on software, annual revenue from which is expected to double to $12 billion in the next three to five years, he said. The software includes revenue from its router and switch business, De Beer said.

"We are very committed to the set-top business and it’s very important to the service providers that we can offer those solutions to them, but we will focus on the profitable parts of the business and not ride the commodity curve down,” De Beer said. “For us it’s a transition to high-value software from low-margin hardware."

De Beer was optimistic about 4K video’s ability to drive business for Cisco in the future, arguing that content is being produced in 4K, but “just not streamed and delivered that way. The experience will get better and that will make people watch more.” Cisco also is working to bringing enterprise products to the consumer market, including transcribing video and making it so “you can search based on anything that was said in a video,” De Beer said.

Cisco also is weighing eventually seeking to have its Videoscape platform built into smart TVs, De Beer said. “In a few years I can absolutely see that happening,” he said. Cisco also expects to complete the sale of its Linksys networking gear business to Belkin “very, very soon, if not in a matter of days,” De Beer said. Cisco will continue to work with Belkin at retail, he said. “Those in-home networking products will continue to be important as people consume entertainment in the home so we are absolutely going to continue to partner with them,” De Beer said.

Sirius XM’s beta test of its MySXM personal radio project is receiving “pretty good” feedback from those using it as part of the satellite radio operator’s desktop streaming service, Chief Financial Office David Frear said. The beta test, which began earlier this year, will give way to a full commercial launch “in the next few months” as it spreads across Apple iOS and Google smartphones and tablets, Frear said. Meanwhile, Sirius plans to continue selling standalone satellite radios at retail despite an increasing number of devices being pre-installed in new vehicles, Freer said. The satellite radios, which are built by Voxx International, have been a means for launching new chipsets and there are “still 200 million cars on the road that don’t have a satellite radio,” Frear said. “We'd like it to be a more robust channel than it is right now.” Sirius will launch its FM6 satellite late summer to 115 degrees west with a goal of replacing the original constellation of satellites by 2015, Frear said. Sirius’ FM5 was launched in 2010 to 85 degrees west. Sirius’ original plans to launch the Space Systems/Loral satellite on March 6, 2012 aboard a Proton rocket from the Baikonur Cosmodrome in Kazakhstan were scrapped amid technical concerns. The decision was made after SES’s SES-4 satellite, also built by Space Systems/Loral, initially didn’t unfurl power-generating solar panels on command. Sirius’ contract with Fox News expires in September, but Frear expressed hope an agreement could be reached before then. Fox News President Roger Ailes is “a very tough guy that values his brand and we have seen this play out before,” Frear said. Sirius “hopes we get something done with him before the contract is up, but we will only do something that makes sense for the company, Frear said. Sirius contracts with Major League Baseball and the National Hockey League, which carry $60 million and $10 million annual payments, end in 2015, Frear said. Sirius XM satellite radios were installed in 10 million vehicles last year, but with used cars increasingly adding subscribers for the satellite radio service, “I can see a day when we are acquiring more subscribers in the used car market” than with new vehicles, Frear said.