Subsequent to a lengthy review of its Service Provider video business, Cisco is divesting its Service Provider Video Software Solutions (SPVSS) segment.
Private equity firm Permira will acquire Cisco’s video security, video experience, and video processing assets. While neither the name of the new entity, nor the value of transaction has been disclosed, it is known that Abraham Peled – NDS’ former CEO and Chairman – will reclaim his role as Chairman of the new company. Subject to regulatory approval, Cisco anticipates that the sale will complete by the end of October 2018, or within Q1 of Cisco’s 2019 financial year.
Financially, the sale of the SPVSS business comes as little surprise. The NDS assets that Cisco acquired from Permira and News Corp in mid-2012 – assets initially dubbed Videoscape by Cisco; subsequently re-branded the Infinite Video Platform and Virtualized Video Processing – have struggled to grow. The business unit has hovered around USD 1bn, and we believe that the unit’s frontend products – regrouping set-top software, unmanaged device clients, content security, and cloud DVR solutions – have, on average, lost 11 percent of their value year-on-year between 2015 and the present.
While SPVSS’ sale is economically well-grounded, the deal raises a number of broader questions whose answers are less clear. The questions are chiefly three – the extent to which infrastructure incumbents are inherently ill-suited to running video businesses; the extent to which the end-to-end video solutions business has a future in its own right; the extent to which structural changes in digital media distribution have created a new class of winners and losers in the video technology space.
It is hard not to place SPVSS’ sale in the context of Ericsson’s recent TV software divestiture. Cisco and Ericsson’s travails in the video space feel eerily similar; at least superficially, the firms' divestitures suggest that network infrastructure goliaths may intrinsically be pre-disposed to encountering difficulty in the video markets. Both firms noted video traffic’s prominence within the networks they were building; both firms invested heavily and repeatedly to amass formidable video technology assets; both firms have since relinquished, at a considerable loss, the brunt of their video holdings.
In truth, the fate of Cisco and Ericsson's video investments more likely reflects changes in the supply and consumption of digital media, and consequently, changes in technology procurement and demand.
It is no secret that pay TV revenues have ceased to grow in a number of regions, that subscription contraction is epidemic in North America, and that in many saturated national markets, subscription growth is increasingly attributable to the sale of lower-ARPU TV Lite packages. These structural changes, coupled with the commoditization of two of the video industry's bread-and-butter products – conditional access technology; set-top box middleware – render value creation much more difficult, and unambiguously reduce demand.
The fundamental question in this analysis is whether assembling an end-to-end video technology portfolio remains a valid strategy in a marketplace defined by commoditization, and saturation.
In growth markets such as Asia, Eastern Europe, and the Middle East, there likely exists sufficient greenfield-type demand to justify the marketing of infrastructure, backend software, and frontend software bundles. Huawei is now uniquely positioned to sell sweeping solution sets in a post-Cisco and post-Ericsson video technology world, and across these same growth territories.
In North America, Western Europe, and much of Latin America, service providers have largely lost appetite for massive technology swap-outs and new build. The zero-sum tussle for subscribers – coupled with lingering uncertainty about long-term, demography-driven media consumption changes – necessitates new technology business models, and a new class of products.
First and foremost, we believe that service providers in mature markets require software solutions that allow entirely new revenue streams to be derived from a fixed userbase. These solutions have many monikers – big data solutions; analytics solutions; predictive intelligence solutions – but all promise similar opportunities. Data-centric solutions allow service providers to build bona fide audience measurement businesses, and use their measurement to market more effectively, bundle more intelligently, advertise more sophisticatedly, and merchandise – vis-a-vis their programming partners – audience and consumption data. Data-centric solutions are not substitutes for a compelling UX, or a directly monetizable cloud DVR solution; they allow service providers to move beyond technologies that incrementally improve but exclusively concern the consumer-facing experience.Second, operators require technology procurement processes that are agile and responsive to market changes, and that avoid sunken capital expenditure. We believe that cloud-based, SaaS-monetized solutions – particularly where those solutions are based upon an open ecosystem of pre-integrated, multi-vendor technologies – hold considerable promise. We also believe that turning technology spend primarily into an operating expense frees up cash for arguably the most important investment type of all: content acquisition.