Cisco Picks Up ExtendMedia

Cisco Systems Inc. (CSCO - Analyst Report) has announced its intention to acquire venture capital-funded ExtendMedia, which is a maker of content management system (CMS) software. The deal, which according to some could be worth as much as $80 million, is expected to provide Cisco the necessary technology for delivering video over IP.
 
ExtendMedia’s OpenCase suite (for managing, publishing and monetizing video across platforms) had a few big customers, such as AT&T Corp (T - Analyst Report) and Bell Canada - a subsidiary of BCE Inc (BCE - Analyst Report). However, further growth was limited by the non-availability of funds. Consequently, the buyout, which is currently expected to close in the first half of 2011 (subject to regulatory approval), comes at an opportune moment.
 
Video over IP is an extremely hot area, expected to grow very strongly over the next few years and scramble the competitive dynamics for service providers and cable companies, such as Comcast Corporation (CMCSA - Analyst Report), DIRECTV (DTV - Analyst Report) and DISH Network Corporation (DISH - Analyst Report). These companies generate revenue through TV channels provided to users through their digital set top boxes. However, once video comes through the IP network, there would be no need for set top boxes.
 
Also, considering the fact that consumers would only be required to pay for what they see, demand is likely to surge once the suitable technology is in place. Anticipating this trend, Comcast acquired the Platform, which is spearheading the company’s “Excalibur” project (basically an initiative to roll out necessary infrastructure to enable video streaming on any device or screen through IP networks). Comcast calls this its “TV everywhere” initiative.
 
On the other side of the table are companies like Google Inc. (GOOG - Analyst Report), Apple Inc. (AAPL - Analyst Report) and Netflix Inc. (NFLX - Analyst Report), which are responsible for much of the push to video over IP. Google is interested in keeping people connected for as long as possible, so it can pick up more advertising revenue, Apple is interested in increasing device sales through increased functionality and Netflix is interested in superior technology that could further improve its online video streaming business.
 
With Cisco picking up ExtendMedia, the company would soon have the necessary infrastructure to enable carrier-grade video streaming. It would also be the only networking company with the technology, since thePlatform is owned by Comcast. This would enable Cisco to cater to both sides of the table (the only one to be able to do so).
 
Moreover, taking a look at its customer profile, we believe Cisco would target large organizations and service providers that would use its services to increase customer satisfaction.
 
Cisco did not do as well as expected in the last quarter, as the company’s core routing and switching business faced a temporary slowdown. We therefore, have a Zacks rank of #3 (short term Hold recommendation) on the shares, reflecting current investor sentiment. Longer-term, we remain positive about the company’s leadership position, as well as management’s growth initiatives.

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