News broke this week of something we have been warning of for some time in the News Corp camp, that News Corp would reduce its ownership of NDS, so that it is free to take open decisions on the provision of technology for its core entertainment businesses, rather than hand them all to NDS.
That was the first thought that we had this week as it transpired that News Corp would sell control of the Israel and UK based NDS to private equity group Permira, and that between them they would take the company private, with News Corp retaining just 49% of the company, and Permira taking control.
It was also the first thing that an NDS spokesman this week refuted the moment we sat down to talk about the company’s new convergence strategy, insisting that all was well in its relationship with its current parent and that this was purely a ‘financial’ stratagem. But News Corp hardly needs the money.
Specifically Faultline has always thought that as pay TV services, cable, IPTV and even satellite, are increasingly moving towards triple play, then they need broadband lines in order to offer three services. In the UK News Corp’s BSkyB has acquired a broadband supplier in Easynet and also insists that its TV sets are permanently connected to the phone line in order to confirm that set tops are where customers say they are. So more and more all Pay TV has a return path, and that will eventually lead to simpler forms of conditional access.
A return path makes it easier for central systems to check if a clone of a particular set top exists on the network, so expensive card based CA systems may find themselves replaced by software only systems which may be slightly easier to copy, but which, with the help of permanently online devices, are perfectly safe. In which case satellite operations like BSkyB, Sky Italia, Sky Brazil and Star in China might all benefit one day from a different flavor of Conditional Access, which means that News Corp would get a benefit from not owning NDS.
You wouldn’t expect NDS head of marketing Nigel Smith to agree with a word of that logic and he doesn’t. His argument is that Conditional Access is two things, prevention of service theft, and content protection, and that new software only systems are poor at the latter.
‘And remember we don’t make smart cards, we only build systems that use them, we’re a software company really,’ he points out and also makes the point that NDS now has software only systems if people want them.
But it is the cost of replacing smart cards after a hack, or even providing them in the first place that creates an expense for NDS customers, even if that money is not going to NDS, and it is this that will force triple play operators everywhere to review their price curves and consider cheaper, downloadable protection systems.
Our argument then swayed back and forwards over the fact that no software systems remain unhacked for long, or that none of the new software only pretenders to the NDS throne have ever scaled to multiple millions, while the NDS systems support over 80 million active smart cards. But this is not about whether or not NDS can hold its own in an argument, this is about change, and the perception at both News Corp and Permira is that NDS will do better by not being a public company.
When News Corp has gone along with decisions of that nature it has usually held the whip hand, and private equity groups have discovered sudden downsides. Take the time when PanAmSat was given nice new contracts to provide DirecTV with new satellite services, and then the business was sold with the News Corp business sewn up, for over $4 billion
At the beginning of 2004 the News Corp owned Fox entertainment group handed over plum contracts for satellite delivery consolidating its entire suite of US and much of its international programming onto PanAmSat’s global fleet for the next 15 years. PanAmSat was part of the Hughes Group that News Corp bought into in order to take control of DirecTV.
Next thing we knew PanAmSat was sold to Kohlberg Kravis Roberts (KKR) at value of $4.3 billion. Later KKR sold some of the shares to Carlyle and Providence Equity Partners to offload the risk.
But it was mere weeks later that DirecTV agreed to add 1,500 HD channels across the US, with the addition of four new satellites with none of that business going to existing PanAmSat satellites, but instead were all new, and it was that early call in favor of HD, and the creation of the money to get the job done, by selling off assets, that proved a master stroke.
That’s not to say that PanAmSat did badly out of the deal, and in 2005 it was finally cleared to create the world’s biggest super satellite conglomerate by merging with Intelsat. But the private equity chain did get its fingers burned on price.
How could that happen here? Well what if the new management at DirecTV decided that it wasn’t happy with the NDS designed DVRs which were brought in to replace TiVo boxes? What if the HD DVR design that was offered by NDS was in receipt of a second legal action from TiVo over atent infringement once that the EchoStar/Dish legal action clears the US Supreme court? These are all potential banana skins for the new NDS owners to clear.
But none are greater than the overall direction that the industry is going in, and the need for NDS to re-invent itself, to operate in a triple and quadruple play world.
From the NDS point of view this may in fact be a good move. NDS has been seen to serve News Corp well in its satellite TV operations in the US (now sold to Liberty Media), Europe and the Far East, by providing mostly conditional access, but it also providing software in the set top, DVR designs and now like many other conditional access companies NDS needs to look further afield at neighboring businesses and broaden its offering, hoping to get more money from each TV home it reaches, by providing more function.
In the not too distant past Nagravision has acquired OpenTV, Verimatrix, Irdeto and Widevine have all attacked the triple screen market, some with acquisitions, others with home built products. The are all trying to change and broaden their scope.
So the new convergent roadmap that NDS has been showing off recently takes it into may new directions. ‘Internally we had a word with all our engineering groups and asked them what might be ready for deployment in the two to five years time frame,’ explained Smith. ‘Some ideas were evolutionary, some revolutionary,’ he said, ‘and the aim was to consider how we could help an operator if it was setting up from scratch and not weight down by past decisions.’
NDS has already come up with what it calls a unified head end, by which it doesn’t really mean a head end, it means a server side product that can serve the conditional access needs of a broadcaster which also wants to deliver content to a PC and a handset. It doesn’t mean head end in the sense of a video encoder device. Only three or four operators have installed this so far and none of these have yet added the mobile end of the platform, so the effect of this is still yet to come in future NDS figures.
The other given for NDS is its Master UI, also already commercially available, which it now uses to navigate services on a TV screen with a remote control. You might want the TV guide, the DVR control, features like viewing an attached device, and this is a set of common options, that can be learned in a few minutes, with simple up down menu commands and drop down 4 or 5 option sub-menus. It’s neat.
Finally another leg that the convergent strategy stands on, is a server side utility called xSpace, which repurposes web video content to show it through existing set tops. This means that services like MySpace, which News Corp owns (we didn’t see YouTube) can be integrated into the TV screen and made to look like TV. There can be integrated search facilities and a recommendation engine used in xSpace, and an operator can open up the set top to receive videos in all of the main PC video formats, be it an AVI file, or MPEG 4 or VC1 or Flash Video from Adobe all plucked from the internet. Effectively xSpace is a server in the operator’s network which acts as a proxy and converts video on the fly, without sending the rest of the web page.
One of the systems NDS has come up with is to offer xSpace web videos by harnessing a search from the Master UI interface. So if you are looking at a band on MTV that you have recorded on your DVR, the operator can set it up to find the same band on the internet and then rank web videos in a recommendation order. It might also Search on EPG data or on invisible metadata, whatever the operator finds works and makes the results available in a menu in Master UI.
Other things that have been brought together in this convergence home of the future are copying DVR held video to another device, either over a directly attached physical network or over wi-fi or even over a femtocell. The demonstration actually creates a fakes transaction that suggests that this might take a few seconds, but of course it might also take 30 minutes to an hour to download an hour of content from a set top or a DVR, and we suggested that the right media for this is UltraWide Band, getting the transfer down to 20 seconds or so, or the new wireless proximity transfer system from Sony called TransferJet, which uses radio and near field communication technology and transfers files at up to 375 Mbps when the devices are within 3 cm of each other.
‘Yes but we don’t take the decisions about what physical connectivity our partners use,’ reminded Smith, but it is our view that until NDS actually partners with device markers to enable this type of high speed copying way beyond Wi-Fi speeds, it just won’t be taken seriously. What it has actually done here is provide a template for extending the VideoGuard CA client to portable devices, but ignored the physical solution for the actual transfer. It would have been so much more impressive if it had use a Pulse~Link CWave chip in the demo.
The other addition was a simple USB slot on the DVR, which allows for copying a TV program, or anything which begins on the DVR to a USB flash memory dongle (so that can include HD content, or web content that has been converted by xSpace). Here NDS is on safer ground. The memory stick can be provided by the operator to work with NDS Videoguard preloaded onto the stick in a secure location, on a flash memory chip which has been designed by NDS. But when the consumer then plays this back on a PC, or a handset, or another set top, Videoguard is giving up the content to that device, without knowing anything about its architecture (because it doesn’t have Videoguard installed), so it could be a device who’s sole role in life is to copy and recode the analog output from the protected memory. That would then leave NDS open to the same criticisms that it levels to its software only rivals, which is that copy protection is just as important as denying service theft.
Again there are physical issues here to deal with before this becomes a reality. Flash memory writes at around 12 Mbps, but specially parallel versions of flash memory with multiple inbound paths have seen this speed up to around 100 Mbps. So an hour of compressed HD may take up as much as 5 GB, and to transfer this onto current off the shelf flash may take as much as 55 minutes, and onto specialist fast flash around 7 or 8 minutes. That would be fine if the systems that NDS had envisioned included controls that said record this program and then automatically make a copy on THIS attached device without asking me again, but at present it is set up as a simple file copy command and doesn’t even have the utility of a VHS recorder with a timer, though we’re sure that will come.
One concept in here that was genuinely original was the idea of buying a gift for someone of a piece of video, sending a gift notification to the recipient’s mobile handset, and then offering download over cellular, wi-fi or to their PC, or as a streamed 3G cellular stream. But once again all of the NDS brainpower has been applied to how to ensure that the gift is not stolen and put onto the internet, rather than actually solving the genuine use case of how to get it to the gift recipient.
In other words all these solutions are about a closed world of conditional access, and NDS is saying, ‘We can protect the digital home of the future, so the protection is in place and ready for when someone else can deliver the actual vision.’
But even that’s not good enough in our view because a lot of content is already under the control of Windows Media DRM, which will slowly convert to the newer PlayReady, or under OMA or Apple’s Fairplay. So when xSpace looks out at the internet, if it wants to make available any content that is protected over the internet, then it will need to have its own implementation of these standard, weak and very alien DRMs.
Right now this is anathema to the strict, mathematical, rigid security culture of NDS. Why would it offer support for weak DRM when it has such secure technology of its own? Well until it does, music from Nokia’s Music Store won’t be possible to copy onto a DVR for playing out of the TV speakers, and neither will Sony’s protected Flash memory held films. To do this it needs a licensed PlayReady client. Or it would have to do something radical like create a universal downloadable Java based open interoperable DRM client (a sort of DRM equivalent of the Adobe PDF reader).
This is the problem with going to your engineering base and asking ‘What can you do?’ instead of going to the consumer and the operators and asking ‘What would you like us to make possible,’ because that would mean asking for a dose of the openness of Sun or Google or Adobe and forcing it on a hyper security conscious culture.
Going back to the Permira deal, which values the company at around $3.6 billion (market capital has gone up on the stock market but is still slightly under this at $3.4 billion) driving down the New Corp stake from 72% ownership to 49% and from 96% of the voting rights, down to a minority. Permira will pay $1.5 billion in cash and offer a $200 million vendor note to News Corp in return.
The NDS board members which are not on the News Corp board must now decide if the transaction can be recommended, but given the News Corp voting rights, this is a done deal whatever the board thinks.
Perhaps the money can support News Corp’s European satellite TV buyouts including Premiere and others that are still being considered as it builds up its power after the enforced DirecTV sell off in the US.
NDS came out of a need for encryption at BSkyB in the early days of satellite TV in Europe, but it’s job now is more or less done and it can afford to stand on its own as a company. However if the loosening of ties with News Corp continues, NDS needs to work on a broader product line, and on less and less service business which is purely security based, and begin to become the software company that Smith professes it to be, with offerings for IPTV and Cable as much as its old satellite leanings.