NDS had an eventful 2002. The conditional access (CA) vendor had numerous lawsuits to contend with from players such as Canal+ Technologies and EchoStar Communications. Despite the publicity, NDS remains one of the stronger players in the CA arena. In an exclusive interview with Interspace, NDS CEO Abe Peled talks about the changing face of the conditional access market, the pay TV markets it serves, and the eventful last 12 months.

Interspace: Smart card piracy has been rampant in Italy over the last three years. While NDS’ system has not been compromised, how difficult will it be to stay one step ahead of the pirates?

Peled: We always treat piracy with a three-pronged approach. You have to start with the best smart-card technology, which we do by having unique chips and the cards are custom designed for us. This makes it much harder to compromise.

Secondly, our systems are designed with electronic countermeasures in mind, which are more effective than some of our competitors because we use a different technical approach. It is an algorithm-based approach, rather than a key-based control or distribution. The whole point of conditional access (CA) is to distribute the control and to do it in a secure fashion. All of our competitors use a key-based approach, which means you simply encrypt the control with standard algorithms and you send the keys for it and distribute them in some fashion. Our technology is algorithm-based, which means we generate locally the control based on something called zero knowledge proofs with an algorithm inside the card. In case of a compromise, we can modify that algorithm over the air, which means that pirates have to study what we have done, resulting in a lull in the ability to view uninterrupted pay-TV. A lot of consumers are not even aware they are using pirate cards because dealers will sell them to them. That was certainly the case in Italy and Spain, where actual dealers sell pirate cards.

A third measure is that we have a very pro-active security team, which works in gathering intelligence about pirates. It brings them to authorities, disrupts their operations and I think the combination of the three have been successful. We also combine them with regular changes for the card, which includes new features and capabilities and new security technology.

Interspace: Could you tell us about any negotiations with MTG in Sweden about supplying CA to Viasat? MTG COO Anders Nilsson recently hinted to Interspace that they were considering a vendor change. How optimistic are you that you can get the account from MTG?

Peled: We are optimistic. We think that they have a big problem, which they have publicly acknowledged and we think we can help them. We don’t comment on deals before they are done. There isn’t a lot happening in Europe these days. Cable is pretty much in a dormant state. So, I think we would obviously be very pleased to get Viasat, which I think has the potential of being a good platform. When we pitch security, it is like the plumbing of a pay-TV operation. People always talk about it when it doesn’t work. NDS is also focusing on technology to make the platform an attractive one by offering a lot of capabilities such as an attractive EPG, applications, etc. I think we can help Viasat through a combination of the two in becoming a much more successful platform.

Interspace: What impact has the consolidation in Europe’s pay-TV markets had on vendors such as NDS? With fewer new business opportunities, where do you see the big growth opportunities for NDS in 2003?

Peled: Europe and Latin America are probably the most difficult regions of the world from a pay-TV point of view. Asia remains buoyant. We are also very focused on the U.S. market, which we think is a very big and important market for us to penetrate. I think we have been quite successful with Cablevision. We have announced a simulcrypt agreement with Motorola, which is an essential agreement to penetrate systems where there is some Motorola presence. We are now integrating with Scientific Atlanta for the Cablevision platform. At the Western Cable show, Sony demonstrated new technology called ‘Passages,’ which is an ability to co-exist with Scientific Atlanta or Motorola System without simulcrypt. The demonstration used NDS technology. It created some excitement at the show, which otherwise was rather subdued. Frankly, I think that the U.S. market has been in a phase where not a lot has been happening because of the AT&T/Comcast merger, Adelphia difficulties, etc. We hope that in 2003 we are going to start to see some additional wins there. We have publicly said we expect to get another major U.S. cable company contract in this fiscal year, which ends in 2003. We see the United States, Asia and opportunities in Australia where the ACCC [Australian Competition and Consumer Commission] has approved the consolidation of the platforms.

Interspace: In terms of doing a deal with a U.S. cable company before June 2003, are you anywhere close?

Peled: We have made considerable progress and we are on track. I believe we can do it. We have done a pilot. We have demonstrated a number of capabilities. We now have integration with a number of set top boxes that offer competitive pricing. I think the fact Cablevision works, and works well, and is really the most advanced platform at this point out there, is getting to be known. All of the signs and discussions we have with operators lead us to continue to be optimistic that we are on track to do such a deal.

Interspace: While I understand you cannot talk directly about the lawsuits your company is facing, there could be a credibility issue when trying to gain new business and customers. What reaction have you had from customers?

Peled: The encouraging thing is that the people we are dealing with actually understand the background of some of these really spurious lawsuits that are being filed for reasons that I think have more to do with commercial issues than with facts. They are seeing through them. We have won some additional business since then, and it hasn’t impeded our ability to win business. We have spent a fair amount of effort with our customers briefing them on that. Our customers understand the industry and the players.

Interspace: How do all the lawsuits impact on management’s ability to focus on the operational side of the business?

Peled: The biggest impact has been that it is quite expensive. In terms of management time, we have been very conscious of not getting dragged into too much and not losing our focus on the business. So far, we have been quite successful in being able to do that. But it requires considerable concentration and conviction. The proof of the pudding is in the eating. We have been able to get on with our business. We have won new business.

Interspace: With this in mind, do you think the market will be able to sustain numerous CA vendors going forward? Do you expect to see further consolidation in the marketplace?

Peled: I stand by my statement that there is not room for five CA providers. Some of them are losing customers and are becoming too small to have a critical mass to provide adequate support to a customer going forward. The problem is that some of the providers are associated with big players. For example, you have Viaccess hidden within France Telecom. It doesn’t seem that anyone is paying attention to a small business losing money. It is the same with Conax, which is owned by Telenor. Some of these companies will either be sold, or fade into the background as their customer base becomes increasingly narrow and unsustainable. The example that Viasat is looking to change CA suppliers is, I think, the first indication that some of the these pay-TV operators will not have their business held hostage through the fact that some of their suppliers are not capable of keeping up with them.

Interspace: Did you ever seriously consider the possibility of buying Canal+ Technologies? Are you actively searching for opportunities in this sector? How many players do you see there ultimately being in this sector?

Peled: Of course, we seriously considered it. I think that was, among other things, one of the reasons that led to the lawsuit. I think there is room for consolidation. It makes sense. But, it can’t be done at the wrong price. People need to have a realistic valuation expectation. I can give the example of Beta Digital, which almost three years ago Deutsche Telekom valued at $1 billion. I think they continue to have unrealistic value expectations. The longer they hold on to it, the lower the value becomes. By today’s standards, it probably has very little value, if any.

Kudelski is a strong player internationally and has some big customers. We are a big player internationally and have a very strong customer base. I expect there will be some French solution in France. Thomson has just bought Canal+ Technologies, so perhaps Viaccess will consolidate with them.

Interspace: In the lawsuit against Canal+, you were pretty scathing about their technology. With that being the case, why would you look to buy them?

Peled: We could have replaced the CA with our technology and they had a substantial customer base at that time. Don’t forget the deal in Italy was also going to go the other way with Telepiu buying Stream. Also, their middleware and efforts in MHP I thought were worthwhile. There were some complementary activities and some access to a large customer base, where there were large substantial synergies in terms of cost reduction that made sense. But all of that has to come at a reasonable price.

–Mark Holmes

(Contact: Margot Field, NDS, e:mail: MField@ndsuk.com)