Echostar calling. What they (and BBC Panorama) really think of NDS.

We have received a comment from Echostar’s PR company, Bob Gold and Associates that our blog “Has Cisco got its sums wrong?” contains some factual errors.

Linda Haugsted of Bob Gold & Associates has asked us to clarify a number of points. It appears that Ms Haugsted has taken issue with our comment that: “[NDS] recently won an $18m lawsuit against Echostar, clearing NDS of allegations of piracy”.

She has requested that we clarify the situation as follows:

  1. EchoStar did not pay damages (compensation for injury due to the wrongful conduct of another), as stated in the post-judgment press statements of NDS. EchoStar paid litigation costs, not damages, per a Memorandum Order by the Ninth Circuit Court, Aug. 4, 2010.
  2. NDS was not the ‘sole prevailing party’ in the litigation. On May 15, 2008, a U.S. District Court jury in California found for EchoStar on three of its six claims: two asserting violations of the California Penal Code and one asserting violations of the Federal Communications Act. Those jury findings were not impacted by subsequent appeals. Further, U.S. District Court Judge David Carter found in favor of EchoStar on its claim that NDS engaged in unfair business practices under California State law, awarded EchoStar damages, and entered a permanent injunction preventing NDS from engaging in certain defined acts of piracy against EchoStar going forward ­ both in the State of California as well as through the United States.  That ruling was not impacted by the subsequent appeals and the permanent injunction remains in place.
  3. In light of the jury and District Court Judge’s findings cited above, NDS was not ‘fully vindicated of all allegations of piracy.’ Each of the three statutes that the jury found NDS violated all involved unlawful acts of circumvention or piracy, and the Court’s ruling that NDS violated California’s Unfair Competition Law was based on the jury’s findings of liability for those 3 piracy claims.

We thank Ms Hausted for her clarification, which I guess goes to show that there is not much love lost between Echostar and NDS!

Since writing and posting the article, there has been a BBC Panorama programme broadcast that calls into question NDS’ approach to anti-piracy, and all but accuses the company of being complicit in the hacking of competitive systems and the downfall of UK pay-TV platform, ON Digital.

As one might expect, NDS have been quick to respond to the allegations, and NDS Executive Chairman Abe Peled has published an open letter to BBC Panorama that may be found on the web (http://www.broadbandtvnews.com/2012/03/29/nds-letter-to-bbc-panorama/). In addition, NDS’ lawyers Allen & Overy LLP have been in touch with the BBC  requesting ‘redress to our client for the false allegations’.

Whatever the outcome of NDS’ spat with the BBC, it must be considered that NDS could now be classified as ‘troubled’, and it’s reputation has been harmed by, if not its own actions, then certainly how those actions have been interpreted by several different broadcasters and broadcast platforms (e.g. BBC, Canal+, Echostar, ITV).

Cisco has announced its intention to buy NDS as it will provide access to a market (broadcasters and platform operators) in which Cisco is not strong.

One has to ask the question whether the acquisition is wise given the recent bad press for NDS. Mud sticks, and if Cisco were to continue with the acquisition, they may well find themselves wrapped up in acrimonious litigation with the very customers that are trying to attract.

It’s difficult to imagine that Cisco’s investors will be eager to be associated with such a troubled reputation, and we await developments with interest.

Has Cisco got its sums wrong?

Has Cisco got its sums wrong?

It was announced last week that Cisco Systems is to acquire pay TV software and conditional access provider NDS for a massive $5Bn.

Cisco said that the deal will complement and accelerate the delivery of its Videoscape video platform, and broaden Cisco’s opportunities in the service provider market, expanding its reach into emerging markets, such as China and India, where NDS has an established customer footprint.

It’s certainly true that NDS is something of a leviathan within the media industry. It employes 5200 people and last year has revenues just short of $1Bn. Of the estimated 430m digital pay-TV households worldwide, 115m of them, over 25%, have NDS content protection within their set top boxes.

However, despite its impressive size, market penetration and reputation (they recently won an $18m lawsuit against Echostar, clearing NDS of allegations of piracy), the company is barely profitable and is also carrying over $1Bn of debt.

The $5Bn dollar purchase price could be something of a windfall for 49% owner News Corporation. After all, with their recent problems over the phone hacking scandal, and now with UK media industry regulator OFCOM questioning whether News Corporation’s partial ownership of BSkyB meets a “fit and proper persons” test, a windfall of several billion dollars from the sale of NDS will be a welcome distraction for News Corp.

The question though is whether Cisco can extract value from the acquisition. Cisco’s annual revenue run rate is about $45m, and they are highly profitable, with net profitability at around 20%. No doubt they will be looking to get the NDS business unit to the same level of profitability. Their stockholders will expect nothing less.

However, as NDS has the TV encryption sector’s largest market share, sales growth in its traditional pay TV market will be difficult. And as 80% of its staff is in R&D, driving cost out of the business would mean slashing the development budget. This is not generally a good thing for a company where innovation is essential in order to protect its market leadership.

Cisco TV?

It’s clear that Cisco is trying to focus on television. Cisco has made multiple acquisitions as part of its strategy to build out its Videoscape platform, including last year’s purchase of ingest and transcoding specialist Inlet Technologies for $95m, and bnI Video for $99m.

However, Cisco has so far only been able to establish its Videoscape platform in a handful of customers in the telecoms and broadcast services sectors. And given that there were a number of layoffs in the Cisco team that supported these sectors last year, does the acquisition of NDS look increasingly like a desperate move by a company that is struggling to maintain its direction in TV?

NDS is hardly known for providing open, standardised platforms. In fact its real value to its traditional customer base is its secrecy and the closed nature of its offering. This does not sit well with the type of customers Cisco is trying to attract to Videoscape.

But is the television business large enough to warrant the level of investment that Cisco is clearly making?

Estimates vary, but the annual video infrastructure and equipment market is reported as between $13.2Bn (ACG Research) and $16Bn (Screen Digest) Worldwide. There is a further $9Bn of service revenue within the sector.

Findings from ACG Research’s Q4 2011 report into the Service Provider Video Infrastructure (SPVI) market indicates that the market reached $4 billion for the quarter, and that Cisco is the clear market leader in this sector with an approximately 60 per cent market share. Competitors include Alcatel Lucent and Motorola. So unless this market sector is set to grow exponentially, then it is difficult to see how Cisco can use the acquisition of NDS to boost its sales volumes.

There is certainly growth in Over The Top television services, but any market can only sustain a level of investment proportional to its size. With most advertising supported broadcasters being squeezed on profits, and pay TV providers being pushed to offer additional services to subscribers at no extra cost in order to reduce churn, then this can only be funded by content paid for by the consumer. It’s ‘brave’ to forecast tens of billions of dollars in additional pay per view revenues when we are still in the grip of a global recession.

Is Cisco a victim of its own success?

In Harvard professor Clayton M. Christensen’s book The Innovator’s Dilemma, he points out that when markets expect 20% annual growth, for a company the size of Cisco, that means $9Bn of extra sales. There are not many new market sectors that can provide that level of additional revenues.

Christensen states that outstanding companies can do everything right and still lose their market leadership. He goes on to say that focusing on “disruptive technology” is one way  to avoid this fate. Perhaps this is what Cisco had in mind when they started developing Videoscape. However, this was a major departure for a company that focused on selling, essentially, hardware. Certainly there is clever software within Cisco network products, but this is only exposed to those clever network engineers who are happy to type UNIX command line instructions. Videoscape was as much a concept as a technology. And Cisco has thus far failed to communicate this concept effectively.

Maybe by buying a company that has an established reputation with TV companies, and is present in 115m homes, Cisco believes that this will strengthen its Videoscape offering. But if Cisco is hoping to woo the likes of Netflix and Hulu, or be the backbone for services such as Streampix from Comcast, HBOgo, ESPN and Showtime, then it may have to do better than buying a company best known to media companies for satellite TV encryption services.

ⓒ Jeremy Bancroft, Media Asset Capital – March 2012