"Rupert Murdoch has affection, and even admiration, for NDS. He originally bought the company with the aim of providing security solutions for the TV broadcasters he owns. Suddenly it became the standard, and we found ourselves straying into foreign territory, even selling to his competitors, and giving him a tidy source of external revenue," says Raffi Kesten, COO of NDS Group plc (Nasdaq: NNDS; XETRA:ND2A), and general manager of NDS Israel, in an interview with "Globes." Murdoch's media group News Corp (NYSE: NWS; ASX: NCP) now holds 73% of NDS. It acquired the company in 1992, four years after NDS was jointly founded by a number of Israeli developers and the Weizmann Institute of Science.
How deeply is Murdoch involved in the day-to-day management of NDS? "Murdoch is very much involved and he cares about the business, but it is the NDS management which runs the company," says Kesten, adding that News Corp has a majority on the NDS board, and that the company's CFO, Alexander Gersh, is a Murdoch appointee. The CEO of NDS Group plc, which has been headquartered in the UK since 1992, is Abe Peled, who also serves as an adviser to News Corp.
NDS, as mentioned earlier, began as an in-house supplier of security solutions for News Corp's TV stations. It went on to become a dominant player in the highly competitive market for conditional pay TV access. "Being a successful provider with News Corp as a parent is ideal, but we won't get an easy run if we start getting sloppy in our business dealings with other companies in the group," stresses Kesten. "The group sets stringent requirements for prices, timeliness, and quality within the group as well. Rupert gives everyone a free run, and News Corp's companies can also choose their competitors."
One such sister company is DirecTV Group Inc.(NYSE: DTV) - NDS's largest customer, and also one of its oldest, which transmits satellite television broadcasts to 21 million households across the US and Latin America. Several weeks ago, DirecTV and NDS announced that they had signed a six-year contract, which will reportedly generate $150 million revenue a year for NDS. The announcement came with DirecTV about to leave the News Corp group, following its acquisition by Liberty Media Group. Kesten attaches great importance to the contract with the soon-to-be ex-sister company DirectTV. "It's a tremendous vote of confidence in us," he says. "It amounts to the long-term retention of a major customer."
NDS's customer list is no longer limited to its sister companies in the Murdoch company empire. A few weeks before the agreement with DirecTV, the company signed a large contract worth tens of millions of dollars, with Malaysian satellite television company Astro, the largest broadcaster in Malaysia, and one of the largest in East Asia. Astro offers 20 channels with content in English and various Asian languages, and has two million subscribers. Astro was previously a customer of Nagra, NDS's rival for conditional access and other services.
Expansions and upgrades
NDS's entry to Malaysia is not exceptional, considering the presence it now has across Asia. "We entered China back in 1999," says Kesten. "We're the largest foreign player there, but we've begun to face competition from local players. China is fairly new to digital television. There are still no satellite broadcasts there, and the various cable networks are, in effect, regional monopolies, so there's no competition and no impetus for innovation. In cases like these, when there's no threat of a new competitor bursting onto the scene, television companies may think, 'why opt for an expensive company when a cheaper Chinese system will be just as good?" Kesten adds. But at the same time, he predicts that eventually, the customers of its Chinese competitors' will switch to NDS itself, and that competition will gradually intensify as the competitors improve the quality of their services.
India is another center of activity for NDS in Asia. "In contrast to China, India has an English speaking middle class which is interested in exposure to entertainment and multimedia, so there's a substantial demand," explains Elad Manishviz, director of product marketing at NDS. "In India, television is the primary source of entertainment and education, since the computing infrastructures there are relatively limited." Manishviz points out that in contrast to China, new players in television are now entering India, and there is now more pressure to bring out new products, thereby providing more work for NDS. One of its largest customers is TataSky.
Developing economies are making an increasingly large contribution to NDS's revenue. The company recently signed two more contracts in China, its latest deals following the agreement with Astro in Malaysia, and earlier contracts with new customers in India, Turkey, Ukraine, and Romania. It has benefited from the economic growth in countries such as China and India, and from the rise in living standards and consumption that their populations in urban regions are enjoying in ever increasing numbers. NDS's potential for growth in developed countries, on the other hand, stems from continual product upgrades.
"The number of set-top boxes held by BSkyB subscribers in the 1990s reached three million and then it stopped growing," Kesten says, recalling the UK satellite television network, NDS's first customer. BSkyB, he says, had numerous misgivings at first about the switch to digital broadcasting. "It entailed a substantial cost, and the revenue 'delta' between analog and digital broadcasting is not endless. When they finally went digital - which typically means a better quality of content and viewing - the number of set-top boxes started growing again, and they have now have eight million. The potential for innovation has increased the number of set-boxes in homes. The UK now has around 1.3-1.4 boxes per home on average, and in the US it's already 2.1".
Technological innovation has a positive impact on NDS's top line, even when they convince us to replace a set-top box rather than add another one. For NDS this means, first and foremost, another new smart card - but that's not all. "Most of our revenue stills comes from conditional access and encryption, but we are also expanding in middleware - set-top box operating systems. Specifically, we've been seeing growth in operating systems for digital video recorders (DVRs)." The entry of DVRs, such as the Yes Max offered by satellite television carrier YES, has provided NDS with a new economic opportunity, and the company's working assumption is that eventually, almost every home will have a DVR, or as Kesten puts it, "It will be just another box in the house."
Figures published by NDS for its first fiscal quarter of 2008 (which ended on September 30, 2007), reveal that it has sold a total of 8.8 million DVR systems to date, 1.5 million of them in the first quarter alone. "Both high definition broadcasts and DVR systems have increased the number of set-top boxes," says Kesten. "Aside from this, average revenue per user has increased by more than 30%.
Another field which NDS entered, a decade ago, is interactive television. But it discovered that although this was an expanding field, broadcasters were not making that much revenue from it. "We've lowered our profile in interactive television. The threshold barriers are insufficient, and the infrastructure is simple," says Kesten. "We're now focusing on more specific areas within interactive television." One of them is the on-screen poker platform that NDS developed for BSkyB.
"One of the great advantages in our business is that we have 30-40 customers, rather than millions of end customers that we have no contact with," says Kesten. "NDS does not invest a lot in branding. I'm not Coca Cola or Cellcom which have millions of customers. On the other hand, it's important to us that our products are good and accurate, and that we serve broadcasters while remaining attentive to end customer needs."
Kesten notes that in certain instances, especially where the customer is new and inexperienced, NDS is the one which suggests ideas for new products and applications.
The future of the broadcasting world
Some of the new technologies pose a substantial challenge to NDS and its customers. After all, this is the Internet era, an era of pirate film downloads, and free content sharing sites such YouTube. As a supplier of services to the world's largest cable and satellite networks, NDS will have to closely follow the changes that the television world is now undergoing. It will also need to keep a close watch on those that have yet to come. "Our revenue today from broadcasts to computers and handsets is next to nothing," says Kesten. "Television is not going to disappear in the future; there is no substitute to watching television in your living room. But we are nevertheless investing in research and subsidiaries to ensure we are ready for future changes."
NDS's executive management has been giving a deal of thought to the future world of broadcasting outside of the television set. These are mediums that could pose a threat to the business of both the company and its customers, but they could also provide fertile ground for new opportunities. The company has set up a special research group headed by VP business development Joseph Deutsch to focus on what it calls "new media" - meaning anything other than television. "We invest very little in cellular. The screen is still small, and the batteries don't last long enough, so current cellular offering consists of content of a lesser quality that needs less protection," explains Kesten. "We are, however, investing more in computers."
NDS has also placed emphasis on convergence between the various mediums such as integration between computer, handset, and television. For instance, a person can choose a program from a television guide displayed on his handset and record it on his TV, and one day even view it on his laptop. The company also focuses on solutions for web-based content security. The technology it has developed is currently deployed on a new website of YES, which offers free online viewing of protected content. YES is a typical example, since quite a few of NDS's customers for content security solutions are the same broadcasting companies which also use the company's conditional access and encryption solutions for TV.
NDS has developed a new product for broadcasting companies now making the switch to Internet-based program transmission, which it hopes to launch at the end of 2008, or in 2009. It is a smart card installed on a disk-on-key, which will identify and secure subscribers, and enable them to gain full access to television content from any computer.
Kesten - CEO of the year
NDS's share gained 42% between August, when it published its results for fiscal 2007, and December, but has followed the market trend since the beginning of the current year, losing 12%. It ended Friday down 1% at $48.95, giving the company a market cap of $2.83 billion. The company will publish its financial report for its second fiscal quarter of 2008 on Tuesday, with the analyst consensus estimate predicting a net profit of $35.8 million, or $0.61 per share on $194.8 million revenue. The company's own guidance for the full year of 2008 predicts revenue of $800-820 million, 14% higher than in 2007, with operating profit coming in at $185-195 million. "The targets for next year are relatively aggressive as far as competitiveness goes, but we are confident that we'll reach them," Kesten told "Globes" when the company published its 2007 results.
Kesten recently won the Israel Center for Management 2007 award for General Manager (CEO) of the year, in the multinational category. Other winners were Check Point (Nasdaq: CHKP) founder, chairman, and CEO Gil Shwed, who was named the top CEO of a large Israeli company, and former Mercury Interactive founder Aryeh Feingold, who won a lifetime achievement award.
Published by Globes [online], Israel business news - www.globes.co.il - on January 27, 2008
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