Pay TV software and content security vendor NDS is hitting back against renewed allegations over smart card hacking just as it is being acquired by Cisco from News Corp and European private equity firm Permira for $5 billion. All the alleged events occurred over a decade ago, leading Cisco to dismiss them as irrelevant for its takeover process. The other common factor was that the allegations all involved News Corp itself, the suggestions being that it abused its ownership of NDS in various ways to undermine the business of rival pay TV operators by encouraging piracy.
The most serious of the renewed allegations was made by the BBC in its current affairs documentary program Panorama, which investigates alleged corruption and scandal, and is itself no stranger to controversy. The program broadcast March 26 showed an interview with computer hacker Lee Gibling, who claimed he was paid up to £60,000 ($96,000) per year by NDS to run a TV piracy website called The House of Ill Compute (THOIC). The site allowed thousands of hackers to make their own pirated smartcards that contributed to the collapse of pay TV operator ITV Digital, which closed in May 2002. This was supposed to support the main allegation of the Panorama programme, which was that NDS had acted deliberately to undermine and bring down the conditional access system provided to ITV Digital by the then Canal Plus Technologies. At the time, the UK pay TV market was just getting going, and ITV Digital was the main rival to satellite operator BSkyB, owned partly by News Corp, with the country’s cable sector still fragmented and in disarray.
Although the hacking definitely took place, leading to significant piracy, NDS has always denied involvement and believes it is on strong ground against the renewed allegations, since the email shown by the BBC to support its claims appeared to have been manipulated. NDS chairman Abe Peled fired off an immediate letter to the BBC accusing Panorama of having deliberately manipulated an email containing the key to the ITV Digital service to make it look like it had been sent directly by NDS rather than having been forwarded as Peled claims it was.
The whole case appears to depend on the presence of the symbol “>” in the email, signifying whether or not it was forwarded. The copy of the email sent to the BBC’s Panorama producer Alistair Jackson, by Peled, does include “>” symbols, which would suggest it was forwarded by NDS as part of an investigation of its own, rather than originated by it in an attempt to generate damaging piracy against ITV Digital. Peled argued in his letter that the BBC had removed the “>” sign, and so “seriously misconstrued legitimate activities we undertake in the course of running an encryption business. You have used footage to falsely demonstrate your allegation that we sent certain emails externally to facilitate piracy, when, in fact, the email was sent internally as part of our anti-piracy work.”
Peled also argued that the BBC had taken emails totally out of context.
“This has helped paint a picture for your viewers that is incorrect, misleading and deeply damaging to my company and our sister company News Corporation,” he added in the letter.
Peled demanded an immediate retraction to the allegations, but this was not forthcoming. Instead, the BBC issued a counter statement standing by the Panorama program and insisting that the emails shown had not been manipulated, as NDS claims, and that nothing in the correspondence undermines the evidence it presented.
For that to be the case, NDS would have had to manipulate the emails itself to insert the “>” characters. It remains to be seen how this case develops, but, this long after the events, it may be impossible to settle the matter beyond all doubt, and it may come down to an arbitrary court judgment. At least one aspect of the case can be dismissed, which is the suggestion that the piracy that did occur was responsible for bringing ITV Digital down, for being as one executive described “the hole beneath the water line.” The facts do not support this, for ITV Digital had around one million legitimate subscribers and 100,000 using pirated smart cards at the time. Not all of these would have become paid customers anyway. More relevant is that ITV Digital suffered from quality issues, and an almost complete lack of premium content. The latter was partly due to aggressive, but commercially legitimate, competition from BSkyB.
Shortly after the Panorama program, the Australian Financial Review piled in with similar allegations that NDS had promoted pay TV piracy in Australia, adversely affecting local operators. The Review published 14,000 emails allegedly from a former head of security at NDS that, according to this business newspaper, appear to show NDS paid hackers to undermine the security of various operators. The events led to operators including Foxtel, Austar and Optus losing millions of dollars, the newspaper claimed.
The Australian arm of News Corp dismissed the report as being “full of factual inaccuracies, flawed references, fanciful conclusions and baseless accusations.” Rupert Murdoch himself weighed in by arguing that this was a case of News Corp enemies ganging up against it. It is certainly true that News Corp has plenty of enemies only too happy to see it dragged down, and now, no doubt, Cisco’s competitors are hoping that somehow this may all scupper its NDS takeover. But, having enemies by itself is not a defense against the allegations.
Far more relevant are the outcomes of other similar cases, including two slightly-related ones in the U.S. One concerns DirecTV, now the world’s largest satellite operator, dating back to its launch in 1997. Then, it used a smart card based on one designed by NDS for its parent, BSkyB, under a contract worth almost $100 million a year. This service suffered from significant piracy like a lot of pay TV services at that time, and subsequently NDS was accused of failing to make available to DirecTV a technology fix it had developed that would enable pirated smart cards to be killed off so as to block unauthorized access to the pay TV services. The allegations emerged at a time when News Corp was hoping to buy into DirecTV, with the suggestion that through its subsidiary NDS it was aiming to reduce the value of DirecTV by stimulating piracy.
NDS was sued twice by DirecTV. The lawsuits were eventually dropped, however, and News Corp finally gained control of DirecTV in early 2004. Now, after various subsequent shifts in ownership, DirecTV is a more conventional public company with multiple shareholders.
The other case involved EchoStar, which was a News Corp rival and competing for a stake in DirecTV. However, this case emerged independently of the DirecTV one, also dating back to the 1990s, with the accusation that NDS was compromising EchoStar’s encryption system, developed in conjunction with the Kudelski group and used by DISH Networks. At that time, DISH was then in the same stable as Echostar. This case rumbled on for over 10 years before being finally settled in January 2012, when a U.S. Supreme Court ruled favor of NDS. EchoStar was ordered to pay NDS $18.95 million in damages, legal costs and interest, which it did on March 9, 2012.
NDS will be citing this as evidence that the other allegations of piracy are also false and were made for commercial or political considerations. But, even if NDS is cleared of all the allegations, it may well conclude that having been a News Corp subsidiary for so long was a mixed blessing, providing a large readymade customer base but an ongoing conflict of interest.
NDS began as an independent Israeli start up before being acquired in 1992 by News Corp, initially to protect its newspaper content. It then became a major player in pay TV Conditional Access with its Video Guard, and later also middleware, called Media Highway, that runs in the set top box to control service delivery and the EPG. News Corp cashed in by floating NDS during the dotcom boom, but then took it back into private ownership in 2009 with backing from the private equity firm Permira, before the final sale to Cisco that looks set to go ahead despite the current hacking allegations. But, being owned by Cisco may bring different problems, since the two companies have very different cultures, and will take some time to integrate. There is also the question of how existing NDS customers that are Cisco rivals will react.