NDS cracked-code allegation poses challenge to Cisco

U.K. broadcast technology vendor faces claims it leaked cracked codes for rival's pay-TV smartcard systems, posing "execution and reputational risk" to Cisco Systems which recently announced plans to buy NDS for US$4.8 billion.

U.K.-based broadcast technology vendor, NDS, is facing fresh allegations that it distributed cracked codes for its competitor's pay-TV smartcard systems. The latest development leaves networking giant, Cisco Systems, a tight situation since it revealed plans to buy NDS earlier this month.

This week's BBC Panorama broadcast accused NDS of leaking data that were used to create counterfeit smartcards, which could then be used to access pay TV programs offered by On Digital.

The latter was renamed ITV Digital but folded in 2002. Its former CTO Simon Dore told BBC that pirated access to its services was undoubtedly the cause of its downfall and "the killer blow for the business".

NDS was then owned by News Corp and had faced similar allegations by Echostar in 2010, but was exonerated in the lawsuit. Canal Plus also filed suit in 2002, accusing NDS of leaking cracked codes for its MediaGuard cards, but later dropped the case.

Cisco earlier this month announced plans to acquire NDS for 3 billion pounds (US$4.8 billion) in efforts to beef up its own Videoscape content-delivery platform, as well as expand its presence into new service provider market segments. "It will expand Cisco's reach into emerging markets where NDS has a strong footprint, with customers such as CCTV in China, and Bharty and TataSky in India," said Marthin De Beer, the company's video and collaboration chief.

Asked how the latest development would impact its NDS acquisition plans, a Singapore-based spokesperson for Cisco declined to provide further details. "These allegations relate to incidents that date back up to 10 years ago and predate Cisco's involvement in NDS.

"Additionally, we are still separate companies so it would be inappropriate for us to make any comments," he told ZDNet Asia.

In a ZDNet UK report, NDS denied any wrongdoing, dismissing the latest claims as "simply not true".

The company previously had links with the hacker site, The House of Ill Compute (Thoic), but these were only to gather intelligence on how hackers operated, NDS said, adding that it was unaware the site had distributed On Digital's codes. "[NDS] never used or sought to use the Thoic Web site for any illegal purpose... It is simply not true that NDS used the Thoic Web site to sabotage the commercial interest of On Digital-ITV Digital or indeed any rival."

Risk to Cisco reputation
While the latest allegations are not new and NDS has been cleared of similar claims, they pose a challenge for Cisco, warned Ovum's principal analyst Adrian Drury.

"While the standard response would be to suck NDS into the wider Cisco organization and bury the brand post-acquisition, this is exactly what Cisco must not do if it is to avoid destroying the US$4.8 billion shareholder value with this deal," Drury noted.

He said this buyout offers a globally leading pay-TV middleware and conditional-access business, providing scale to Videoscape. It also provides an "accelerated route" to address Cisco's troubled Scientific Atlanta hardware business--acquired in 2006 for US$6.9 billion but had underperformed--and pave the way for the networking vendor to move into the higher-margin video-platform software and services business.

The analyst applauded the decision to acquire NDS, noting that entertainment video will play a "massive role" in FTTx deployments. This will drive converging telecoms, satellite, and cable players to accordingly structure both their pay-TV and wholesale capacity strategies, he said. FTTx networks include FTTB (fiber-to-the-building) and FTTH (fiber-to-the-home).

Drury added that establishing a stronger position in the video market will enable Cisco to sell more infrastructure, software and services through its service provider channel.

But the NDS acquisition brings with it much risk in terms of execution, even before taking into consideration the ongoing hacking allegations, he said.

"The pay-TV market is changing," he explained. "As the threat from over-the-top video providers intensifies and there is more demand for on-demand multi-screen access from smartphone, tablet and PC, we are hearing that key pay-TV technology decision-makers are finding the embedded nature of NDS in their organizations restrictive and would consider looking for alternative suppliers."

The acquisition opens a door for rivals to look to displace NDS, he added. He said Ovum had asked Cisco about the acquisition and found its Videoscape team to be aware of the execution risk.

"Certainly, in the longer term, there are synergy opportunities in other areas of the Cisco business such as its CDN (content delivery network), home gateway, and video collaboration product lines, but these near-term factors will signal whether Cisco ever gets to exploit the strategic value of NDS," Drury said.