Issue 4, 01 April 2002

It seems highly ironic that, only days after News Corp president Peter Chernin had ranted in a public forum about the importance of thwarting piracy on the internet, the NDS technology unit of News Corp was itself accused of hacking the encryption code of its biggest rival for commercial gain.

Canal Plus Technologies' $1bn lawsuit against NDS alleges "extensive sabotage efforts" against the French company's conditional access system, used to protect content on satellite and cable systems from pirates. The suit, described as "outrageous and baseless" by NDS, underlines the growing importance of protecting subscription services from hackers as well as the growing rivalry amongst the technology firms that make these secure systems. On a conference call the day the suit was filed, an equities analyst asked if the alleged hacking of Canal's codes by NDS was done because they were easier to break than those of another encryption specialist, Swiss-based Kudelski. Canal Plus Technologies CEO Francois Carayol responded by pointing out that Canal won the contract to supply smart cards to ITV Digital against both Kudelski and NDS. "[Our win of] ITV Digital must have represented a threat to NDS," said Carayol.

Now, with ITV Digital struggling under huge financial pressure and low subscriber numbers, the fact that pirated ITV Digital smart cards are readily available does not help relations between the UK firm and its technology supplier. Canal Plus has pledged to replace all its smartcards in every system around the world by the end of 2002. This will involve a large cost. Significantly, Carayol indicated that the replacement card schedule was predicated on NDS being stopped from any further alleged hacking of the Canal Plus codes.

Carayol believes that NDS posted the French company's codes on the net for all to see as part of a plan to cripple its French rival. NDS claims that Canal approached it in late in 2001 about a merger and used the accusations of piracy as leverage. Canal says it had talked to NDS about a way to settle its claims out of court but was rebuffed.

The outcome will be decided in a US court, but the issue of piracy and hacking in general is much wider and threatens the way media companies have always been able to do business.

In early March, News Corp's Chernin told the FT New Media and Broadcasting conference that one million movie files are downloaded on the internet illegally every day. Chernin may call this stealing, but the idea that content on the internet should be free is proving a tough one to dislodge.

This has to do with the nature of the net. Born in a non-commercial environment and without a gatekeeper, it is unlike any other broadcast system.

Big media companies first ignored the net, and now are trying to tame it into something where they can collect subscription fees. But with some notable exceptions, such as the 625,000 subscribers to The Wall Street Journal online, the 424,000 who pay to use Sony Online's Everquest internet game, and the 100,000 people who subscribe to Playboy.com, it has been tough going. Big media company executives have sought help from lawmakers and have used public forums to plead with consumers not to "pirate" copyrighted content, most recently at the Grammy Awards. Easily said, not so easily done.

By contrast to the net, making money from pay-TV platforms looks like a walk in the park. There is a tradition of payment for these services and because set-top boxes are typically provided by the operator, the ability to control piracy has been more or less manageable. However, the pay-TV companies are finding that as set-top boxes become more of a consumer electronic device it is harder to track their subscribers unless the box or the digital TV set is connected to a fixed phone line.

A management book published several years ago called Who Moved My Cheese? used mice in a maze looking for cheese as a metaphor for a business world where the route to get to the cheese is always changing. The business of media distribution and payment is highly complex and is made more so by technologies like the internet which mean that tried and true business models don't readily apply. This is happening even as these same companies are scrambling to increase their revenues in a tough market. If media companies keep worrying about who moved the cheese rather than getting on with finding it, then, like the mice in the management book, they will starve.