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Murdoch's Tech Offensive


The NDS Group (NNDS), a collection of former code-breakers, scientists, and even a few ex-spy chasers, could be one of those shadowy outfits that help Jack Bauer battle bad guys on Fox Broadcasting's hit show 24. But NDS is no creation of a conspiracy-obsessed Hollywood writer. It's what Rupert Murdoch, chairman of Fox parent News Corp., is betting on to help make him the most powerful player in the TV world.

In the media industry's version of the arms race, no one is better equipped. News Corp. (NWS) owns 76% of the onetime Israeli company that comes up with tech wizardry like "smart codes," which are programmed with complex algorithms that keep TV beamed from Murdoch's global fleet of satellites from getting into the hands of pirates. Now NDS's brainiacs are cooking up a jam-packed set-top box for News Corp.'s U.S. satellite service, DirecTV (DTV). The boxes will let viewers assemble their own shows from snippets of different programs, change camera angles for sports events, even stream some Internet programs from the Web onto their TVs. "Rupert sees technology as a weapon," says NDS CEO Abe Peled, a former Israeli platoon commander and top IBM (IBM) scientist.

Satellite can't yet compete in data and phone, given its one-way service from the skies downward. But NDS is providing plenty of bells and whistles, including a service that boosted DirecTV subscriber counts by offering several games simultaneously on the screen during March Madness. Its "hybrid" DVR will use DSL to offer Internet on the TV screen. And in a lab in Costa Mesa, Calif., researchers are readying other services: a feature that lets viewers record programs by simply clicking on the network TV promo and another that streams content from News Corp.'s newly acquired IGN Internet game site. Further down the road is a wireless Net technology that will enable video-on-demand for mobile devices.

MURDOCH NEEDS TO MOVE even faster. Cable has its own digital skunk works: At Time Warner, a smallish unit in Westminster, Colo., code-named The Maestro Group, helped create a service that lets viewers restart shows that have already begun. Time Warner is also making available more hours of video-on-demand than DirecTV can. "NDS is Rupert's way of trying to do the best he can with a basically inferior product," says Peter Stern, Time Warner Cable's executive vice-president for product management.

Technology hasn't always been Murdoch's friend. His company took a $6 billion write-down and suffered the humiliation of taking control of Gemstar-TV Guide International just before its CEO, Henry Yuen, resigned and was later found liable for accounting irregularities. Gemstar paid $10 million to settle a civil suit related to those allegations in 2004.

And as smart as Murdoch's NDS investment looks today, the company hasn't always been a picnic. In the early 1990s, one of Murdoch's partners in the venture, Israeli-American businessman Michael Clinger, was accused by Murdoch of overcharging the company for smart cards made by an associate. While Clinger has denied the charges, News Corp. did win a $47 million civil judgment in 1998 related to the allegations. The company says it can't find Clinger. Later, French satellite company Canal+ Group (V) sued, alleging that NDS used a hacker to break the code on Canal+'s competing smart cards and publicized the code on the Internet. Canal+ later withdrew the suit as part of a business transaction, and Peled says NDS is no longer looking for Clinger: "Last we heard, he was in Cuba, and we don't think he has any money."

Since taking control of DirecTV in 2003, Murdoch's mission has been to lure subscribers from cable by slashing prices, giving away set-top boxes, and paying big for ads. Now comes the second wave: a technology offensive. During a recent stroll through NDS's Costa Mesa facility, the 75-year-old proudly reviewed his arsenal. "We expect NDS to build up new offerings and to improve DirecTV's market share," he said with a crocodile grin. Translation: The war for viewers is about to escalate.

Jon Fine is on vacation. His blog on media and advertising is at www.businessweek.com/innovate/FineOnMedia

By Ronald Grover


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