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					INSIDE SATELLITE TV
                                                                                                  Edited by
                                                                                                  Chris Forrester

                                                                                                  Volume 6, No 4
THE BUSINESS OF DTH BROADCASTING                                                                  February 23, 2009



NDS: “World now very uncertain”
Pay TV “working very hard to maintain subs”
BY CHRIS FORRESTER                                                “We announced the deal in July last year, and there
                                                               were more than a few shareholders and analysts com-
Dr Abe Peled, CEO at the now privately held NDS,               plaining that $60 a share was not good. The indepen-
speaking exclusively with Inside Satellite TV, said he was     dent directors examined everything and ended up rec-
enjoying his first flush of freedom from the daily pres-       ommending $63 a share, and when I travelled around
sures of the stock market. “But it won’t last,” he joked. “I   talking to people in August they all seemed to say this
am enjoying the freedom just at the moment, but maybe          was better, but they were not all that happy. Two weeks
we have swapped one set of challenges for another! It          later in September when everything fell of the cliff, well
has been a wonderful year, and pulling this deal off           then they were much happier! As September went on all
seems almost incredible now given the current climate. I       they wanted to know was whether the deal was to be
am not sure the deal could be done today. We were also         renegotiated downward, or would it still happen? They
able to distribute $100m to our employees. I am very
proud of that, and that Permira did not back out.”                                                                       "
                                                                                                    continued on page 5/6/7
# “World now very uncertain”
1 NDS:

    were all very nervous. Timing is everything. But even in
    December our share price was still $45 a share, because
    the market was worried that the deal wouldn’t happen.
    We needed 75% shareholder approval, and got better
    than 99%.” [see panel for details of the transaction]
        “Then the Bank of New York received the funds and
    held the cash. The lawyers spent the best part of a week
    trying to figure out how to protect the cash in the event of
    the bank being somehow affected by everything that was
    happening on Wall Street. The world is now a very uncer-
    tain place. I don’t ever recall anything like the situation we
    have today. Even the Dot-Com crash, bad as that was for
    some technology companies, didn’t affect everything the
    way it is today. Then the problem was highly localised.          Dr Abe Peled
    Now, people don’t even trust the banks. This hasn’t hap-
    pened since World War 2, at least in mainland Europe.            places like Romania today, badly affected by local deval-
    We as a generation have never experience this before.”           uations which affects operators who are having to pay for
        “People are saying that the pay-TV industry is more or       everything in dollars. They are charging their subs in
    less immunised from the collapse, but in my view noth-           local currencies, and this is difficult for them. It is much
    ing is immunised. People involved in well-established            the same as happened in Latin America in the late
    pay-TV businesses will tell you they are having to work          1990’s when again currencies fell through the floor. But
    much harder for their subscription income and to get the         the fundamentals, even in places like Russia, still show
    same results. The Sky or DirecTV results are stellar com-        good local demand but the projects need funding. Most
    pared with the general picture, but they say they’re hav-        of these businesses are in their early start-up stages
    ing to work harder to hold onto those revenues. It means         when they are on the way to break-even, but they still
    more marketing, and more concessions to customers.               need cash. What do you do when credit and funding
    Sky has just reduced the price of its Sky+ HD box to just        dries up?”
    £49. It is a bargain, and a wonderful deal.                          Last month, unexpectedly Gateway Broadcasting
        “The problems for us comes with less-developed               closed is African DTH operation. Peled said the news
    countries, where we might be sitting on a nice contract          came as a surprise, especially given that Kinnevik had
    but if they decide to alter their plans what do we then do       divested itself of its stake profitably [See Kinnevik Panel].
    with our contract? It means a further round of discus-               “Frankly, added Peled, “I don’t know what happened
    sions and possibly downward pressures. This is the situ-         with Gateway in Africa because they were doing well and
    ation with some marginal operators where the business            it was a viable business. It was working fine, so I hope
    plan was always going to be difficult. Look at Russia or         somebody will buy it. Kinnevik withdrew from the project    "

     NDS financial restructuring explained
     The NDS ‘buy-out’, valued at some $3.2bn, saw                      The financing for the deal, aside from the
     Permira Advisers LLP overcome any market caution                rollover of a portion of News Corp’s stake, called
     or uncertainty. Announced last June, the deal saw               for Permira to provide $915 million of equity.
     NDS’ majority owner News Corp (which controlled                 Permira had reportedly made its capital calls for
     NDS’ super-voting shares and had a 72% econom-                  the buyout on Jan. 7. Permira had committed
     ic interest in the company) selling down its owner-             financing from J.P. Morgan plc and Morgan
     ship to 49% and eliminating NDS’ dual-class struc-              Stanley Bank International Ltd. for a $1 billion
     ture. News Corp received $1.52 billion in cash and              senior credit facility and $385 million mezzanine
     an NDS note for $242 million.                                   facility to fund the deal. NDS gave notice
        The deal closed with an agreed price of $63 per              following the court approval for the funding to be
     share. NDS shares traded just ahead of the close                available, the source said.
     (Wednesday Jan. 28) for roughly $61, however dur-                  The deal was conditional on NDS having $724.9
     ing the year-end and New Year period market anxi-               million in cash from internally generated funds at the
     ety and uncertainty saw share prices tumble to                  close, which was also to be used to fund the share
     around $45. Shareholders, including News Corp,                  purchase. NDS had roughly $711 million as of Oct.
     approved the deal Jan. 13.                                      11. The deal wrapped on Feb 5.



    www.insidesatellite.com                                                                               February 23 2009 5
   just a few weeks before it closed down, and I under-
   stand they might well have stayed and bought the busi-        Gateway & Kinnevik
   ness had they known it was going to fold. I am sure
   other people are looking at it.”                              Investment AB Kinnevik has numerous holdings
       “At the margins we are feeling that in developing         in media-related businesses, not least Modern
   markets hit by currency changes it might be difficult.        Times Group, Tele2, Metro International, Millicom
   There are plenty of positive signs, however. Look at          Cellular, etc. Gateway Broadcasting was a pan-
   people like Bharti in India, which is in a very strong        African pay-TV operation with some 120,000
   position. Same with News Corp with its Premiere               subscribers, and at the time of its collapse was
   [Germany] operation, which is going to see a big push         “Africa’s fastest-growing pay-TV operator”.
   in the second-half of this year. But the more marginal        Kinnevik’s January 7 announcement said it had
   [pay-TV] operation, perhaps bank or equity funded,            sold its stake for $23.6m, and received 1.8 times
   they may have problems.                                        the amount invested in May 2007.
       “From the NDS perspective the biggest impact on us
   is still currency, not helped by the Pound falling 25% and    going to take time, and I’d guess that we will see some
   the Euro weakening. However, we’re also pretty well           progress being made around 2011. Remember, many
   balanced given that we are active in so many markets.         things have to come together: first, there has to be the
   We have re-looked again at our plan for the year and          critical mass of boxes that have the ability to work with
   while I am the first to admit I am by nature an optimist I    the scheme. They have to measure in the millions, but
   think it is fair to say that things will work out sooner or   then we have to have the broadcast and back-office sys-
   later. People cannot put off for ever buying a car, or the    tems to handle these demands. In comparison, today’s
   other major expenditures that we all have. I wish I could     ad-market is mature and people know how many eye-
   put a timeframe on when it will start looking better, but I   balls have seen an ad. Now, we have to drill down while
   am hopeful. The downside will, frankly, affect some of        at the same time accounting wholly for the end results.”
   our competitors very badly. They are not operating with           “Everybody that we’ve spoken to, at the agencies and
   the reserves we have and margins will be squeezed.            broadcasters, believe that this is the right thing to do.
   There will be consolidation, or even failures. There are      Now we have to have the same dialogue with the cre-
   some people in the so-called software CA side of the          ative community. I fundamentally think that this technol-
   business that I can see failing. Even some Tier 1 telcos      ogy will increase the total amount of cash going into TV
   supplying IPTV have yet to make real headway on their         advertising. The great thing that Google ha done is not
   subscriber numbers, they are entirely unimpressive. We        just to redistribute the advertising pie but it has brought
   supported SES Americom with their IP Prime proposi-           new advertisers in. Previously these advertisers didn’t
   tion, which we though was a solid proposition. Their idea     have a voice. People who provided a very local service,
   was to go via satellite to the local exchange where these     perhaps just using Yellow Pages now all of a sudden
   local operators could package the bundle up. But              have a world audience.”
   nobody was biting. It seems that people either have               Peled gave some compelling examples. “Look at
   cable or DTH or they cannot afford much else.”                Porsche, which tends never to advertise on TV because
                                                                 99% of that audience are not their target. It would be
                                                                 very wasteful. Today, they have no choice expect to go
“We supported SES Americom with their IP Prime propo-            with magazine advertising which while good is not as
   sition, which we though was a solid proposition. Their        powerful as TV. What if we could give them that access?
 idea was to go via satellite to the local exchange where        The same with expensive watches and the like.”
 these local operators could package the bundle up. But              He explained that these same back-end systems,
     nobody was biting. It seems that people either have         needed for the advertising model, would also help ser-
          cable or DTH or they cannot afford much else.”         vices like Sky’s Anytime TV, so that the programmes
                                                                 stored on the hard drive could become more relevant to
                                                                 the viewer. “Today, Sky Anytime is not targeted in any
      Peled remains very optimistic about the prospects for      way, but our back-end system would change that.”
   targeted advertising, using the growing number of                 He was also of the view that set-top box hard drives
   deployed set-top boxes. “We hired some consultants to         would have to increase capacity. “Today’s biggest com-
   help us fully understand the advertising business,            plaint concerns the size of the hard drive. 300 or 320GB
   including their language and methods, and understand-         is simply not sufficient in an HD home. An external drive
   ing what is important, and how it is bought and sold.         will change this. The issue with external discs is that
   There was much that was initially foreign to us. Now we       there are 101 versions out there, so the answer would
   have a much better understanding. We now have dates           be for a branded and approved external drive that the
   when two major pay-TV broadcasters will introduce tar-        box recognised and conformed to an understood speci-
   geted advertising. Sky has confirmed their interest, as       fication. We have done a lot of work with Seagate to
   has DirecTV, so we are working closely with both. It is       improve the drivers because initially we had some prob-   "
   www.insidesatellite.com                                                                           February 23 2009 6
lems with the head crashing on the drive. Patterns of           still very enthusiastic for India. “We have some 5m sub-
usage are very different on a PVR than on a PC. Then            scribers in India, and everything is going well. Dish TV
we had troubles with the noise that the disc was making.        has seemingly stopped growing and is doing poorly, but
These problems have all been solved but it has taken            the new DTH entrants are winning subscribers although
time. Products that are linked to our receivers in any way      revenues are modest with typical prices of just $5 a
have to be really bullet proof in terms of reliability before   month. Bharti is just launching a new advertising cam-
you associate them with a pay-TV operation.”                    paign, and remember that the population is simply huge
    “We now have some of broadband hybrid boxes                 and not being touched by pay TV. We have just
installed with DirecTV, although they’re not yet pushing        launched a new concept of the PVR [for India and simi-
their use fully at the moment because of concerns about         lar markets] which is a Memory Stick that gives you a 1
the OTT supply of internet video. There’s no doubt in my        tuner PVR and 8MB of memory and adds about $25 to
mind that OTT internet will happen but it has to be the         the cost of the box. I continue to be very optimistic about
same experience as on a TV. Nobody calls up YouTube             India, but I am cautious on China. They have financial
because there’s a problem with a video. But they’ll call        problems and there is such a small middle class which
DirecTV if it doesn’t display correctly on the TV. It all       is usually essential to the success of pay-TV.”
means that the industry is ultra-cautious about these
new developments because it could ruin their brand. It
will happen, but it has to be flawless. In my opinion at the    Peled on Mergers & Acquisitions
risk of losing a few early adopters it is better to get it      “We have always been careful buyers. MediaHighway cost
right, delay a service if necessary, and then you’ll get the    us €60m, and has been a fantastic acquisition and much
mass market.”                                                   cheaper than Mr Kudelski’s acquisition of 30% of Open TV
    Looking forward, and Peled said that people are             which cost him $200m!”
clearly happy and enthusiastic to pay extra for HDTV.
  “I think Sky is now looking for the next frontier. The
timeframe is harder to predict, but in the same way                As to his own Conditional Access and Middleware
that Hollywood likes 3D, it brings in extra revenues            technology market, Peled predicted a further shake-out
and is much harder to replicate on bootleg DVDs. I              in the number of vendors, especially now that margins
think 3D for television is still some way off, but it will      were further being squeezed, and with IPTV failing to
  happen. HD has not yet run its course. Hybrid boxes           make any real progress. “The next year might well pre-
will provide another level of richness for viewers. It is       sent opportunities. Our major reserves have gone as
hard to say what will come after these developments.            you know as part of the deal, but we are still sitting on
Is it Super HD, or is it 3D? In the next three years we         about $100m so purchases are quite possible. But I
will see a continuing price erosion on the cost of the          have to say there doesn’t seem to be much that we are
box. A year ago there was just a handful of HD                  missing just at the moment, but if there are opportunities
channels, now the UK has more than 30 HD channels               – and certainly prices look cheap – then we’ll look. We
and the production houses are now shooting in HD.               have always been careful buyers. MediaHighway cost
So, a timeframe for 3D is harder to predict but it is           us €60m, and has been a fantastic acquisition and much
going to happen.”                                               cheaper than Mr Kudelski’s acquisition of 30% of Open
    As to new and developing markets for pay TV, he was         TV which cost him $200m!”

				
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Description: Satellite TV broadcasting is set in the geostationary satellite over the equator, the first terrestrial television reception by satellite earth stations transmitting television signals, and then forward it to the designated area on the planet, from the receiving device on the ground for the TV to watch. Achieved in this way is called the satellite television broadcasting.