Digital Signage
Suppliment July August 2008

With Irdeto’s relocation to China approaching its first year, Goran Nastic spoke to CEO Graham Kill to see how the move has affected the company and its strategy to crack the US market

Goran Nastic: Tell me a little bit about your logic to move your HQ to Beijing.

Graham Kill: We made our entrance into the East with the acquisition of our first digital payTV customer in Thailand and Australia in the mid-1990s, and have been building business in the region and establishing offices throughout the region since that time.

In the late ’90s we identified like most people that China would be a huge market, but unlike most of our competitors we committed early to the market and in 1998 established an office in Beijing. That office has become part of our global infrastructure on three levels. Firstly, it is the office that serves the Chinese market, secondly, it is our headquarters for the Asia-Pacific region, and thirdly it does a lot of global functions in terms of product development among others.

About a year ago, we looked at how the eastern hemisphere would develop over time and we continue to see that the fastest growing aspect of digitisation – on whichever dimension you would define digitisation – would be happening here. As a consequence, we wanted to be closer to the market and closer to our customers. It’s one thing to have significant presence of your business represented in another geographical location, but the mindset and the way of operating and determining strategy doesn’t really change until the senior management are more immersed in the region, and much more connected to it other than just visiting as any other western company might do. So we felt that if we’re truly going to embrace the situation that we should relocate senior management to these places as well. Beijing was the natural choice for the Eastern Hemisphere HQ because we had the largest number of people in that location, and of course with China’s economic rise it will become the economic centre of gravity for the region.

To truly make a difference and develop an office from being merely a satellite operation, you have to have senior management in that location. And in order to affect that change, I thought I should take the lead and set the example, so I moved myself and my family here in August of last year. There are other members of the senior management team joining in the second half of this year, and the aim is to get a situation where the senior management team is balanced between East and West, and that we rotate on a set basis so that any one point in time there are roughly half of us in each location.

How does the day to day management between Amsterdam and Beijing work in practice? Is there a great deal of interaction happening between the two?
Absolutely; the best way to describe it is that it’s joined at the hip.

When you first moved, you stated you are looking to increase your responsiveness to customer in the eastern hemisphere – was there ever a fear that the relocation could perhaps compromise your image in the West?
It’s always something you run through the discussion. The reality is that most companies are doing some business in the East, but we operate in a global business, and if you’re truly going to represent the markets in which you serve you have to have that outlook at the senior management team level. We’ve put a number of things in place to make sure we safeguard that situation. We were very concerned of course that part of the company may feel that there was an erosion of the West. We continue to invest there, build new premises, develop key strategy and products in both locations, and we are very conscious to make sure there is a right balance in every respect. I will be the first to admit that you can really only ensure that balance to the extent where you have both locations growing, as otherwise there would be an allocation between the two locations at one or the other’s expense.

How exactly do you think the move has benefited Irdeto and your customers? Looking back, do you think it has borne fruit?
It’s still relatively early days to change a culture of an organisation. I think if you look at most organisations with headquarters in once place and geographical satellite operations elsewhere, there is what I have coined the ‘mother-ship syndrome’ in which all roads lead back to the mother-ship for decision making. What has tangibly changed since the move is that that syndrome has been eroded, which means that you no longer have a single confluence point for decisions – that now becomes much more dispersed. And whether you are a customer in Europe, the East or America, it means that Irdeto as an organisation has the ability to respond even faster the before.

That’s one tangible benefit in the short term. Another benefit to people in the China office in particular has been the greater accessibility to me and other senior management, sharing ideas, gaining a greater understanding of the organisation etc, making us much more dynamic. We are also able to see and foster talent that we might not have had contact with in the past, which gives us the opportunity to be exposed to new people. There’s been a huge new appreciation of what other teams can do because you are seeing it on a daily basis.

We partnered with the London Business Schools’ management innovation lab (MLab) and they worked with us to put in place metrics to see how we progress through this change. We’ll have to see the results and the first milestone is year one’s timeframe coming up soon.

You recently won a contract for two million smart cards with a Chinese operator. Can this be attributable to the new strategy?
We had a very significant Chinese business prior to my relocation so I don’t think that my presence or anybody else’s from the senior management made a difference to securing that contract, as it was very ably handled by the local team. However, what I do think if you are a Chinese or any other operator across the world is that you are positively encouraged by an organisation that is closer to you from a strategic decision making point of view. Human nature makes one tend to gravitate to the ones nearest your geographical home base. The downside is that you have to work very hard on communication with senior colleagues because you can no longer rely on those incidental spontaneous meetings by coffee machines.

How multi-cultural in the Chinese office?
We are very keen - and this has been a deliberate strategy on my part – to employ a diverse range of cultures. In Amsterdam, our staff is comprised of 40% Dutch people, with a further 37 different nationalities present. In China, we want to try and replicate the same effect, although for now the vast majority are Chinese.

We would like to have the same eclectic melting pot of eastern cultures based in Beijing, as we do western cultures based in Holland and there are talented people in Asia and parts of the former Soviet Union that we would like to encourage to locate to Beijing.

Looking beyond China, what growth plans do you have and is there one focus to your activity that outweighs others?
Taking a macro global view, we define our business into digital TV and secure software solutions. Digital TV can be any form of distribution, whether mobile TV, cable, satellite, IPTV etc. We are increasingly building end-to-end solutions for our customers. As part of those end-to-end offerings, we have CA/DRMA solutions, customer care and billing solutions and a middleware solution. The latter two components we acquired over the course of last year. We don’t have the aspiration to move into hardware: our focus is on software. We believe that while our clients want to choose from a range of hardware suppliers in order to negotiate the best deal, they are attracted to a single player to provide them with software solutions.

The secure software solutions element is personified by Cloakware, which has two aspects to its business using the same core technological tool. One is an enterprise orientated solution for protecting and managing passwords in enterprises. The other part is orientated towards media and entertainment selling technology to digital TV players, consumer electronics companies and other entertainment segments, making, for instance, DRM solutions more robust, or better protecting an application inside a set-top box. The advantage of Cloakware is that its technology is horizontally applicable, and can be used in a whole variety of markets and different verticals. From a strategic point of view, it’s our intention to use that horizontal nature of Cloakware’s technology to explore and expand into new areas, using it as a catalyst for growth. So it’s a deepening in one area, Digital TV, and broadening through horizontal technology through Cloakware.

Geographically, particularly significant is the rise of Indian activity. Many of us had been tearing our hair out at the stagnation in the Indian Indian market due to the regulatory discussions, particularly in relation to the Conditional Access Bill. This Bill particularly related to the process and regulatory requirements/conditions relating to the digitisation of the Indian cable networks. Regulation formation is by definition a time consuming process to ensure that all the interest groups are heard and in a complex and large market such as India that was always going to be the case. However, the Conditional Access Bill had many false dawns that introduced significant uncertainty into the market for a long time. Where there is uncertainty to that extent there is a reluctance by the majority of market players to press ahead with investment. However, that phase is passed and significant digitisation is happening in the Indian market as a consequence of greater regulatory clarity and market moves spurred by competition.

The general phenomenon in the Asian region is an emerging middle class that is increasingly affluent with a desire to spend money on entertainment products. And if you look at the entertainment/communications expenditure in household income compared to Europe it’s disproportionately high compared to other expenditure categories.

In North America, our focus up until now has very much been on the customer care and billing solutions market. We do feel there is an opportunity now in North American cable. Up until now, we have consciously stayed away from this market, we felt the duopoly of Motorola and Scientific Atlanta was well entrenched. A few of our competitors tried and poured huge amounts of resources into the market to little effect, and we had felt the main watershed would originally come with the onset of IPTV. That opportunity has been limited by virtue of purchase decisions in Microsoft’s favour. It hasn’t had that much effect on cable other than that increasing the competition between the operators. It certainly didn’t necessarily offer a major opportunity in terms of a watershed from a technology supply point of view into North American cable – a watershed that we felt would present an opportunity for Irdeto.

What has changed now is the realisation from the cable operators that the only way they are going to compete, particularly in the area of HD services, is by freeing up bandwidth by migrating their large base of analogue customers to digital and switching off the analogue signals. Their analogue customers are generally low(er) ARPU customers who offer little opportunity to up-sell to because of the technology limitations. The economic strategists within the cable community have come to the conclusion that you can afford to heavily subside the conversion of that analogue base. So if you can afford to subsidise the digitisation of those customers, allowing analogue signals to cease, freeing up bandwidth, which in turn creates new revenue opportunities – and retention – from and of high ARPU customers, whilst giving the opportunity to upsell to the low(er) ARPU customers. It is also an important move to allow effective competition against satellite (particularly with its plethora of HD channels) and increasingly IPTV, then that is the watershed that really makes the difference in North America and makes it a very attractive proposition to target the market.

So it’s true you are using Comcast’s RFP for a sub-$35 box as your main push into North American cable? Can you share some of the economics behind this?
We hold some interesting pieces of the puzzle in our hand, and this is where China and America link up. Our experience in China - targeting the cable market here with its low ARPU analogue customers together with the market’s price sensitivity has allowed us to formulate offerings now suitable for the North American cable situation. So learning to deal with those Chinese (and other market) factors can now be put in combination with our other skills and technologies such as Cloakware for opportunities in North America. The other thing the combination of our CA experience and the Cloakware acquisition allows is innovative solutions for software CA in one-way environments.

Up until now, most people felt that software-only solutions were viable in two-way environments, where you have the ability to receive information back from the CPE, whether an STB or otherwise. That upstream path gives you the ability to get behaviour about the client and monitor that behaviour to see that a device was vulnerable to piracy and it was less prone to needing a particular hardware lock-box in the form of a smartcard for the security code. In a one-way environment you don’t have that luxury so you need a replacement for that lock-box that a smart card provides and that’s where Cloakware comes in because it is that software lock-box making the software unreadable.

As a consequence, we think the combination of our traditional CA content protection experience plus the newly acquired knowledge of Cloakware we’re able to offer more innovative solutions, particularly for these types of environments where price sensitivity is at its highest. And of course the North American cable community is very interested in these types of solutions because if you’re talking about mass digitisation of a very large analogue base they are also keen to reduce their logistics costs and inventory, so that’s an area we’re talking to people about.

Going back to the horizontal aspect, do you have any plans to enhance your end-to-end offering? Are there pieces of the puzzle you think you are missing?
It’s something we constantly evaluate and have a business development pipeline running, whether it’s acquisitions, partnerships or other forms of collaboration. One of the challenges of an end-to-end solutions provider – and it sounds like a quite grandiose title – but the challenge in all these things is defining where the ends are. And where you can add value and not get too far beyond your core competency. Now our core competence is not only in security but also secure video delivery, the integration of large scale video solutions, it’s the whole video delivery chain and the elements that have to come together to bring the solutions successfully installed in the client. So we want to make sure that in any definition of where the ends are in the end-to-end solution we don’t stray too far from those core competencies.

It’s really driven by where we can add the value and things make sense together. I think there are some few remaining pieces of that puzzle that would be valuable to acquire or to partner with somebody in a more intimate sense (and I’d be giving the game away to our competitors if I told you what those pieces were), but there are a couple of pieces that I think would be valuable to add to the solution at this stage.

Irdeto is very active in mobile TV, but given the problems plaguing it, should we just go with a free-to-air model that has proven successful in Japan and South Korea?
It’s arguable whether it’s financially successful in those countries. While there are a large number of devices, the advertising and/or subscription revenue and economic models of the players isn’t necessarily that successful; the advertisers aren’t paying for these eyeballs currently.

Speaking in a more general worldwide sense, the mobile TV market is beset with challenges in terms of frequency licensing and the configuration of the various players in the marketplace. There are the broadcasters keen to continue their model on another platform and the MNOs keen to propagate their services and use mobile TV as a service for customer retention. And this collaboration is a challenge across various marketplaces – each wants the end relationship with the consumer.

Then of course there is the business model, on which the jury is still out. My feeling personally is that you’ll probably have a phase of more FTA or very low subscription initially in order to build the base and that over time there will be a migration to other forms of business model, whether transactional, impulse, subscription etc and technological tools are needed to facilitate all those models, including the controlled access of handset users to services and to facilitate these additional revenue streams. I think the combination of television and mobile telephony is intuitively one that should succeed although I’m not sure the actual model has been found yet as to how to do that profitably by operators.

TU Media recently announced that SK Telecom will be paying it a fixed price for packages of channels and the provision of mobile TV to subscribers and it will effectively be providing mobile TV to its voice and data customers as part of adding value. So here is an early market entrant experimenting with different business models as it gains experience. I think you will see lots of different twists and turns before a dominant business model emerges.

Do you see an opportunity to work with T-DMB?
We do already work with T-DMB in limited volume in Germany and its DAB variant in China. We have an association with all the mobile TV standards, including DVB-H, FLO, T-DMB, S-DMB and CMMB. We feel there is room for a number of different standards in the world, given the different positions of players in the marketplace.

To wrap up, what would you identify as the greatest challenge facing the industry, and how are you reacting to it?
The greatest challenge is that the pace of business in the industry is ever increasing and therefore you need to architect and implement your organisations to be able to deal with that and it needs to constantly change. From a content protection point of view, the threat of piracy is a continuous challenge and the proliferation of broadband internet means the challenge only increases and becomes more dynamic.

One of the most difficult things is determining what will be successful in terms of products and services that our customers provide to their customers and our aim is to try to anticipate our customers’ needs before they actually express those needs to us because that decreases our/their time to market. We introduced some eight years ago the concept of Scenario Planning into our strategic planning process and that has helped us think differently about the future and how we might anticipate needs in this fast changing and evolving world.

I’d love regulation to move quicker, whether it be licensing of frequencies, digital switch off dates etc. Generally, government regulation – almost by definition – moves behind the industry, or what is available in terms of technology. I know it’s a utopian thought to think the two could completely be in synchronisation because a government needs to balance various interest groups and it could never keep pace, but I would love that regulation to be speeded up. I recognise consultation and debate in the regulation formulation process has its place in the chain and it fulfils an important function.