Kudelski, the parent company of Swiss Conditional Access and TV software company Nagravision, is to acquire Conax, the conditional access business of Nordic telecoms and broadcasting company Telenor. Kudelski will pay NOK 1,509M, approximately USD 226M, for Conax and expects to complete the deal within 10 days of announcing the acquisition. This values Conax at 2.4 times its 2013 revenue.
Kudelski’s Nagravison CA is currently the second most deployed CA system globally after Cisco’s NDS Videoguard product. The market share growth provided by Conax's customer base is likely the primary driver of this acquisition. Pay TV operators typically use just one CA system to secure their platform, unless they are transitioning from one vendor's product to another's. This lack of overlap should allow Kudelski to convert all of Conax's customers and revenues to its own. Even after the acquisition Kudelski’s combined Nagravision and Conax installed base will still be smaller that Cisco’s consolidated US cable and NDS CA businesses.
Conax's customer base is also of strategic importance to Kudelski because it lies mostly in emerging markets, which Kudelski has been less aggressive in targeting. This is important because emerging markets have provided much of the growth in global pay TV subscribers from 2009 to 2013. However, this growth is expected to slow as these markets begin to saturate, which in turn limits the opportunity for CA growth. The greater opportunity lies in transitioning operators to higher value content security products to support services such as VoD, DVR, HD and Multi-screen.
These advanced services provide Kudelski with a second opportunity: STB middleware. Generally, advanced pay TV services require STBs to be provisioned with middleware to enable them to offer identical functionality, regardless of the manufacturer. Few pay TV operators in emerging markets – and crucially to Kudelski, few Conax customers in these regions – have so far deployed STB middleware. While many pay TV operators take CA and middleware from the same provider, Conax has not offered a STB middleware of its own, providing an opportunity for Kudelski to cross sell its OpenTV middleware product to current Conax CA operators. Kudelski can rightly expect a significant opportunity from Conax operators as it currently supplies over 40 per cent of its CA customers with middleware.
The combination of Nagravision and Conax will provide Kudelski with a customer base covering most of the world, but one that is still centred on traditional cable and satellite pay TV operators. The arrival of IPTV, along with smartphones, tablets and other connectable consumer electronics devices, has been highly disruptive to video distribution, driving the market towards IP-based video distribution and new players and away from traditional broadcast delivery. Neither Kudelski nor Conax have done particularly well at winning market share in IPTV, dominated by Verimatrix and Ericsson through recent acquisition of Microsoft’s Mediaroom. Likewise, neither Conax nor Kudelski have targeted products to online video players such as Apple or Netflix. Both have chosen to remain focused on their traditional pay TV customer base, and with good reason; the majority of TV viewing still occurs on the TV via STBs, and traditional pay TV operators still maintain the rights and relationships to access the highest value premium content. However, consumption on other devices is growing and becoming a core part of the video experience. The most successful conditional access vendors will be those which best enable pay TV operators to service and monetise legacy video distribution methods along-side delivery to connected devices, to compete with the disruptive new entrants.