As Internet TV Soars, Verimatrix Software Keeps the “Pay” in Pay-TV

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Since it was founded in 2000, San Diego-based Verimatrix has raised about $50 million in institutional venture funding and spent untold hours of software programming to address a relatively simple problem nagging the pay-TV industry for more than a decade. As Verimatrix CEO Tom Munro puts it, “We keep people from watching television without paying for it.”

These days, however, the security issues confronting Verimatrix and the pay-TV industry have only become more complex.

Munro estimates there are 110 million consumers in the United States who pay to watch television provided by cable, satellite, and other TV service providers (with an estimated market penetration of 90-plus percent). At the same time, the number of U.S. consumers who are watching TV online, using Netflix, iTunes, Hulu, and other Internet video services has exploded—with the fast-rising total estimated at somewhere between 40 million and 70 million, according to consultant Bill Rosenblatt of New York’s Giant Steps Media Technology Strategies.

Meanwhile, cable TV operators like Time Warner, Comcast, and Cox Communications are moving to offer their subscribers “Everywhere TV” that allows them to watch any digital video content on any device. And of course, electronic device-makers have been busy developing an estimated 1 million different types of gadgets that consumers can use to watch digital content anywhere.

Verimatrix fits into this industry maelstrom by developing encryption software and related security technologies for pay-TV networks. In some respects, Verimatrix’ task has gotten easier as ever-increasing bandwidth has enabled the industry to move increasingly to a “pure digital” format, and away from more specialized electronic devices, such as Blu-Ray players. Riding this trend, the company has been successful in creating piracy protection software for Internet-Protocol Television (IPTV), and today more than half of the company’s business is in so-called unmanaged networks, such as Netflix, which provides streaming video “Over the Top” (OTT) of a cable- or satellite-based broadband Internet platform.

“The nice thing about our solution is that it’s based on software, and not on a hardware, card-reader type of security technology,” Munro says. He describes Verimatrix as “agnostic” in terms of the technology used to transmit a digital video stream to a consumer because, “We can encrypt the video signal as it goes up and decrypt it as it comes down. It doesn’t matter to us whether it comes through fiber, satellite, or cable.”

The company says its software also can give Hollywood studios, sports leagues, and other video content owners an extra level of protection against piracy for streaming video delivered over IP networks, including watermark technology that can help identify the set-top box where a pirated video originated.

While studios and content owners are not Munro’s customers, he says they are moving to restrict content distribution in ways that will change the rules for network operators—and cut into the revenue operators have generated under traditional content licensing deals. For example, such restrictions could limit content resolution, for example, or the availability of certain Hollywood films to certain geographical areas, the times when they can be viewed, and perhaps even limit how much data storage is available for customers to save movies, sports events, and other licensed content.

Tom Munro

“They want to be sure that [their] video is not just distributed for free over the Internet,” Munro says. “The good news is that they need us to do it—to manage those business rules and deploy that technology.”

Munro joined Verimatrix with its Series A round of venture funding in 2005, a $5 million investment by San Diego’s Mission Ventures and Germany’s Siemens Ventures (Siemens also was the company’s chief customer at the time). When Siemens spun off its communications equipment business, forming Nokia Siemens Networks in 2007, Munro says Verimatrix gained the freedom to expand its customer base, which now includes Ericsson, Cisco, Huawei, GTE, and roughly two dozen other makers of video encoding hardware, set-top boxes, and related equipment.

Since then, Verimatrix has raised additional capital from Crescendo Ventures, Goldman Sachs, Cipio Partners, JK&B Capital, and SunAmerica Ventures, but the company is not expected to need any additional money.

Verimatrix has been operating at break-even, and Munro says the company is expected to be profitable in 2012. He also has Verimatrix on an aggressive growth track, saying, “We need to get as big as we can to get as much of the market as we can.” Munro says the company has 105 employees and needs to fill another seven or eight open positions—and that it will likely need to add more staffers later this year.

Last spring, Verimatrix acquired Comvenient, a 22-employee company in Germany that it had been working with, but Munro says he doesn’t anticipate making any more acquisitions. Nevertheless, much of the company’s customer base is outside the United States—Verimatrix generates 80 percent of its revenue outside the U.S.—where Munro says the transition from analog television to digital set-top boxes remains the biggest business driver.

The company faces legions of competitors overseas, but Microsoft is the biggest competitor in the United States. “Our go-to-market approach has been open and interoperable, and Microsoft has been just the opposite—developing closed and proprietary standards for set-top boxes,” Munro says.

“Something like 40 percent of the market—subscribing households in the IPTV space—use our technology,” Munro says, “while Microsoft is in the low 20 percent and very fragmented. Still, no one at Microsoft is lying awake at night wondering what Verimatrix is going to do.”

In the end, a bigger challenge for Verimatrix may be anticipating the innovations in digital piracy and in developing countermeasures to thwart them. But as long as studios and others produce valuable content, the industry will need ways to prevent people from watching it without paying for it.

Bruce V. Bigelow is the editor of Xconomy San Diego. You can e-mail him at bbigelow@xconomy.com or call (619) 669-8788 Follow @bvbigelow

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  • Carter Pewterschmidt

    I do agree that there is a huge increase in the amount of people who stream TV or watch it online, but I don’t think that it will ever threaten the pay TV industry. I still have my pay service, and with tons of shows and content that isn’t available via just streaming or online. Now this doesn’t mean that they are falling behind the times, quite the contrary in fact, DISH for example has the best TV Everywhere option out there. I can stream all of my shows and channels that I get through DISH right on my smartphone or tablet, and working for DISH I know that it’s completely free.

  • http://giantstepsmts.com Bill Rosenblatt

    Actually, that figure of 40-70 million U.S. users of “over the top” services only counts subscription services like Hulu and Netflix. It doesn’t count pay-per-view or download services like Amazon Instant Video, Apple iTunes, and Blockbuster On Demand. But in any case, the total number of pay TV subscribers in the U.S. is about 85 million, so over-the-top is catching up fast and will most likely overtake traditional pay-TV providers within the next year or so.

    By the way, those figures are in a whitepaper that I authored for Verimatrix, which is available at http://www.verimatrix.com/multiscreensecurity/ or http://www.giantstepsmts.com/whitepapers.htm.