IT specialist Kudelski sees parallels with pay TV

“There was a fight, and behold, each sword went against the other, and there was a very great tumult.” The Old Testament is a good television program these days. The streaming providers are outdoing each other with martial series: HBO Max has just launched “House of the Dragon”, followed in a few days by Amazon “The Rings of Power”. If the hustle and bustle in Westeros and Middle-earth isn’t enough for you, Disney+ has the “Star Wars” series “Andor” in its program shortly afterwards. In early summer, “Obi-Wan Kenobi” had already unpacked the lightsaber in a galaxy far, far away.

The arms race is exhausted

Combined, the four series are said to have cost almost a billion dollars. It is the temporary climax of the “streaming wars”, in which program providers try to win new viewers or snatch away old ones with increasingly complex productions. Overall, they are investing an estimated three-digit billion amount in new video content worldwide this year. The industry is increasingly questioning how economically viable this arms race is.

At the moment, the “streaming wars” are still causing collateral damage. One occurs in Cheseaux-sur-Lausanne, where the Kudelski company is based. According to its own statement, the leading provider of digital security technology has grown as an encryption specialist for pay TV. But since paid content is no longer transmitted in the classic way, but is transmitted, temporarily stored and accessed via the Internet, the company with 3,300 employees worldwide has had a difficult time. Of the past five years, four have resulted in a loss.

This is not because there is less to encrypt on the Internet or to protect against unauthorized access and copies. On the contrary, the task is greater, as CEO André Kudelski explains in an interview. It used to be about encrypting a TV transmission from the broadcasting station to the viewer’s receiver box. Several things must be combined on the Internet: encryption, digital property rights management, digital watermarking and active defense against hacking.

Is security becoming more important than expansion?

But streaming providers have not put much emphasis on using digital technologies, as Kudelski has them in the program. “That wasn’t wrong,” says the company boss, who is unexpectedly understanding. “It’s about priorities. When you start a new business, it’s important to gain market share and grow,” says Kudelski. In return, many streaming providers, now large, have neglected IT security and protection against digital piracy.

Getting the genie back in the bottle is more difficult. Netflix, for example, is now trying to prevent the disclosure of passwords. Profitability is becoming more of a focus. The industry is speculating whether the “streaming wars” have passed their zenith: subscriber growth seems to have been exhausted, Netflix and Disney+ are already raising prices. The money for productions is no longer so loose; at HBO Max, some major projects were canceled. David Zaslav, the head of HBO’s parent company Warner Bros. Discovery, has already stated that he does not want to “win spending wars”.

The turn would be Kudelski welcome. Although the company managed to return to profitability last year, the trend broke before it even started. Adjusted for currency effects, sales in the first half of 2022 increased by 3 percent compared to the same period last year and reached $328 million. But it resulted in a loss of $ 19 million, as announced by Kudelski on Thursday. Last year, sales in the Digital TV division finally picked up again after a long dry spell. Now it has slipped back again – even by almost 9 percent. The dwindling demand for traditional pay TV is a burden.

Kudelski cannot do without television

In the other three divisions, the Lausanne-based company increased sales at double-digit rates, at least in local currency. Kudelski is increasingly focusing on cyber security and security applications for the Internet of Things. But due to the high investments to become more independent from the TV business, these areas are not yet profitable. You can’t do without television. Digital TV still accounts for more than 40 percent of sales. That’s the only place where you can make a profit.

André Kudelski doesn’t want to do without either. “We’re continuing to invest in new technologies here, streaming is a clear priority,” says the son of the company’s founder, Stefan Kudelski, who also serves as Chairman of the Board of Directors. For example, Kudelski has developed software that uses artificial intelligence to analyze the user behavior of streaming viewers and generates a digital twin of the customer. Then it can be tested how the customer would react to individual price adjustments.

André Kudelski hopes that streaming providers will invest more in such offers in the future and also attach greater importance to security. He draws his confidence from the industry that was caught off guard by streaming: traditional pay TV. In its early days, many vendors tried to develop their own technologies. When they failed, the market consolidated – and with this adjustment Kudelski was able to expand the market share. It was only then that pay-TV became really profitable for the Swiss.

First the fragmentation, now the bundling?

In the streaming world, consolidation could start with content bundling. Many streaming customers have proven fickle and move on to a different provider depending on the blockbuster series. They should have less reason to do so: Disney has already put together a premium package consisting of Disney +, the sports service ESPN + and the entertainment service Hulu. Warner Bros. Discovery will combine the HBO Max and Discovery+ services.

“Is the streaming market developing like the market for linear television forty years ago?” Experts from the Boston Consulting Group asked in an analysis in May. Even with the cleanup in pay TV was once bundled. The appeal for Kudelski is that platforms that bring together content from different sources require more sophisticated IT solutions. André Kudelski says he sees clear signals that interest in security is growing. “It’s taking a bit longer than other sales cycles, so we have to be patient. But it’s worth it,” he affirms.

The shareholders have already shown a lot of patience. Kudelski stock has been down for years. They received a small boost in early 2021 but have since fallen back. There was no pandemic bonus for Kudelski – and not just because the streaming boom passed the company by. Access systems for ski areas, stadiums and multi-storey car parks, which are marketed under the Skidata name, are the second-largest sales segment by a clear margin. Unsurprisingly, Corona also had a negative impact here. In the meantime, André Kudelski also sees encouraging signals in the Public Access division. But his family’s life’s work remains in the process of being restructured.

You can refer to Benjamin Triebe, Editor for Business and Business Twitter follow.