Set-top science gives Murdoch new headache

It's back to court for News Corp's NDS

It is essential for the smooth running of Rupert Murdoch's international satellite empire, but it's given him a headache on more than one occasion. NDS, a seemingly innocuous 80 per cent-owned subsidiary of News Corporation, the media goliath controlled by Mr Murdoch, has the sort of history that would make a good programme on one of News Corp's TV channels. NDS's past is dotted with claims and counter-claims of fraud and corporate espionage, and last week it found itself accused of sabotage against its competitors.

NDS develops the encryption technology that prevents users getting satellite channels for free; it also makes the software in a set-top box used to decode satellite signals and turn them into a TV programme. It has a stock market listing in the US and its headquarters in the UK (in Staines, Middlesex); it conducts its research and development in Israel and sells its wares around the world. Customers include News Corp companies such as BSkyB in the UK and Star TV in Asia, but it also sells to competitors.

Headed by former IBM scientist Abe Peled, NDS also has Rupert's sons, James and Lachlan, on the board to make sure it's doing the job right.

But according to French pay-TV group Canal Plus, the company has a sideline in sabotaging its competitors. Last week it went to a US court to sue NDS for $1bn (£704m). The claim alleges that NDS spent "large amounts" of money working out how to crack the security code of Canal Plus' encryption technology, then put this information on a website. Tech- nology whizz kids could use it to get the pay-TV service of Canal Plus for free.

NDS calls these claims "baseless" and says it plans to counter-sue. But is NDS to blame, or is it the victim of a bigger battle? After all, Canal Plus is owned by Vivendi Universal, run by Jean-Marie Messier, one of Rupert Murdoch's main challengers for the title of the world's leading media mogul. Relations between Mr Messier and Mr Murdoch are rumoured to be souring, and this court case is likely to fuel the gossip.

It's not the first time NDS has hit the headlines. The intriguing tale of the Anglo-Israeli firm goes back to the early 1990s, when Mr Murdoch was just starting his Sky TV service in the UK. Crucial to his new venture was a bit of technology called Videocrypt, which encoded the satellite signal so that only paying subscribers could see the picture. It was made by NDS, at the time known as News Datacom.

Although News Corp had recently gone through a debt crisis, it decided to buy News Datacom from its founders, one of whom was Michael Clinger. It wasn't the last they heard of him.

Mr Clinger was wanted in the US for fraudulent accounting and insider trading. Angry shareholders wanted to sue him over his association with Endo-Lase, a failed medical supplies company. The Securities and Exchange Com- mission, the US financial regulator, didn't take too kindly to Mr Clinger's actions, either, and fined him $810,000 for inflating the company's accounts.

He then tried his luck at News Corp. Unbeknown to Mr Murdoch, after News Corp had bought News Datacom, Mr Clinger still owned the part of NDS's operations that supplied the plastic cards put into the satellite systems.

News Corp discovered it was being overcharged for his services and in 1996 issued a writ in London's High Court. Amid false allegations that Israel had issued an arrest warrant for Mr Murdoch, Mr Clinger hit back in the Israeli courts, alleging that he had been bugged by News Corp. The British judge, Mr Justice Lindsay, was not impressed and eventually ruled in Mr Murdoch's favour, awarding News Corp around £28m in damages. Mr Clinger hasn't been heard of since.

More than three years on, and NDS is under attack from Canal Plus. The game has got dirty after just a few days; newspapers reported last week that NDS's head of security, Ray Adams – a former policeman – was involved in the investigation into the murder of the black teenager Stephen Lawrence, and was allegedly linked to one of the suspects, although he was cleared of any wrongdoing in the subsequent Macpherson report. He was also investigated over allegations of "improper relations" with gangster Kenneth Noye, which were found to be untrue.

NDS has itself put the knuckle-dusters on. It says that Canal Plus attempted to merge with it last year, using the "baseless allegations" in the writ as leverage. It has also claimed Canal Plus tried to poach the very employee who allegedly gave the encryption code to a hacking website. It looks like the start of another long and tortuous court ordeal for News Corporation.