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Thinking Out of the Box to Provide Security

Verimatrix has built a reputation protecting the delivery of TV programming to households over the Internet.

As Internet-based television, or IPTV, has become popular in Europe, Asia and the Middle East, the San Diego-based startup has gobbled a third of the market for encryption services since 2003, according to Multimedia Research Group.

Now Verimatrix has set its sights on traditional cable markets, where the switch to digital broadcasting from analog is under way worldwide , affecting 320 million subscribers.

Verimatrix recently raised $21 million in venture capital in its third round led by Goldman Sachs to peel off a slice of the market.

“The number it takes for us to be successful is really a fraction of that,” says CEO Tom Munro, who expects 70 percent year-on-year growth in 2009 and 2010.


Executing Plan

While IPTV is expected to grow from 20 million subscribers in 2008 to 89 million in 2010, it’s been Verimatrix’s strategy to eventually move into cable, said Robert Kibble at Mission Ventures, one of the original investors.

“We’re obviously very pleased by the company’s progress,” he said. “They’re regarded by a number of independent market research organizations (such as MRG) as having the number one market share by quite a margin in this rather narrowly defined space. We think their opportunity is very substantial.”

For its encryption software, Verimatrix charges operators a few dollars per subscriber. With 300-plus million cable boxes ready to be encrypted, “we can be fabulously successful with a single-digit percentage,” Munro said.

Verimatrix will soon announce a major new customer in Latin America that is the second-largest cable company in that region, said Steve Oetegenn, the chief sales and marketing officer.

“We’ve also had some extremely in- depth discussions with all the well-known cable companies in the U.S.,” he said. “Those discussions are in extremely advanced stages.”


Venture Investment

Verimatrix has plans for an IPO, but doesn’t plan to go public soon.

“Ten percent of the investors we talked to gave us term sheets,” Munro said. “We raised about 30 percent more than we planned to.”

He added, “I’ve been on harder trips.”

The company does not disclose revenues. But company officials say they have 180 customers , which are small to midsize telecoms offering IPTV , in 32 countries.

“We could have remained an 80-person company purely focused on telco TV and made a good living at it,” said Oetegenn.

Instead, the company decided to take on the cable market. It has increased employment to 104 people this year with a goal to reach 110 employees by the end of the year.

“Now we’re much more ready to move into a wider market. It’s clear that in order to do that, they needed to be well-funded,” Oetegenn said.

Grabbing market share in the cable space will be more difficult than in the IPTV space, which five years ago was in its infancy.

“As a very small company, they have to be very strategic about how to develop traction in that part of the market,” Kibble said. “I think it’s the case of building credibility with some customers who are very, very satisfied with them.”

Yet the company’s experience protecting content over the Internet allowed Verimatrix to leapfrog current technology to secure set-top cable boxes, which are typically smart cards.

Smart cards are thin cards embedded with circuitry that unencrypts a cable signal, allowing subscribers to receive their purchased content.

When a smart card is hacked and replicated, for instance, tens of thousands of new cards must be mailed out.

Verimatrix, however, can respond to a security breach by uploading new encryption software through the network, which is more efficient.

“We can communicate with set-top boxes the same way a PC communicates with an Internet service provider to grant Internet access,” said Munro. “We can constantly change the security.”

That allows single service providers , like AT & T;’s television, computer and mobile phone video , a single solution, said Munro, who is anxious about getting started.

“There’s no time to relax,” he said. “It’s time to execute all the promises we made when we raised the money.”

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