A News Corp subsidiary providing security for pay-TV smartcards let piracy go unchecked at U.S. satellite broadcaster DirecTV less than a year before News Corp looked into buying the business, an Australian paper said.
The article in the Australian Financial Review, citing internal emails from NDS, added to questions over News Corp practices after reports that NDS promoted the piracy of rivals and after scandals at News Corp's British newspapers.
NDS said in a statement that it completely rejects the allegations made by the Australian Financial Review.
DirecTV, which depended on NDS for the security of its scrambling system, suffered major piracy problems around the turn of the century that ate into revenues as viewers using pirated cards watched it for free.
According to the article published on Wednesday, NDS found a fix for the problem but decided not to implement it for more than a year, because of what an NDS engineer described in an email as the politics of the DirecTV situation.
It did not say what those politics were.
Over the years, DirecTV and other competitors have brought several lawsuits against NDS, accusing it of abetting piracy, but almost all suits failed or were dropped. DirecTV made no immediate comment on the Australian Financial Review's report.
Allegations against Rupert Murdoch's pay-TV operations could prove even more damaging than the hacking scandal at the British newspaper operations because television is so much more lucrative for the media conglomerate.
They also bring the matter closer to James Murdoch, Rupert's son, who previously chaired News Corp's UK newspaper arm but has recently moved to New York to focus on the international pay-TV businesses.
There is no evidence that James Murdoch or any other News Corp executives knew about the alleged practices at NDS.
James Murdoch is chairman of BSkyB, the British satellite broadcaster in which News Corp holds a 39 percent stake, and also sits on the board of NDS, whose $5 billion sale to Cisco was agreed this month.
News Corp shares closed down 2.5 percent at $19.74 in New York, underperforming the Nasdaq, which was down 0.5 percent.
The Australian Financial Review published an email on Wednesday from an NDS engineer in which he praised the discovery of a way to kill pirated DirecTV smartcards, but said implementation of the solution had been banned by management.
Therefore, this idea will probably never be implemented, he wrote in the email dated November 21, 1999.
Less than a year later, General Motors put Hughes Electronics, its unit which contained DirecTV, up for sale. News Corp began negotiations to buy GM's stake in Hughes for $8 billion and create a global satellite network.
Rupert Murdoch later dropped that bid, but eventually bought a controlling stake in DirecTV in 2003 for $6.6 billion.
Years later, Rupert Murdoch sold DirecTV to Liberty Media Chairman John Malone in exchange for a voting stake that Malone had built up in News Corp.
(Reporting by Georgina Prodhan; Editing by Matthew Tostevin, Phil Berlowitz)