News

NextLevel Pursues Set-Top Partners

1/04/1998 7:00 PM Eastern

MSOs' high-profile efforts to put meat on the bones of
their next-generation set-top box deal continued to generate more publicity than results
as the year came to a close.

The search for consumer-electronics-industry support has
emerged as the latest source of speculation.

NextLevel Systems Inc. was pursuing talks with a number of
potential consumer-electronics partners in hopes of coming to terms 'very soon,'
officials said last week.

While Sony Electronics Corp. and Thomson Consumer
Electronics Inc. were singled out in some press reports as the primary targets,
discussions involved a broader range of players. These included Mitsubishi Electronics
Corp., Toshiba Corp. and Matsushita Electric Industrial Co. Ltd., along with the
possibility that more than one partner might emerge as the linchpins in winning retail
distribution for next-generation terminals.

'This is something that we're trying to walk
through very carefully,' said Richard Badler, vice president of corporate
communications at NextLevel. 'I can't say at this point whether it will be one
or more than one partner.'

NextLevel needs the consumer-electronics connection for the
brand recognition and distribution clout that go with MSOs' efforts to move box costs
'off balance sheet' and into retail stores. Tele-Communications Inc. and eight
other MSOs tapped the company three weeks ago as the supplier of upward of 15 million
terminals to be delivered, starting in 1999.

'We don't have the distribution experience, and
we don't have a brand that's well known in the consumer marketplace, which are
two things that you need to be successful in retail merchandising,' Badler noted.

One of the hazards that the industry faces in securing a
place for its OpenCable standardized boxes -- both as stand-alone units and as components
of TV sets on retail shelves -- is the fact that the technology could end up being too
narrowly wedded to a single brand, sources close to the situation said.

'What happens to our ability to sell advanced services
if Sony is the only supplier of the set-tops?' asked an official close to the
negotiations.

But swinging a deal that involves multiple parties greatly
complicates matters.

'You can't get all of these guys in a room and
ask them to sign on the bottom line,' the source added, speaking on condition of
anonymity.

One possible model for moving forward might be the approach
taken by DirecTv Inc., Badler said. Initially, Thomson, through its RCA brand, had the
exclusive deal for supplying DirecTv's receiver and set-top components, which created
a business structure that made it worth Thomson's while to sell equipment at
volume-order price points.

Later, contracts were signed with other manufacturers,
broadening the distribution base.

Both Thomson and Sony were respondents to the OpenCable
Task Force request for proposals, signaling that they are prepared to adapt the technology
that they've developed for digital TV in their satellite and European
digital-video-broadcast businesses to the requirements of cable.

Sony, in particular, has pushed development in this
direction through its electronics subsidiary, Sony Electronics Co. of America, which is
promoting a four-chip solution for advanced set-tops.

The highly compact architecture employs
software-operating-system 'kernels' within each integrated circuit that can be
programmed to accommodate a variety of external-operations programs. These include set-top
microprocessor operating systems and the interactive TV 'middleware' currently
in development within the OpenCable initiative, said Vishvanath Nayak, director of
marketing for consumer audio/video digital products in the Sony Semiconductor Group.

This flexibility allows the company to leverage the costs
of its components across a number of industry sectors, he added.

'OpenCable is still a very broad concept, with several
key issues to be resolved,' Nayak said. 'But we're confident that
we'll be able to accommodate the final solution through our application program
interfaces without having to change the hardware.'

While Nayak's unit must bid for Sony's set-top
business against other potential suppliers, its ability to leverage the design across many
platforms could be a key to making Sony a valuable ally in the push to deliver a low-cost
OpenCable product to consumers.

'Sony has more than just brand recognition going for
it in these negotiations,' said the cable source quoted earlier.

As complicated as the effort to gain a consumer-electronics
toehold is, it's only a piece of what TCI and its allies must accomplish if the
OpenCable gambit is going to work. As TCI chairman and CEO John Malone has stated
repeatedly in recent interviews, his company needs other partners to help cover the box
costs and the risks associated with ordering so many units for services that have yet to
be proven in the marketplace.

An order of 15 million boxes by nine MSOs represents close
to 25 percent of cable's entire current subscriber base. And, with regard to
TCI's share of at least 6.5 million units, the projected purchase volume is
equivalent to over one-half of the MSO's current subscriber count.

To make such a purchase possible, 'we need at least
one anchor tenant,' Malone said, in reference to potential partners that might reap
the benefits of being exclusive providers of certain types of subscriber services or
enabling software.

So far, despite hints from senior executives that a deal
for an anchor tenant is imminent, none has been found.

Nonetheless, Malone said, 'I have the sense that this
is where we're headed.'

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