News

Ops Worry About PODs

9/06/1998 8:00 PM Eastern

Cable operators raised warning flags last week, wondering
if the two leading set-top manufacturers will protect their future revenues by introducing
delays into a set-top scheme that the FCC recently mandated.

Three months ago, the Federal Communications Commission
ruled that cable operators must decouple signal security from other set-top capabilities
by July 2000.

Now, MSOs are concerned that General Instrument Corp. and
Scientific-Atlanta Inc. -- the two companies that essentially own the signal-security and
set-top segments for cable -- will not stay on track with the removable security module,
which is called a POD (point of deployment).

PODs will likely take the form of computer PCMCIA cards,
not unlike plug-in telephone modems, and they will include conditional-access circuits,
some memory, processing chips and similar ingredients.

Time Warner Cable went so far as to include language in its
reconsideration petition filed to the FCC that extends the navigational-device rules to
conditional-access-control vendors like GI and S-A, although the two were not named
directly.

"It's a case where we don't want to be the
only ones with the 'X' on our backs," said Mike Hayashi, vice president of
advanced services for the MSO.

Both GI and S-A submitted that they will make the PODs at a
pace that coincides with MSO plans.

Bill Wall, chief scientist and technical director for
S-A's subscriber-networks division, said S-A "absolutely plans to make"
PODs, as well as the set-tops that the PODs plug into.

The same goes for GI, according to Geoff Roman, executive
vice president for the manufacturer. "It's required. It's part of business
going forward," he said.

But senior MSO executives wondered privately last week
whether the vendors will drag their feet because of concerns about lost revenue.

"Both companies have privately indicated that they
have no real interest in building the PODs," said one senior engineer with a top-five
MSO. "This needs to get out. We're tired of being held hostage to these
guys."

Another top-10 MSO executive, also speaking on condition of
anonymity, said he wouldn't be surprised to see reluctance from the two vendors.

"I think that they're going to delay the POD as
long as they can, because they think that otherwise, they're hosed," he said.

Manufacturer-induced delays, if they occur, could stem from
simple revenue models, which, at first glance, don't appear to benefit either vendor.

PODs are expected to run in the $50 to $70 price range,
said David Beddow, CEO of Tele-Communications Inc.'s National Digital Television
Center. The receptacle devices themselves -- whether they are TVs or set-tops -- will run
upward of $300.

And looming on the horizon to make the set-tops -- which,
by their very definition, are slated for retail shelves -- are a long list of large
consumer-electronics companies with strong brand presence.

Both GI and S-A said they are steadfast with their retail
digital set-top plans, although neither has moved beyond introductory relationships with
big consumer-electronics players. Sony Corp. owns a 5 percent interest in GI, and S-A has
licensing arrangements with Pioneer New Media Technologies and Toshiba America Consumer
Products.

Neither manufacturer has formalized retail plans with those
partners, however.

"They seem to be stuck on the question of: Do set-top
boxes go away for good if the security gets put on a card that slides into a TV or
VCR?" Hayashi and others said.

Said another MSO engineer, who requested anonymity: "I
don't think [that S-A and GI] have convinced themselves that the market for them
could actually be bigger with PODs." The engineer said MSOs will need PODs for the
boxes that they rent to customers, and consumers will need PODs for the boxes that they
buy.

Still, neither GI nor S-A seemed overly concerned when they
were contacted last week.

Although they are bitter competitors, the two vendors --
contacted separately -- agreed on one thing: Their market advantage lies in the fact that
digital set-tops are part of an overall system.

"We incumbents have a lead [with end-to-end digital
systems], for one," Roman said. "Two, we've seen the [consumer-electronics]
guys go at this business before ... and we're convinced that we'll be able to be
very competitive."

Despite GI's and S-A's insistence that
they'll make the PODs, neither company has a plan that it can discuss publicly.

"We're certainly not to a bill-of-materials
[stage] yet," Roman said.

Even if consumer-electronics vendors leapfrog set-tops,
opting instead to find a way to load more value into TVs and VCRs, the financial impact on
GI and S-A could take years to make a dent, said one industry analyst, who asked not to be
quoted.

"Consider that the average life of a TV is, what, 15
years? And as a consumer, you're not going to run out and buy a TV just because it
has this slot for a card," the analyst said.

Beddow said he remains confident in GI's long-term
future. TCI -- which could own up to 18 percent of GI through a complicated equity
arrangement introduced early this year -- placed a standing order with GI for 6.9 million
digital boxes, which could swing much higher.

Asked whether GI or S-A face longer-term revenue trouble if
they are reduced to selling $70 cards instead of $300-plus boxes, Beddow said,
"That's one possible outcome, but an unlikely one.

"Somewhere along the line, both GI and S-A will hook
up with retail manufacturers and become part of the retail scenario," he added.

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