Philips Hopes Retail Clout Means Modems Will Thrive

5/09/1999 8:00 PM Eastern

Bolstered by its foothold with MediaOne Group Inc., Philips
Broadband Networks Inc. said it is gearing up to further crack the U.S. market for
advanced broadband equipment.

Building on its February deal to supply MediaOne with
"open-system-based" digital set-top boxes, Philips last week formally unveiled
its standards-based cable modem, which, it said, completes a product lineup aimed at
exploiting U.S. operators' desires to deploy advanced services and to create a retail
channel for customer-premises broadband gear.

Besides manufacturing scale economies that hold down its
product costs, the Atlanta-based unit of electronics giant Royal Philips Electronics
boasts a huge, established U.S. consumer-electronics retail presence -- a key for MSOs
entering uncharted retail-sales waters.

While progress in creating relationships between cable
operators and potential retail partners has been sluggish, Philips' retail channel,
supported by a $100 million branding campaign, moves billions of dollars per year worth of
televisions, DVD players, hand-held computers, cellular phones and other digital gear.

"We know how those retail channels work. We know what
they're looking for," said Dave Torr, Philips Broadband's group manager for
data/voice-access systems.

Philips briefed reporters in advance of the upcoming SCTE
Cable-Tec Expo, where it plans to showcase its open-system-based set-tops for MediaOne;
its Data Over Cable Service Interface Specification-based modem; a point-of-deployment
security module based on its "CryptoWorks" conditional-access system; and other
digital-video solutions.

Philips also touted "SpectraHub," a
1550-nanometer dense-wavelength-division-multiplexing solution that it claims will boost
transmission capacity on existing hybrid fiber-coaxial systems to more than 9,200
compressed digital-video channels per fiber, or a 100-fold improvement over competing

The new DOCSIS 1.0 modem, currently dubbed the
"PD10D," did not gain certification by Cable Television Laboratories Inc.
Philips said it expects to pass the next wave of interoperability testing, tentatively
scheduled to begin May 12.

The retail model is still up in the air, Torr said. The key
factor in that equation crucial to MSOs is the allocation of costs, like subsidies to
lower the consumer cost of the modem.

"The correct retail model will vary from operator to
operator," Torr said. "Some operators we're talking to don't see
retail for years to come. The precise model will depend on how the money flows work out
for each relationship."

Torr said the modem -- based on the widely used Cisco
Systems Inc. reference design -- has been deployed in trials with 20 operators in the
United States, Asia, South America and Europe.

Philips has been in the cable-modem business for about
three years, distributing Com21 Inc.'s proprietary cable modems -- a relationship
Torr said would likely continue even as his company gains DOCSIS business.

Philips is also developing a modem based on the recently
released DOCSIS 1.1 specification, which covers advanced features that are necessary to
offer cable telephony. Versions will include one with universal-serial-bus connectivity;
an internal PCI-card (peripheral component interconnect) modem; and, eventually, an
external unit to install outside of a home or office.

To help penetrate the digital set-top market -- which is
currently dominated by General Instrument Corp. and Scientific-Atlanta Inc. -- Philips
pointed to its experience in providing equipment for virtually all elements of
digital-video systems, from studio and transmission equipment to its DWDM networking

Director of business development Paul Pishal said Philips
has shipped more than 2 million digital receivers worldwide, beginning with its 1995
deployment with France's Canal Plus.

That is a track record of interoperability with a variety
of headends and conditional-access systems, enhanced by a focus on open systems specified
by the U.S. industry's OpenCable standards initiative.

Philips also claimed a significant core technology
advantage through "TriMedia," the programmable voice, video and data chip it
will use in a high-end OpenCable set-top that is expected to be available at year's

That box will support Microsoft Corp.'s Windows CE and
Network Computing Inc.'s application programming interfaces; a DOCSIS modem;
interactive applications; and selective conditional access.

Pishal said TriMedia performs 5 billion operations per
second, and its capabilities include encoding and decoding of MPEG-1, MPEG-2 and
MPEG -- 4 video streams; Dolby Digital AC3; an H.324 reference design for
videoconferencing; and digital-television features such as an electronic program guide.

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