Further DOCSIS Delays Will Stall Massive Modem Rollout

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Denver -- The completion of standards for certifying cable
modems faces new uncertainties, executives reported last week, prompting speculation that
massive rollouts of the new gear won't be possible until this fall.

The situation came to light here during a Cable Television
Laboratories Inc.-sponsored briefing for analysts on new cable technology.

The good news is that the process of certifying modems
embedded in personal computers could come quickly on the heels of completing the same
procedure for external modems. This could add momentum to cable's retail strategy in
2000, said Rouzbeh Yassini, project leader of the DOCSIS (Data Over Cable Service
Interface Specification) process.

"By crossing every 't' and dotting every
'i' as we complete certification of external modems, we are making it possible
that the embedded [modem-certification] cycle could move faster," he said.

Yassini shied away from nailing down a date for completion
of the certification, which was widely expected to wrap up this past fall.

When last interviewed on the subject nearly two months ago,
Yassini indicated that his group was hoping to certify at least some vendors' modems
by early March. Now, following repeated questions from the audience, he said he was
optimistic that this could happen by the end of March, although he could not be sure.

"A month or two, in the context of what the industry
has accomplished in creating such a standard, is really nothing," he added.

Operators are so confident that vendors' products
largely conform to the complex set of DOCSIS protocols that they have launched new markets
using DOCSIS headend equipment, instead of deploying proprietary systems.

In dozens of markets in the United States and Canada,
operators are hooking up customers using uncertified DOCSIS modems on the understanding
that they can bring the modems into conformance through software downloads.

But the ongoing delays in certification are taking a toll:
They have set back the onset of massive retail distribution, as well as cable's
marketing efforts for new modems. Moreover, they have postponed the massive industry
switchover to DOCSIS in systems that are now using proprietary equipment.

General Instrument Corp. CEO Ed Breen acknowledged to
analysts in a teleconference last week that his company is "slightly frustrated that
this product has not launched en masse in the marketplace. If everybody were honest and
open, you'd hear the same thing."

Breen said that as a result of the certification delays,
"the real volumes will still be another couple to three months off. Some product is
being shipped now, and the downloads will be done to bring them up to DOCSIS status."

At the CableLabs conference, Bruce Stone, corporate vice
president and general manager for the multimedia group at Motorola Inc., spoke of an even
longer time line for his company's DOCSIS products.

He expressed hope that meaningful field trials of certified
modem systems will begin on a large scale in the "back-to-school time frame,"
with commercial launches and promotions of the new gear in time for "a fairly
active" holiday season.

By that time, Stone added, Motorola will be shipping DOCSIS
modems that have interconnections with home telephone wiring built into the chip sets,
allowing multiple PCs to operate off the same high-speed-data connection.

"We believe that the linking of multiple PCs in the
home will be a very rapid process that starts to happen in late '99, as the prices of
PCs continue to drop," Stone said. "The real question that we had was whether we
could take the DOCSIS modem and leverage it with PNA [the Phone Network Alliance
protocol]."

PNA connections, now available in some PC models, allow
users to plug all of their PC modems into wall jacks and to operate off a single dial-up
Internet connection. Cable would have a tough time reaching a mass market for this service
if the DOCSIS modems couldn't interconnect via the PNA protocol.

"We'll have a product in the market that does
this by late this year," Stone said.

Delays or not, vendors made it clear that the transition to
retail distribution is an evolutionary process that will require hard bargaining and a lot
of experimentation before it reaches mass-market proportions.

"We're having dialogues with major retailers like
Best Buy [Inc.], Circuit City [Stores Inc.], Sears [Sears, Roebuck and Co.] and
RadioShack, but there are no agreements yet for distribution of our DOCSIS modems,"
said Carl Bruhn, general manager for RCA broadband products at Thomson Consumer
Electronics.

There is "across-the-board" interest in stocking
cable modems in the retail community, Bruhn said, adding, "We think that there will
be a significant test market for retail distribution of DOCSIS this year."

But, he added, retailers must be convinced that MSOs are
committed to retail distribution and that high-speed-data services are available over a
large enough portion of upgraded cable systems to make stocking the products worthwhile.

If one-half of the households owning PCs -- currently
representing 48 percent of the market -- were to sign up for cable-data services, that 24
percent penetration would represent a savings of $6 billion in equipment costs for the
industry if the consumers buy the modems, Bruhn said.

The key issue right now is what retailers can expect as far
as residual returns on support for modems beyond their initial margin on the unit sale,
Bruhn added.

"That's where most of the conversation is focused
right now," he noted, declining to say what the retailers are asking for.

Retailers are interested in gaining a share of ongoing
revenues as compensation not only for stocking the gear, but also for providing technical
assistance to customers. In addition, they believe that the marketing support that
stocking the modems affords cable in selling its high-speed-data services merits some
measure of compensation.

Nonetheless, vendors said, they don't view retailer
residuals as a major barrier.

"We're seeing a lot of flexibility from retailers
working with MSOs and manufacturers," said Mark Stubbe, vice president of the
networks division at Samsung Telecommunications America Inc.

In fact, he added, not all retailers are firmly committed
to getting residual compensation.

But beyond retailer support for stand-alone modems, the key
to real momentum in consumer acceptance of DOCSIS is the availability of modems as
embedded components of PCs, Stubbe said.

"We're working very hard to drive the costs of
equipment down as quickly as we can," he added.

Stone and Bruhn agreed, stressing the significance that
they place on the OEM (original-equipment-manufacturer) PC market in their strategic
commitment to DOCSIS.

"Most of our business plan is built around the OEM
market, Bruhn said.

Thomson's commitment to making DOCSIS a "core
competency" at the chip level is based on its belief that the modems will be
"the front-end technology for a whole variety of products in the home, from the
telephone, to set-tops, to means of connecting TV sets to the cable network," Bruhn
added.

But first, the embedded-device versions of DOCSIS must be
certified. This could come within six months of whenever external-modem certification is
wrapped up, Yassini said.

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