Harmonic Hints at Recovery Scheme


When Harmonic Inc. launched its new "Narrowcast Services Gateway" (NSG) at the International Broadcasting Convention in Amsterdam as a more efficient and cheaper server gateway for video-on-demand, the venture's happy tune had a curious undertone.

Though the announcement had the potential to make VOD deployments more affordable for the interactive-TV industry, it also signaled Harmonic's strategy for recovering from summertime hits to its stock price.

The NSG is the smallest VOD gateway available at present, claims the Sunnyvale, Calif.-based manufacturer of digital and fiber-optic systems for video, voice and data networks. It reduces the cost and complexity of launching and supporting VOD services, so network operators can develop viable business models.

"Major MSOs in many parts of the world are evaluating VOD as an additional service for subscribers," Harmonic chairman CEO Anthony Ley said. "But the cost and complexity of previous systems has slowed deployments. The NSG is a major step towards making VOD more practical and profitable."

VOD headend systems typically require costly subsystems to deliver the appropriate video-signal processing and management, Harmonic vice president of marketing Yaron Simler added. The new NSG handles multiple high-capacity server inputs, multiplexing, program filtering and routing, conditional-access scrambling, and does this for eight-channel QAM modulation with upconversion, all in a single-rack unit that does not require extra thermal spacing.

"Since VOD deployments require hundreds of QAM channels in a single cable headend or a hub, the NSG's compact construction reduces both the space and the capital investment needed to launch VOD service," said Simler. "The NSG interoperates with other VOD components on the market for a best-of-breed solution."

Added Ley: "Our focus was on bringing down the size and the cost. Eight VOD streams within one rack unit makes this the smallest physical realization of VOD available. The cost works out to about $300 per stream, which is very competitive."

Harmonic doesn't want its VOD gateway to succeed just for the sake of the growing global ITV business. It needs the unit to thrive for the sake of its own business vitality.

Harmonic's stock took a 30 percent hit on June 12, after Ley reported that sales to AT & T Broadband for this year would be lower than expected.

AT & T accounted for half of Harmonic's business in the third quarter of 1999, but orders shrank to only about 28 percent of Harmonic's revenues in first-quarter 2000.

The other shoe dropped June 26, when Ley revealed that second-quarter earnings would be sharply lower than anticipated. Harmonic stock plummeted more than 25 percent that night in after-hours online trading.

When second-quarter results were announced July 19, Harmonic reported net sales of $80 million, 65 percent in the U.S. Accounting for about $27 million of this was Harmonic's Convergent Systems division, essentially the DiviCom business it acquired from C-Cube Microsystems Inc. in May.

That unit sells digital-headend systems to cable and direct satellite operators. It also sells the VOD gateway.

Harmonic's U.S. customers include Adelphia Communications Corp., Charter Communications Inc., Comcast Corp., Cox Communications Inc., Rogers Communications Inc., Time Warner Cable, DirecTV Inc. and EchoStar Communications Corp. A notable overseas VOD customer is United Kingdom MSO Telewest Communications PLC.

"Improving the cost and performance of content-on- demand services will make the digital experience far better for subscribers, which will encourage more investment in digital services, which will have a dramatic affect on the entire cable industry," said Ley.

Said Intertainer Inc. CEO Jonathan Taplin: "My feeling is that anything that truly helps lower the cost of video-on-demand services is going to be helpful to everybody."