Shaw Buys Modems, Invests in Terayon

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Canada's Shaw Communications Inc.gave
Terayon Communication Systems a double nod last week, agreeing to buy 40,000 cable modems
and to invest $7.5 million into the Santa Clara, Calif.-based manufacturer.

The three-year deal marks a validating domestic win for
Terayon and its first supply relationship with an affiliate of broadband-data-provider
@Home Network.

It also lends de facto approval -- albeit small and early
-- to Terayon's pitch to become an advanced-modulation option in the second version of the
DOCSIS (Data Over Cable Service/Interoperability Specification) standard, which is
expected next year.

Calgary, Alberta-based Shaw, which already boasts 24,000
subscribers to its @Home-based broadband-data service, plans to deploy the modems in
"several major markets," including Toronto and Victoria, British Columbia, said
Michael D'Avella, senior vice president of planning for the MSO. Following that are Shaw's
Winnipeg, Manitoba, system, and its interior British Columbia system, he said.

"This is a serious business, from our
perspective," D'Avella said of what he figures is a two-year window to capture market
share against competing xDSL (digital subscriber line) consumer options. "Terayon's
products give us the most cost-effective approach."

The cost-effective part maps to the technical underpinnings
of Terayon's system, known as S-CDMA (synchronous code-division multiple access). Because
the S-CDMA modems perform so well in noisy, all-coaxial systems, operators can sidestep or
postpone costly fiber upgrades, Shaw and Terayon said.

"It's absolutely rock-solid," D'Avella said of
the high-speed-data system, which Shaw has tested in Victoria for the past six months.

Specifically, operators can save on capital-upgrade costs
by eliminating the need for house filters and plant-cleanup activities. Terayon has
estimated that MSOs spend roughly $1 million on plant cleanup for a 60,000-subscriber
system, not including the cost of the filters, or "traps," that are needed for
the job.

Terayon executives described the order as "a major,
major, major win" over Shaw's existing supplier, Motorola Inc. It also gives Terayon
a foothold into @Home's service footprint, of which Shaw represents about 22 percent, said
Zaki Rakib, CEO of Terayon.

"I think [that the Shaw order] will give us the
dimension that was missing, which is large-scale deployment in North America," Rakib
said.

Shaw's agreement to plow $7.5 million into Terayon will
quicken its delivery on a promise made last year to incorporate DOCSIS specifications into
its modems.

"This gives us more resources to make sure that we hit
our targets," Rakib said, noting, "Our challenge is greater [than that of other
modem suppliers], because we're trying to incorporate two systems into one."

This means coming up with what is essentially a triple-mode
product: one that operates in its native, bidirectional, S-CDMA format; another that runs
DOCSIS specs of 64 QAM (quadrature amplitude modulation) downstream and QPSK (quadrature
phase shift key) upstream; and a third that uses 64 or 256 QAM downstream and S-CDMA
upstream.

Shaw is the third of Terayon's customers to place an order
in conjunction with an investment. Large Brazilian operator Globocabo and Japan's Sumitomo
Corp., which is involved in the Jupiter MSO joint venture with Tele-Communications
International Inc. (TINTA), also invested in Terayon last year.

Rakib said the combination of investments and orders is a
good strategy for a company as young as Terayon, which plans to go public by the end of
this year.

"It's an advantage for a young company like ours to
get the customers, as investors, involved in determining the future," Rakib said.

Michael Harris, president of Scottsdale, Ariz.-based
research firm Kinetic Strategies Inc., said Shaw's decision to use Terayon "is
clearly an endorsement of the technology."

What remains to be seen, he said, is whether or not
Terayon's S-CDMA approach becomes part of a future "Hi-PHY," or higher-order
physical-layer, modem standard.

S-CDMA allows 10 megabits per second to pass over a
6-megahertz channel, almost regardless of the kinds of ingress and impulse noise present.

Ingress happens when signals leak into a hybrid
fiber-coaxial system through shoddy connectors or bad wiring, while impulse noise comes
from sharp electrical spikes associated with anything from a furnace kicking on to a spark
generated when a person shuffles across a carpeted floor in socks, then touches a light
switch.

Both impulse noise and ingress are serious problems in
cable's upstream lane from homes to headends, because the 5- to 40-MHz spectrum is
inherently susceptible to both.

CDMA technologies are also known as "spread
spectrum," and they were originally developed for the military to keep data
transmissions secure from enemy jamming.

The technique works by taking an upstream data payload and
coding it, then dispersing it across a 6-MHz channel in the 5- to 40-MHz zone.

If, during transmission, an electrical-noise spike or
errant zing of RF energy blasts the channel, the data can still be recovered at the
receive site in the headend, Terayon executives said.

Other upstream technologies, like QPSK, work by assigning
data packets to a series of carriers present in an upstream channel. If one of the
carriers is obliterated, the data are dynamically moved to a cleaner spectral area -- but
this means that precious upstream bandwidth has to be reserved for that occurrence, which
is wasteful, executives said.

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