Sony's Loss is S-A's Gain In New Cablevision Order

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Less than a month after Cablevision Systems Corp. said it would look beyond Sony Corp. when buying digital set-top boxes, the MSO announced a deal to buy Explorer 4200 units, as well as headend gear and associated software, from Scientific Atlanta Inc. for immediate deployment this fall.

The deal is a significant shift for the New York-area operator, which is fine-tuning its strategy to reach its digital-penetration commitments using existing Sony-based headends and set-tops, while building a stable, long-term platform with equipment from S-A.

It also means Cablevision is entering uncharted territory, both by using two types of headends and set-top gear within the same cable plant, and by integrating NDS Group plc's conditional-access technology into the S-A boxes.

MSOs typically choose digital gear from either Motorola Inc. or S-A, which translates to a single set of headend gear, transport equipment and set-top boxes.

Historically, the use of parallel headend and set-top gear from two sets of manufacturers has been too cost-prohibitive and complicated for MSOs to attempt.

And Cablevision has pledged to cut capital expenditures from $1 billion this year to $550 million to $650 million in 2003. The cost and complexity of running separate networks would appear to eliminate Motorola from the Cablevision picture.

But Motorola Broadband raised the specter it could still get a Cablevision deal for set-tops only, integrating NDS's conditional access system into Motorola boxes like S-A is doing. Mark DePietro, vice president of marketing, said Motorola has integrated NDS software in DBS set-tops for BSkyB Corp. in the United Kingdom. Cablevision also has tested Motorola's 5100 set-top product line, he said.

Minimizing the integration challenge, Cablevision might deploy S-A and Sony equipment side by side in only portions of its metropolitan New York market.

Cablevision has started to roll out S-A gear in parts of Brooklyn and Queens, with suburban Westchester County, N.Y., and Connecticut slated for October or November, according to a report issued by analyst Needham & Co. last week.

The report said the Sony launch has been confined to the Long Island, N.Y., counties of Suffolk and Nassau, as well as Morristown, N.J.

Cablevision declined to comment on where S-A gear was being introduced.

If the Needham analysis is correct, it would mean that if Cablevision chooses to eventually shift its entire system to the S-A platform, then it must build a parallel network only in Long Island and Morristown.

A second key element is the integration of NDS, which has supplied the conditional access to Cablevision's Sony boxes.

NDS signed a nonbinding letter of intent to incorporate NDS conditional-access technology into S-A's Explorer set-tops. It's the first time S-A has signed a deal to put another conditional access system into an S-A box, home to proprietary access system PowerKey.

NDS said it would take 90 days to complete integration with S-A.

This integration of NDS's access system marks the first such move involving either of the top two U.S. set-top suppliers, S-A or Motorola. MSOs have long complained that the two vendors comprise an oligopoly that at times has put a chokehold on innovation.

There have been a handful of U.S. tests involving gear from vendors other than Motorola or S-A. The former MediaOne Group Inc. tested gear from NDS and Philips Consumer Electronics in its Jacksonville, Fla., system, as well as equipment from Canal Plus U.S. Technologies in California. But no alternative conditional-access systems for set-tops has caught on with U.S. operators.

While this is the first time S-A has agreed to an outside conditional-access system, an S-A spokesman said it's not expected to set a precedent.

"This arrangement is strictly related to Cablevision," the S-A spokesman said.

SONY SCALED BACK

Cablevision signaled its multiple vendor set-top move at a meeting with analysts last month, at which the MSO said it would drastically reduce its commitment to purchase boxes from Sony.

The MSO, which at one time contemplated buying 300,000-plus Sony set-tops, reduced its financial commitment to Sony from $1.38 billion to $138 million over the past few months.

Cablevision and S-A executives were not available for comment after the agreement was announced last Thursday.

When Cablevision launched the Sony set-top and its iO service late last year, the MSO experienced software problems with the set-top. That was eventually remedied, but Cablevision was forced to scale back its digital-penetration forecast for 2002 from more than 250,000 to between 125,000 and 150,000.

At the end of the second quarter, Cablevision counted just 42,670 iO customers.

In the past, Cablevision has bought transport equipment from BarcoNet, now owned by S-A. The new Explorer 4200's will carry a card slot for conditional access. At some point in the future, Cablevision could switch out conditional-access features without replacing set-tops.

Although Cablevision hopes to top the 125,000 digital-subscriber mark by year-end, it's still in the early stages of its rollout. Thus, it might not pose a huge challenge to switch out conditional-access cards, or even set-top boxes, in the near future.

After completing an $87.5-million payment to Sony in 2002, the MSO is only obligated to pay Sony $50 million to license certain software for existing boxes. It has no commitment to rollout Sony boxes thereafter.

How much Cablevision will pay S-A for the Explorer 4200 also wasn't disclosed. Rutledge has told analysts Cablevision planned to buy set-tops for an average of $215 apiece year.

IT'S A NEW BOX

An S-A spokesman declined to comment on how much Cablevision would pay S-A, but stressed the word "average" in Rutledge's comments.

The Explorer 4200 was introduced only a month ago. It sports a Data Over Cable Service Interface Specification cable modem and Digital Audio/Video Interoperability Council (DAVIC) capability.

S-A has called the 4200 a "home gateway" that can support wired and wireless connectivity to TVs, personal computers, palm devices, telephones and Internet appliances.

It also supports interactive television, Web browsing, video-on-demand and electronic commerce.

As if Cablevision's move to back away from its ambitions Sony rollout wasn't intriguing enough, the move to S-A gear and BarcoNet transport could hold an even more alluring proposition: Time Warner Cable could purchase Cablevision's MSO business.

Time Warner Cable's New York City cluster is surrounded by Cablevision properties. That MSO is also a major buyer of S-A equipment.

Cablevision New York president Tom Rutledge is a former Time Warner Cable executive.

"S-A was the logical choice because Cablevision would seek to maximize the value of its properties in the event that Time Warner Cable would be interested in buying Cablevision's cable TV plant," wrote Needham & Co. analyst Anton Wahlman.

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