Terayon Buys Imedia for $100M

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Terayon Communication Systems Inc. agreed last week to buy
Imedia Corp. for about $100 million, aiming to shore up efforts to create a
next-generation headend for the cable industry.

For the next 18 months or so, the two firms will continue
to generate product targeted toward the largely separate markets that they have been
serving, Terayon CEO Zaki Rakib said.

During that time, the companies will combine their
expertise -- with additional expertise coming from a possible further acquisition in the
IP-voice (Internet protocol) arena -- in order to develop broadband-multimedia headends
for delivery in the mid-2001 time frame, he added.

"We believe that's when the industry will need a
common network-management platform that has the capability to integrate video, data and
voice services much more efficiently than can be done with today's headends,"
Rakib said.

This is an ambitious undertaking for a company that so far
has built its business on delivering a proprietary modem system to the cable industry, he
acknowledged.

But the deal -- aimed at bolstering the ability of cable
networks to handle multimedia traffic where video is a key, bandwidth-hungry component --
plays into Terayon's strong suit: its ability to maximize bandwidth efficiency.

"Cisco [Systems Inc.] is becoming the primary
competitor in the next-generation headend business, and they have the market
capitalization that will allow them to acquire the expertise they need to handle all of
the tasks of a headend, including the legacy operations," Rakib said. "But
I'm expecting that there will be issues that aren't addressed by them and other
suppliers, which we can solve very effectively."

Most significant, these issues involve the ways in which
video and data will be integrated in the future, which is where Imedia comes into play.

Imedia currently delivers products designed to give
operators flexibility in mixing digital-TV services from different sources, as well as the
ability to insert local ads seamlessly in real time.

"These same capabilities can be applied to the
multimedia environment, where ad insertion and bandwidth efficiency are vital,"
Imedia senior vice president for sales and marketing Stephen King said.

"There's nothing new about delivering IP over
MPEG [Moving Picture Expert Group]," King added, "but where we have something to
offer is in our ability to synchronize data with video, where, for example, multimedia ads
can be linked with advertising in the video programming through synchronization at the
headend."

This type of integration -- preserving the dominance of the
MPEG video feed, while adding IP-based ads and e-commerce to the mix -- is central to the
approach to next-generation services that many operators are taking in plans to implement
the OpenCable set-top terminal.

Meanwhile, video entertainment delivered over the IP feed
by new suppliers like Broadcast.com Inc. and Snap presents alternatives for operators that
want to be able to insert advertising or local content to realize more value.

"We'll be able to support whichever approach
operators want to take," King said. "I think the distinctions between cable
headends and ISP [Internet-service provider] points of presence are going to get very
blurry in the future."

The next-generation headend's timing would coincide
with the cable industry's need for the next level of transport capabilities embodied
in version 1.2 of DOCSIS (Data Over Cable Service Interface Specification), Rakib
predicted.

Terayon -- which will introduce DOCSIS 1.0 headend
cable-modem-termination systems later this year -- has provided key pieces of the
underlying technology to be used with 1.2, which employs the Terayon S-CDMA (synchronous
code-division multiple access) modulation system as a way to maximize upstream capacity.

The emergence of video as a component of upstream
communications, especially in video-telephony applications, will be a major driver in the
move to DOCSIS 1.2 and to next-generation headends, Rakib said.

"In addition to traditional videoconferencing-type
calls, you'll see remote-monitoring applications like home security and the
distribution of video-enhanced content from home Web sites as things that people want from
their services," he added.

Terayon is likely to acquire or partner with a specialist
in the IP-telephony field in the near future to ensure that it has the capability to
integrate voice applications within its modem and headend systems, Rakib said.

At the National Show in Chicago last month, Terayon
demonstrated a small-office business service that delivered high-speed Internet,
videoconferencing at 30 frames per second and voice via its proprietary modem system.

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