Flexible design............................................
mediacentral.com
TCI-GI Place 15M Unit Box Order
Mega-deal includes TW, Cox, Comcast, C'Vision
By Jim Barthold and K.C. Neel
The cable industry will usher in 1998 a lot like it greeted 1993: giddy about digital TV's prospects and optimistic about mass technology deployments after nine MSOs led by Tele-Communications Inc. agreed Dec. 17 to buy up to 15 million OpenCable digital set-tops from General Instrument Corp.
TCI and its affiliated companies ordered up to 11.9 million of the $300-per-unit digital set-tops that will be delivered over the next three to five years.
What's more, Time Warner Cable announced that it will order 500,000 units, while Cox Communications Inc., Comcast Cable Corp., Cablevision Systems Corp., Canada's Shaw Communications Inc. and TCI's Headend In The Sky affiliates will cover the rest of the 15-million-box order.
Noticeably absent: MediaOne, which a company spokesman said last week is "in discussions" with GI.
As part of the deal, GI will surrender a 16% stake in the company by giving the nine MSOs warrants to purchase equity at about $15 per share. The warrants will vest as the set-top orders are shipped over the next three years.
"This is the old programming model; we'll trade you carriage for equity, which is incredible," remarked one industry source.
GI also sold another 10% of the company to TCI in exchange for HITS' digital transport and authorization functions. TCI chairman-CEO John Malone estimated that TCI and its affiliate companies will get 10% of the overall 16% stake in GI, thanks to its box orders. In all, Malone said TCI will receive about $600 million in GI stock.
Malone's moves prompted financial analysts to wonder what's next for TCI. Some speculation centered on AT&T buying into the MSO, which would give TCI more muscle to upgrade its plant before the new OpenCable boxes arrive.
Some 58% of TCI customers live in systems that have been upgraded to a hybrid fiber-coax architecture, Malone said, but few have two-way capability. Upgrading those systems to two-way plant will take two years, he added, while upgrading the rest will take three.
One analyst who requested anonymity last week said he expects AT&T, which has reportedly been talking to TCI for some time, to buy into @Home, the MSO-backed, Internet-access service provider. And some sources said last week that AT&T is ready to buy Teleport Communications Group, in which TCI is a major investor.
But other industry observers said TCI doesn't need another partner, given its rising stock price and the large amount of debt financing it can tap after shoring up its balance sheet this year.
Although several MSOs were part of last week's set-top deal, industrywide enthusiasm was tepid.
"This is nothing more than just a HITS order," said one MSO who requested anonymity. "It involves all the operators that have agreed to carry HITS, even if it's only in a few systems. The MSOs win because they get the warrants and get a box at the low price. But they don't have to order very many of them to get those benefits."
Other major MSOs said they're taking a wait-and-see attitude.
Dallas-based Marcus Cable, which counts about 1.2 million customers, is a Scientific-Atlanta Inc. digital customer.
"We made the choice to roll out S-A's digital boxes in our major markets," said COO Lou Borrelli. "It's product that's available today and that we can deploy in the first half of 1998. We don't have to wait."
While Time Warner ordered 500,000 units, it said it's still committed to its Pegasus order with S-A. "Digital boxes we view as something that takes us further than just broadcast delivery," said Time Warner CTO Jim Chiddix. "The DCT-5000 is a box that's aimed at that market."
He continued: "There's an agreement about making a capital investment in digital boxes. There's a long line that leads to interactive services to be a success. That only works if there are open standards, and the industry has come a long way with open standards."
Last week's box deal capped a difficult year for GI, which ousted chairman Richard Friedland, laid off thousands of workers and made plans to change its name back to General Instrument from Next Level Systems Inc. next year.
"It's a nice feeling that 16% of our company is owned by the customer base," said Ed Breen, GI's newly named chairman-CEO. "Clearly, we have coalesced a significant portion of the North American industry to get behind a massive digital deployment."
He pegged the value of last week's order at about $4.5 billion by using a $300 average price point for each digital box. He said GI bid four models: the low-end DCT-1000 and DCT-1200, which are currently being shipped; the DCT-2000; and the high-end DCT-5000. Breen added that box prices have dropped about $150 over the last 18 months.
News of the deal helped boost GI's stock $2.69 ¥ or 18% ¥ to $17.69 a share Dec. 17. On the flip side, several MSO stock prices dipped a bit. TCI's stock fell 13 cents to $27.69 Dec. 17; Comcast's shares dropped 50 cents to $31.06; Cox's stock fell 25 cents to $38.75; and Time Warner's shares sank 6 cents to $60.13.
"GI had to do something," said one industry observer. "They came out of the Western Show with little to offer. By giving away some of the company, they boost their stock and ensure the deployment of their technology. Let's face it: Just about everyone has some GI product in their systems, so it behooves the industry to have a strong GI, not a weak one."
Some industry observers said the GI box deal looked a lot like 1987's MSO rescue of Turner Broadcasting System Inc. But they added that last week's announcement could very well help the entire cable industry. "This deal puts 15 million boxes in the field at a reasonable $300-a-box price," said Tom Eagan, a PaineWebber Inc. analyst, who added that he liked the fact that a family of boxes ¥ rather than just one set-top ¥ will be deployed to meet customers' needs.
And although the new deal is reminiscent of Malone's infamous 500-channel promise of 1992, his latest declaration is based on realistic goals, one analyst said.
"The difference between now and 1992 is that then the industry promised something it couldn't deliver, it was on the verge of major reregulation and didn't have the cash flow to make it happen," said Fred Moran of Furman Selz Inc. "This time, the cash flow exists and the technology exists. The [cable] industry is already deploying digital boxes, and I think [Congress'] current [reregulation] threat is a farce."
All the new digital boxes will comply with CableLabs' OpenCable initiative, although not all of the set-tops will be the richly featured units that eventually will receive OpenCable certification, according to Don Dulchinos, the director of business development at CableLabs and the OpenCable project manager.
"By the time they take delivery of these orders, we expect the spec to be in place and be able to certify against the spec," he said, noting that the agreements carry a clause calling for OpenCable compliance.
Added Mark Coblitz, the VP-strategic planning at Comcast: "These boxes can be ordered today, but [they are] not something you can get delivered immediately."
One set-top vendor who requested anonymity said he was confused by a purchase announcement that came only two days after TCI's deadline for a request for information on OpenCable boxes.
Although S-A wasn't included in last week's TCI-GI deal, executives there said they aren't out of the running.
"We submitted our RFI response on Dec. 15 and we've been asked to come out and meet with them on Dec. 22," said Allen Ecker, S-A's CTO. "I don't think they have given all their requirements to GI. That's our understanding, that this is only a portion that they have committed to GI. Otherwise, why would they ask us to come in Monday in response to the proposal we made this past Monday?"
Pace Micro Technology PLC was the other big winner last week, thanks to its licensing of the GI technology. "We put ourselves in a position where we are fundamentally the main second source for TCI," said senior VP Michael Tucker. "We have been talking to TCI for quite some time."
Malone's rollout schedule for the next three years: "We'll continue with our current deployment of what I consider the Model T version [DCT-1000] throughout 1998. In '99, we'll start mass deployment as fast as we can get the boxes of this Cadillac [DCT-2000 or 5000] version. As our plant upgrade rolls forward across the nation, we would ubiquitously deploy these boxes in my economic model, and that would open up to service providers a long list of services that this platform would be able to [handle]."
(December 22, 1997) |
