A "competitor" of sorts, but they are selling 100,000 boxes a week at $500. Not the same type of box of course, interesting nonetheless. Wonder if the commerce part could be handled using a web browser (and a board from MUCP?) Maybe Motorola (mentioned near the end of the article) could use such an enhancement to their non-competitive box??
Scientific Atlanta: A Big Payoff Inside the Box
Its Explorer digital-TV set-top box is red hot -- and it has an operating system that could make it the Microsoft of next-gen TV
When Scientific Atlanta Inc. (SFA
)unveiled a $5,000 digital set-top box in 1993 for a trial run of interactive-TV in Orlando, Fla., analysts sneered in disbelief. Who, they asked, would buy a $5,000 box just to send e-mail and order pizza through the tube? Despite the chilly response, Scientific Atlanta worked hard to lower production costs. Today, the same box -- called the Explorer -- costs $500, and it's flying off the shelves. As a supplier for 52 of the 100 largest U.S. cable-TV systems, Scientific Atlanta is now selling 100,000 Explorer boxes a week.
This explosive success has ignited new interest on Wall Street in Scientific Atlanta, a perennial No. 2 behind industry leader General Instruments (GI). But with Motorola Inc.'s (MOT
) acquisition last year of GI, investors are suddenly turning to Scientific Atlanta as the best pure play on the booming demand for digital TV boxes. Scientific Atlanta's stock, which closed 2000 at around $32 a share, soared as high as $62 in late January, before settling back to around $49 amid the recent market correction.
Considering its heady gains earlier this year and where it is now, many Wall Street analysts believe Scientific Atlanta has room to run. With its stock selling for 28 times projected 2001 earnings -- just a shade more than its 25% growth rate -- Wachovia Securities analyst George Hunt is predicting that Scientific Atlanta could hit $110 a share over the next 12 to 18 months.
THE RACE IS ON. "I follow 11 stocks, and Scientific Atlanta is the only one that beat its quarterly numbers and raises expectations for future growth," Hunt says. Underpinning his price target is a belief that cable systems will soon start subbing out their antiquated analog boxes in favor of new digital systems like the Explorer. Such systems provide a wide range of interactive services -- allowing everything from interactive commercials to e-commerce applications like, well, ordering a pizza.
While cable operators were initially slow to adopt the new digital boxes, consultants at Paul Kagan & Associates now expect sales to nearly double, to 19.7 million, in 2001. Kagan expects Motorola/General Instruments to capture 42.6% of those digital sales, vs. 30% for Scientific Atlanta. But Scientific Atlanta's top brass is betting that its new technology will enable it to close the gap with GI, its old nemesis. "GI has plateaued," sniffs Scientific Atlanta President and CEO James McDonald .
Nothing is wrong with being a close second in a booming market. Scientific Atlanta saw its backlog of orders soar to 2.1 million in December, vs. 1.7 million in September. And the company has future upgrades of its Explorer series in the works that could drive demand even further. Later this year, Scientific Atlanta is scheduled to deliver the first shipments of its state-of-the-art Explorer 8000 box to AOL-Time Warner -- a unit that possesses the capability to provide not just Internet browsing and e-mail but video-on-demand and even a personal video recorder.
Already, the Explorer is providing a nice bounce to Scientific Atlanta's bottom line: In the fourth quarter, the company saw profits jump 112%, to $70.8 million, on a 69% surge in sales, to $631 million. And with more of its sales coming from the Explorer, instead of lower-margin analog boxes, the company's gross margin rose 1 1/2-percentage points, to 30.8%, in the most recent quarter. Wall Street is expecting an additional 74.6% jump in profits during 2001, to roughly $265 million.
PC PARALLELS. Some analysts believe that Scientific Atlanta has even more upside, thanks to its success in developing a common operating system for all digital set-top boxes, which it's now licensing to other box makers. Anton Wahlman, telecommunications analyst for UBS Warburg, draws an analogy between Scientific Atlanta's current situation and the race two decades ago among IBM (IBM
), Microsoft (MSFT
), and Apple Computer (AAPL
) to develop the de facto standard for PC operating systems. While IBM held the early edge with DOS, it thought the real profits lay on the hardware side. Apple was developing what proved to be the more sophisticated operating system but couldn't get it to market in time, giving Microsoft the opening to score with its MS-DOS (which begat Windows, which begat Windows 95, which begat...).
Walhman sees parallels in the digital-box business. Motorola, given its hardware-driven culture, opted to hit the market fast with a cheaper-to-build box that simply converted existing analog signals into digital ones. That gave viewers the benefit of a sharper picture and scores of new channels. And in time, Motorola plans to build in more interactive capabilities as demand dictates. That first-to-market strategy "let us win a big footprint in the digital market, and now we're No. 1," gloats Motorola Senior Vice-President Daniel Moloney.
But with the release of its Explorer box, Scientific Atlanta has clearly upped the ante. Analysts note that while Motorola has developed hardware capable of delivering many of the same services as Explorer, "they're sitting in warehouses awaiting an operating system that will make them work," says Lawrence Harris, an analyst at Josephthal & Co. Motorola designed its digital boxes to work with a variety of operating systems -- including a gee-whiz new system from Microsoft that's way behind schedule. Motorola says the boxes with the new operating systems are now being field-tested.
By contrast, Scientific Atlanta has jumped ahead and is already licensing its operating system, known as PowerTV, to rival boxmakers like Pioneer and Philips Electronics. Scientific Atlanta "is in a similar position to where Microsoft was 20 years ago in the PC industry," says Wahlman. If that's true, the company has come a long way from those early days in Orlando. Who's laughing now?
Haddad covers technology issues from BusinessWeek's Atlanta bureau
Edited by Beth Belton |
