Silicon Valley Courts Cable TV
By PETER H. LEWIS
Several of the nation's largest cable television companies announced plans last week to
buy 15 million digital set-top boxes from NextLevel Systems Inc., a move that could
sharply accelerate the use of new digital services by TV viewers.
But the agreement between NextLevel and the cable operators o led by the largest of
them, Tele-Communications Inc. o also served as the starting gun for a race by Silicon
Valley companies to move beyond the world of personal computers into the far larger
television business. The computer industry wants to provide the processors and
operating systems for all these new digital boxes, and the cable industry appears to be
a receptive customer.
"Silicon Valley will now play a critical role in the development of what we used to call
the cable industry," predicted Gerald M. Levin, chairman of Time Warner Inc., which
owns the nation's second-largest cable system.
Leo J. Hindery Jr., the president of Tele-Communications, said the industry had now
set a course that would intersect rapidly with Silicon Valley. "The era of promising has
passed," he said. "The world of the future is the world of the network PC."
Although final technical specifications have not yet been issued, the digital TV set-top
devices will actually be powerful computers. Unlike the conventional analog boxes in
use today, these new devices will be able to process high-speed digital signals moving
to and from the home.
They will enable cable companies to expand the number of channels they offer. And
they will also make possible new generations of television-based interactive services,
including high-speed Internet access with e-mail, on-demand pay-per-view videos,
push-button electronic commerce, advertising that can be aimed to specific homes,
interactive games and eventually high-definition video.
The speed of the deployment of these boxes depends in large part on the cable
companies' ability to upgrade their existing analog systems. That can be a slow and
expensive process. To raise money to pay for new cable and optical fiber networks
and millions of the expensive new boxes, the companies are actively wooing big
investors -- including computer and telephone companies.
In June, for example, the fourth-largest cable operator, Comcast, sold 11.5 percent of
the company to Microsoft Corp. for $1 billion. Microsoft has also spent an estimated
$1 billion this year in buying and developing WebTV, a system that uses a standard
telephone line instead of cable to provide Internet services on a television set.
Tele-Communications, short of cash, has been the focus of recent billion-dollar
investment rumors; press reports have identified Microsoft as a possible suitor. In fact,
John C. Malone, chairman of Tele-Communications, and his counterpart at Microsoft,
Bill Gates, have held several meetings this year.
Cable companies have completed installation of digital lines that could potentially serve
3.25 million current cable subscribers nationwide, said Cynthia Brumfield, a senior
cable television analyst for Paul Kagan Associates. But so far, only about 40,000 of
those customers have taken the digital television leap, she said. Still, the potential
market is huge.
Cable lines now pass more than 90 million American homes, and 65 million of those
subscribe to cable services. In contrast, residential penetration of personal computers
has stalled at fewer than 40 million homes, of which about 16 million subscribe to an
Internet server or other online services.
The opportunities for the Silicon Valley companies include not just a new market for
microprocessors and operating systems, but also for new applications, many not yet
imagined. But before any of these marketing dreams can reach fruition, cable
companies must persuade their customers to buy or lease the digital boxes o and to
pay higher fees for the new services.
The digital boxes available today are expensive; at a typical cost of $400 or $500, they
are above the threshold that most consumers are willing to pay. Most customers can
choose to lease them from the cable companies instead.
But cable companies are also reluctant to pay so much for the boxes, until they are
certain that their future income will offset the high initial cost of equipping homes for
digital services.
"On one hand, the cable companies have not placed orders for these boxes because
they cost too much, and on other side, the box makers want to lower the cost but
didn't have a big enough order," said Bruce Leichtman, a media analyst with the
Yankee Group in Boston. Still, he added, the NextLevel announcement "breaks the
logjam."
NextLevel says it plans to sell the next-generation boxes for about $300 each, meaning
the deal announced last week could be worth as much as $4.5 billion to the company
over the next three years. Tele-Communications, the largest customer, agreed to buy
10 million of the boxes but demanded concessions from the bidders that resulted in the
$300 price. Other customers include Time Warner, Comcast, Cox Communications
Inc. and Cablevision Systems Corp.
The new digital boxes require far more processing power than the conventional boxes
now in about 30 million homes. They will also need a robust operating system, and
Microsoft wants to establish Windows and its own WebTV Plus unit as the industry
standard.
A rival proposal has been offered by a joint venture of Netscape Communications
Corp. and Oracle Corp.
Under one outlook that Tele-Communications' Malone detailed last week, the cable
industry could possibly name both Microsoft and Network Computer Inc. (an
Oracle-Netscape joint venture) to supply system software for the new digital television
boxes, and cable operators would decide which of the two operating systems to use in
the boxes they lease to their customers.
In such a situation, analysts said, the choice would be simple for Comcast, or any
company partly owned by Microsoft.
About 30 other companies also want to set the standard, including IBM, Sun
Microsystems, Scientific-Atlanta, Toshiba, Cisco Systems, Thomson Consumer
Electronics, Sony, Lucent Technologies, Zenith Electronics, Texas Instruments and
Panasonic.
With stakes so high, companies in the computer, consumer electronics and cable
industries are in a flurry of negotiations over everything from technology to investments.
Intel Corp. recently invited cable company representatives to its California
headquarters to demonstrate prototype systems that are based on Intel's Pentium II
microprocessors.
In advance of the visit, Intel announced that it would no longer fight the use of
high-definition television standards favored by broadcasters and consumer electronics
companies.
Meanwhile, Microsoft says it is integrating a number of video-related features into its
Windows 98 operating system. But the cable industry is wary.
"We're not going to let one maker of hardware or software get into a position to
control this industry," warned Ted Turner, vice chairman of Time Warner.
After meeting with Gates earlier this year, Malone, the Tele-Communications chairman,
warned in September, "Beware Bill Gates."
But at the Western Cable Show earlier this month, Microsoft officials were meeting
with cable operators from Tele-Communications and other companies to demonstrate
their new Windows-based cable boxes. And Hindery said his boss' comment in
September had been misinterpreted.
"We said, beware closed environments," Hindery explained. "We can't have anything
that retards growth." Most of the cable companies covet Microsoft's money, but none
wants to see the software giant dominate their industry as it does PCs.
The comment prompted Barry Diller, chairman of HSN Inc., to snap back, "Beware
Bill Gates."
In presentations to cable industry executives last spring, Gates proposed a business
alliance that would have made Windows the standard operating system for
digital-television boxes -- and also would have given Microsoft a slice of the revenue
from all the new electronic commerce conducted over these cable networks. He was
rebuffed.
Cable executives said Microsoft had sweetened its offer in recent weeks, asking for a
smaller percentage of revenue. But the cable industry is still talking to other suitors.
</a> Related Sites
NextLevel Systems
nlvl.com
Tele-Communications
tcinc.com
Monday, December 22, 1997
Copyright 1997 The New York Times |
