General Instrument to Acquire Stake
In Spyglass in Move to Digitize Cable
By LESLIE CAULEY
Staff Reporter of THE WALL STREET JOURNAL
General Instrument Corp., a maker of digital set-top boxes for the cable-television industry, plans to buy as much as 10% of Spyglass Inc., a small Internet player.
The deal is aimed at increasing General Instrument's lead in the race to digitize the cable industry.
Under the terms of the deal, General Instrument purchased 700,000 shares of Spyglass's common stock -- or about 5% of the company -- for $7.4 million, and retains the right to acquire another 700,000 shares over the next several years. The deal guarantees Spyglass, which specializes in developing software for interactive devices such as set-top boxes, revenue of $20 million over the next three years, nearly matching its 1998 revenue alone.
Despite the small size of the transaction, the two companies say they plan to establish a new digital software-integration center to help encourage the development of applications for new digital set-top boxes, the linchpin of the cable industry's digital revolution.
"We think we have a business model that will be extremely successful going forward," said Mike Tyrrell, Spyglass's executive vice president of development. Dave Robinson, a General Instrument senior vice president, said the deal would permit his company "to move faster" than it could on its own. "A lot of success in software is about execution," he said.
The deal, which is expected to be announced Wednesday, is a strategic play for General Instrument, whose major investors include cable giant Tele-Communications Inc. TCI owns about 12% of General Instrument, whose stock has continued to escalate during the past year, buoyed by the cable industry's aggressive move to upgrade to digital technology.
AT&T Corp. has announced plans to buy TCI for $31.8 billion in cash and stock, but won't inherit TCI's stake in General Instrument -- that goes to TCI's programming arm, Liberty Media. The arrangement will allow Liberty to continue to wield influence over General Instrument, and thus over development of the digital equipment market that the rest of the industry, including AT&T, will need in the future.
Cable operators are moving aggressively to upgrade old one-way cable wires to accommodate a raft of new technologies and digital services, including interactive TV, Internet-access services and phone service. General Instrument has moved rapidly to offer up new equipment to meet the industry's needs, cobbling together a raft of new partnerships along the way, often with help from TCI, one of its biggest customers and supporters over the years.
Last year, TCI helped rally the cable industry to agree to buy at least 15 million advanced digital set-top devices from General Instrument over a three-year period. Under an unusual arrangement, General Instrument, at the time called NextLevel Systems Inc., offered cable companies warrants to buy about 16% of its stock at $15 a share, which would vest as the boxes were shipped. A big chunk of the orders are expected to come from TCI. Shares of General Instrument, which were trading at around $14 when the set-top deal was announced, have since soared to almost $25.
For Spyglass, of Naperville, Ill., the General Instrument deal represents validation of its decision two years ago to get out of the desktop browser market and go after the market for non-PC-based Internet devices, such as digital set-top boxes.
Separately, Spyglass reported a fiscal fourth-quarter loss of $589,000, or four cents share, down from $4.7 million, or 38 cents a share, a year ago. Revenue rose 84% to $5.9 million, from $3.2 million in the year-ago period. The quarter ended Sept. 30. Spyglass said the results reflect "robust" revenue growth coming from both technology licensing and professional service revenue.
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