Set-top Box Wars. Good for us.
Technology
Scientific-Atlanta hopes to whip archrival General Instrument with its new digital set-top box. Playing catch-up is more like it.
My box can beat your box
By Bruce Upbin
THE FIGHT OVER a precious piece of turf in the Digital Age—the top of your TV set—is about to get a lot rougher.
In one corner is the perennial champ, General Instrument, with a 65% share of the $3-billion-a-year business of making the set-top boxes that funnel cable programming to TV screens. In the other is the market's longtime also-ran, Scientific-Atlanta, now hawking its next great hope for an upset: the Explorer 2000.
The $350 box boasts more processing power—54 million instructions per second—than any other box on the market. Linked to a digital network, this thin, gray device promises moves the champ can't yet match—high-speed Web browsing, phone calls, shopping and games (once such things are available).
News that Scientific-Atlanta had shipped 126,000 boxes last quarter—twice as many as expected—sent the stock up 25%, to $31.25. By next year the new line and related gear could provide 25% of the company's $1.2 billion in annual sales.
For Scientific-Atlanta's James McDonald, the Explorer is a shot at a rematch. Shortly after he arrived as chief executive officer in July 1993, he gave the go-ahead to develop a supercharged digital box to serve a new world of fully interactive video networks to be built by the Baby Bells, Time Warner and others.
The Norcross, Ga. supplier had always been an engineers' firm, and it ended up overengineering a box that was too far ahead of the market. Early prototypes cost $3,000 apiece. Time Warner was to be a big customer, but then its much-hyped network project in Orlando, Fla. infamously fizzled. Most other companies abandoned their interactive ambitions, too.
Meanwhile, General Instrument, based in Horsham, Pa., stuck to older-design analog boxes. It finally put out a less ambitious digital box in 1996—which mainly let cable operators squeeze in more channels with better picture quality.
Now General Instrument has 1.5 million digital set-tops in use. Scientific-Atlanta's Explorers are barely off the truck. Since 1995 General Instrument's revenue has risen 9% a year, compared with just 1% at Scientific-Atlanta. The latter's shares are up just 12% a year since McDonald took over, well below the S&P 500. The stock now is at 46 times 1999 earnings.
Can Explorer keep the stock aloft? Other revenues (satellite, transmission and analog) are expected to stall. That makes Explorer's lead all the more important. It may be nine months before General Instrument catches up—but will that be enough?
No way, scoffs General Instrument's chief executive, Edward Breen. By next fall the set-top champ will ship its more powerful answer to Explorer, the DCT-5000. AT&T says the DCT-5000 will be "the workhorse" at the cable systems it will own after acquiring Tele-Communications.
"Right now it's 98% us and 2% them in digital. By the time they are rolling anything out commercially, we'll have the 5000 out and leapfrog them," Breen boasts.
James McDonald is careful to avoid predicting victory. "We'll know 18 months from now what kind of lead we have, and we won't be in the same place then," he says, adding hopefully: "We'll both do fine."
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