NXTV coming in on my scope low & fast
check this out - another BRCM ?
Heaven help us if it is (and thankyou J P Morgan)
Next Level races ahead on cutting
edge
Phone, video, Net on one line
June 13, 1999
By TED APPEL
Press Democrat Staff Writer
"Traveler, there is no path,
Paths are made by walking."
The lyrical quote, by renowned Spanish poet Antonio
Machado, is painted prominently on a wall in the foyer
at Next Level Communications. It is a mantra of sorts
at the Rohnert Park telecom startup, reminding
employees that trails are blazed in the wilderness by
pioneers. The corollary is left unsaid: Stragglers bring
up the rear.
"We really had to make our own path. If we relied on
other people, it would have been a dead end,"
explains Pete Keeler, chief executive officer at Next
Level.
After an exhausting, five-year development project
that cost more than $250 million, Next Level is rolling
out a new technology that allows telephone
companies to deliver phone service, high-speed
Internet connections and digital TV over an ordinary
copper telephone wire.
Now, the world is starting to beat a path to Keeler's
door.
U.S. West, one of the most aggressive Baby Bell
telephone companies, is deploying Next Level's
technology in a frontal assault on cable TV operators.
GTE also has signed a contract to buy Next Level's
broadband equipment, while several other major
telephone companies are testing its video technology,
including SBC Communications, Bell Canada and
Telefonica.
Sales more than tripled in 1998, when Next Level
rang up $43 million in revenues. With sales growing
rapidly, Next Level is proceeding toward a
long-planned initial public stock offering, which could
come any time.
Explosive county industry
Like other companies before it and others still to
come, Next Level is emblematic of the county's
explosive telecommunications industry -- and the
potential it holds for the region's future.
Now, the 320-employee company -- which makes
equipment that connects homes and businesses to
the central telephone network -- is at a crossroads.
Next Level could survive very nicely just by selling its
basic "digital loop carrier system," designed to carry
ordinary telephone calls and Internet traffic, Keeler
said. The company's future is not dependent on
winning widespread acceptance for its video
technology, he said.
But if the Baby Bells decide to attack cable TV
operators by offering television service over their
telephone networks, Next Level could quickly become
a major player in the converging world of
telecommunications by selling its digital video
technology.
Platform for 3 services
"The way that shapes up will greatly affect the size of
this company," Keeler said. "If we are successful in
the digital loop carrier business and the data business
and the video business in varying degrees, it is going
to be a big company. We have an access platform
that addresses all three services."
No other company has a similar product on the market
today. Next Level is 1 1/2-years ahead of its closest
competitors racing to develop VDSL technology, said
Bill Weeks, vice president of technology at Next
Level.
VDSL -- shorthand for Very high-speed Digital
Subscriber Lines -- allows phone companies to
transmit picture-perfect video signals into the home by
running fiber optics lines into a neighborhood.
Ordinary copper telephone wires are used to span the
final 4,000 feet between a home and a central fiber
optics hub.
Distance will be a crucial factor in a Baby Bell's
decision to deploy VDSL service.
About 30 to 40 percent of the Baby Bells' telephone
network is already powered by fiber optics lines
running to a "carrier serving area," a central hub
located an average of 5,000 to 6,000 feet away from
the customer, Weeks said. Many of these hubs have
existing ducts that would allow the phone company to
cheaply run fiber optics lines within 4,000 feet of the
customer, he said.
VDSL service will be easier to deploy in cities, where
50 to 60 percent of the customers are within easy
reach of a fiber optics hub, Weeks said.
Hunger for bandwidth
Telephone companies are upgrading their networks to
provide more and more bandwidth, said Claude
Romans, an analyst with RHK, a telecom market
research firm South San Francisco. VDSL is one of
several different types of technology that could be
used to feed their hunger for bandwidth. If telephone
companies decide to deploy VDSL service, Next Level
holds an early lead but will face competition, Romans
said.
"There will be competition. But they have got an
interesting system. It has potential," he said. "They do
have a head start. Once one of the operators starts
going with your product, you have a lot of momentum
there. Getting customers early on has an awful lot of
value."
Founded in July 1994 by Keeler and partner Tom
Eames with $5 million in seed money, Next Level set
out to build a revolutionary platform that would allow
telephone companies to provide a host of futuristic
broadband services.
The small company quickly attracted the eye of a
powerful financial backer. General Instrument, a
Chicago cable TV equipment supplier entering the
market for telephone equipment that connects homes
and businesses to the "local loop," acquired Next
Level in September 1995. The price: a cool $91
million in cash and stock.
Paid compensation
But storm clouds were forming overhead. In the spring
of 1995, Keeler and Eames were accused of stealing
trade secrets from their former employer, DSC
Communications. After a bitter two-year court battle,
Next Level retained ownership of its technology but
was forced to pay $140 million in compensation to
DSC.
General Instrument continued to believe in the future
of Next Level, but began reconsidering its own
decision to diversify into the telephony business. In
late 1997, General Instrument refocused on its core
cable TV and satellite businesses, spinning off Next
Level into a limited partnership controlled by New
York investment firm Spencer Trask & Co. General
Instrument continues to own an 80 percent stake in
the Rohnert Park company.
Keeler acknowledges that Next Level was lucky to
have a financial backer like General Instrument. The
parent company provided unwavering support, even
during difficult times. Over the last five years, General
Instrument invested $250 million in Next Level's
development program, Keeler said.
Overall, General Instrument has bet almost $500
million on the Rohnert Park company, counting the
$91 million purchase price and the $140 million
judgment paid to DSC.
"It was a very big development program. But General
Instrument stuck with us," Keeler said. "It has been a
big expenditure for them. That is not lost on the
employees."
Today, Next Level Communications appears poised to
move to, well, the next level.
The company -- which employs 280 people in
Sonoma County and 40 others across the U.S. -- is
starting to see its technology move out of telephone
companies' evaluation labs and into the field.
In Phoenix, U.S. West is using Next Level's
technology to upgrade its telephone network. By the
end of the year, at least 350,000 homes will be able to
buy telephone service, high-speed Internet access
and digital TV service from U.S. West, Weeks said.
100 TV, 40 music channels
The technology is impressive: Next Level's equipment
allows U.S. West to deliver more than 100 channels
of digital TV programming and 40 music channels with
CD-quality sound into the home over a copper
telephone line. Users can watch three different TVs
tuned to three different channels -- while
simultaneously talking on the telephone and surfing
the Internet.
"The customers are very, very satisfied, which is good
news to us and to U.S. West," Weeks said. "The
message we are getting from U.S. West executives is
they can sell this stuff against the cable companies."
Next Level has developed a crucial link for the
high-powered network: An set-top box that, once
installed in the home, can distribute digital information
to TV sets, computers and telephones.
About the size of a large VCR, Next Level's
"Residential Gateway" serves as the foundation for
in-home networks, linking the power of the telephone,
TV and computer. For example, users watching TV
can see the number of an incoming call pop up on
their screen.
"Next home computer'
"Our Residential Gateway is the next home computer.
We view the Residential Gateway as being the
linchpin for the living room of the future," Keeler said.
Telephone companies have been slow to deploy new
technology that expands the bandwidth available to
consumers. For example, many parts of the country
still cannot get ADSL service, a less expensive
technology that does not require installing fiber optics
lines in a neighborhood.
However, the telecommunications market is changing.
Long-distance telephone giant AT&T is making a
strong move to offer phone service, Internet
connections and television service, acquiring
Tele-Communications Inc. and MediaOne Group, the
nation's No. 2 and No. 4 cable TV companies.
AT&T's buying spree increases competitive pressures
on Baby Bell telephone companies, Keeler said. Over
the next two years, Next Level will find out how
serious the Baby Bells are about deploying
high-speed data and TV service. At this point, it is
difficult to know whether the Baby Bells will avoid a
battle with AT&T -- or attempt to become one-stop
shops for telecommunications services by offering TV
service in some fashion.
"We don't know what their reac "The customers are
very, very satisfied, which is good news to us and to
U.S. West."
BILL WEEKS,NEXT LEVEL VP tion will be," Keeler
said. "It is still a very fluid situation. But we believe we
are in a very good position."
If Next Level is successful, the company could quickly
double its work force in Sonoma County, employing
600 people in Sonoma County for research,
development and technical marketing. Production is
done outside the county by contract manufacturers.
Fast work pace
As it approaches its fifth anniversary next month, the
pace of work has not slowed down at Next Level. With
the basic development of its technology completed,
Next Level employees are now working to add new
features and to make the equipment easier to use.
"They have worked in a startup mode for 4 1/2-years.
The only thing in my mind that could keep people
working that way is an inherent belief in the product,"
Keeler said.
"It is a world-class set of employees. To build a
platform that does data, video and POTS (plain ol'
telephone service) with competitive set-tops in 4
1/2-years is incredible."
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