What I can't understand is why a cable operator would view TERN as a long term solution when it's business model
wastes $/MHz downstream and upstream with each deployment.
Clearly, every operator must want to get to DOCSIS 1.1 as
soon as possible and quickly replace equipment that doesn't
already maximize revenue per MHz allocated.
I'm sure there are many answers, but to get the ball rolling, I suggest we glance at Shaw's SEDAR filings over the past year:
From their latest report dated January 18, 2000, a CRTC order for open access indicates ISPs are going to be deploying their own modems, making it more critical for operators to be standards based. For our discussion, this underscores their need for DOCSIS products.
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Shaw has been ordered by the CRTC to provide third party Internet access to its distribution network for Internet Service Providers ("ISPs"). In the future, Shaw may derive revenue from other ISPs. On September 14, 1999, the CRTC announced as an interim measure, that cable operators must provide access to the ISPs for a fee equal to 75% of the "best" retail rate for the Internet Service within 90 days. However there are many technical issues that must be resolved and this interim measure is not anticipated to materially impact Shaw's @Home results. On December 3, 1999, the CRTC decided that ISPs will be responsible for providing the cable modem when they resell high-speed Internet access to cable operators. . . .
As well, Shaw has focused its attention on retail relationships to promote and sell its Internet and Digital Cable offerings. In 1999, Shaw partnered with key retailers to offer Shaw products and services through high-profile point-of-purchase displays in their stores. This strategy focuses on offering Shaw cable-related products and services in attractive bundles at competitive price points. Shaw has continued this strategy in fiscal 2000 by bundling the Shaw@Home service with Dell personal computers.
>>>>
From the same report, the following up-grade announcement indicates TERN's systems will lose their ostensible "noisy-plant" advantage:
>>>>>
Consistent with Shaw's view that broadband network is most suitable to meet customers demands for faster networks to enhance work, entertainment and educational experiences, Shaw is committed to upgrading its network to two way capability. In 1999, over 70% of homes passed had two way capability. In the year 2000, an additional $100 million in capital will be used to expand the speed and capacity of its Internet distribution network to business and residental customers. This investment will allow further fiber node segmentation and enhanced system performance and reliability. Shaw has achieved the highest penetration of its high speed Internet service, Shaw@Home, in North America. Shaw is confident that penetration levels of 30% to 40% are achievable in the next few years.
Upon completion of this project, Shaw will have one of the most developed two-way broadband networks in the industry. This will further improve the quality of digital television service and facilitate the launch of the Shaw's 50-channel pay per view offering in fiscal 2000.
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Moving now to financial considerations, a careful assessment of Shaw's warrants will reveal why they have every reason to want TERN's share price to remain high, even if they don't continue to deploy their non-standard, inefficient systems. Note the "incentive program" awarded to the "Executive Chair of the Company." [Incentive program, indeed --- amazing use of the King's English.]
<<<<<
>>>>>
Beginning with an April 21, 1999, filing:
Net income in the current quarter of $30.7 million includes after-tax gains on sales of shares of At Home and Terayon of approximately $38.2 million realized in the second quarter of the current year.
. . .
The Internet access servie Shaw@Home continues its stellar performance with the addition of almost 22,000 customers in the current quarter.
. . .
During the second quarter, the Company sold 230,000 shares of @Home Corporation and 250,000 shares of Terayon Communications, yielding a pre-tax gain on the sales of approximately $54 million. In addition, a further 100,000 shares of @Home were sold in March for a pre-tax gain of approximately $17 million. The Company also exercised warrants to purchase shares of @Home and Terayon during the quarter. The current holdings of the shares of the two corporations are as follows:
@home
Shares 770,000
Vested Warrants and exercised 820,710
Non-vested warrants 1,849,095
Reserved for employee incentive prog 270,000
TOTAL 3,709,805
Terayon
Shares 326,923
Vested Warrants and exercised 1,500,000
Vested Warrants but not exercised 1,500,000
TOTAL 3,326,923
>>>>>
From Nov. filing:
In 1998 the Company acquired 576, 923 Terayon common shares for $10,767,000 and was allocated warrants to acquire a further 3,000,000 common shares at $6.50 U.S. per share until December 31, 2003. The economic benefit attributable to 400,000 warrants was awarded, under an incentive arrangement, to the Executive Chair of the Company. In January 1999, the Company purchased these warrants at their fair market value from the Executive Chair at a cost of $22,594,800. During 1999, 384,615 shares were sold for $22,806,000, resulting in a pre-tax gain of $15,589,000 and 1,500,000 shares were acquired through the exercise of warrants.
>>>>>
I haven't had time to do a search of Rogers, but I understand the same "incentives" are in place.
During the last TERN conference call, Lehman's analyst, Steve Levy, raised some interesting questions regarding missed specifications and the need for waivers in order to recognize revenues. He also asked about the timing of certain shipments and their status as "book-to-bill." Perhaps someone can help out, but I understand the original agreement states Rogers can return any product any time and for whatever reason. Is there any chance products have been shipped that might be sitting in warehouses? If so, isn't this called "stuffing the channel?"
Levy's comments raised a couple red flags and coupled with comments made by a former TERN manager, who studied the report and said there's no way they could have come up with those totals without "throwing everything they could possibly find into the numbers," I've been compelled to ask some hard questions. Admittedly I don't know all the ways companies can make top line, but I suspect someone with more experience might be able to help out.
As to why Rogers and Shaw would want to deploy TERN's obviously inferior products, I believe it's clear they stand a lot to gain by TERN's share price being high. I suspect they can even afford a few warehouses to stock what they don't use.
While maintaining their Canadian story, they're madly making acquisitions (keeping BT Alex Brown happy. . . and definitely maintaining their support) and if they play their cards right (including "executive incentives"), they may be able to re-invent the company and the original investors will forget about S-CDMA and its promise of revolutionizing cable access.
There have been many red flags over the past couple years, but the most alarming was TERN's press release saying they'd received DOCSIS --- based on an OEM version from Toshiba, that came out of nowhere and apparently remains there. It's sort of like catching someone in a lie. From that moment forward you look for other untruths. (Inevitable, this side of a lobotomy.)
At any rate, from what I've dug up so far, whoever wrote Bonfire of the Vanities should be taking notes.
On the positive side, CMTO has stated they'll be doubling their sales force over the next 12 months, and with 4 products with DOCSIS approval, and others in the pipeline, they're certainly well-positioned for growth and, with any luck, more notice from the investment community.
I have a lot coming up over the next few days so may not get to the Rogers search for awhile. Stay tuned. . .
Pat |
