Since it's now agreed that TERN's technology is not an "industry standard", Gilder is wrong.
We can put that debate to bed and turn to a few more segments from Gilder's report. I'll let the pros debate the technical claims while I tackle some inaccuracies and/or fuzzy logic.
Gilder writes:
Terayon, however, clashed repeatedly with the DOCSIS group setting cable modem standards. DOCSIS wanted the company to surrender its technology into a royalty-free pool of patents to be shared by any company developing products for the standard. Zaki refused to surrender tiny Terayon's key asset.
The following excerpts from Terayon's SEC documents, ranging from 1-12-98 to 1-25-00, show its willingness to submit intellectual property to CableLabs IP pool, contrary to Gilder's account of Zaki's refusal. [If you want to compare the three different submissions as they changed over time, continue on. If not, scroll through all the SEC clippings.]
<<<<<<
S-1, 12-24-98:
In November 1998, CableLabs selected us to co-author a technicalspecification for DOCSIS 1.2, an enhanced version of the DOCSIS cable modemstandard based in part on our S-CDMA technology. Our agreement to co-author theDOCSIS 1.2
specification will require us to contribute some aspects of our S-CDMA technology to a royalty-free intellectual property pool. As a result, anyof our competitors who join the DOCSIS intellectual property pool will have access to some aspects of our technology and will not be required to pay us anyroyalties or other compensation. Further, some of our competitors have beensuccessful in reverse engineering the technology of other companies, and ourcontribution to the DOCSIS 1.2 intellectual property pool would expose someaspects of our technology to those competitors. If a competitor is able toduplicate the functionality and capabilities of our technology, we could loseall or some of the time-to-market advantage we might otherwise have.
10-Q, 5-13-1999
CableLabs may select additional authors to contribute to the DOCSIS 1.2 proposal. Any vendors that participate in the drafting process, including us, must contribute any of their technology that isessential to implement the DOCSIS 1.2 specification to the DOCSIS intellectual property pool on a royalty-free basis. If the DOCSIS Certification Board includes our proposal in the DOCSIS 1.2 draft specification, it will then be made available for comment by the organizations that participate in the DOCSIS specification process. The DOCSIS Certification Board may decide not to proceed with our proposal. Further, the comment process may take considerably longer than expected and may delay the publication of a DOCSIS 1.2 standard, currently anticipated to occur in 2000. If our draft proposal is not approved by the DOCSIS Certification Board, we may be unable to develop DOCSIS 1.2-compliant cable modems in a timely fashion or at all. We believe the adoption of DOCSIS 1.2 will result in increased competition in the North American cable modem market. This competition could come from existing competitors or from new competitors who enter the market as a result of the adoption of DOCSIS 1.2. This increased competition is likely to result in lower ASPs of cable modem systems and likely will harm our gross margin. Because ou competitors will be able to incorporate some aspects of our technology into their products,our current customers may choose alternate cable modem suppliers or choose to purchase DOCSIS 1.2-compliant cable modems from multiple suppliers. We may be unable to produce DOCSIS 1.2-compliant cablemodems more quickly or at lower cost than our competitors. The inclusion of our S-CDMA technology in DOCSIS 1.2 could result in increased competition for the services of our existing employees whohave experience with S-CDMA. The loss of these employees to one or more competitors could harm our business.
S-3, 1-25-2000:
CableLabs has requested that we submit a prototype of a DOCSIS system that incorporates an S-CDMA advanced PHY capability for testing. CableLabs has stated that if the testing of this prototype reveals that the S-CDMA advancedPHY works as claimed, and if the costs for adding S-CDMA to DOCSIS products are in line with estimates, then it is highly likely that it will add S-CDMA advanced PHY capabilities to a future version of the DOCSIS specification. There can be no guarantee that the prototype we submit to CableLabs will demonstrate the level of performance that CableLabs seeks, or, that even if it does meet performance expectations that CableLabs will incorporate the technology into a future version of DOCSIS specifications. In addition, if CableLabs does proceed to include S-CDMA in a future DOCSIS specification, there can be no guarantee that the DOCSIS S-CDMA specification will be the same as the specification we incorporated in the prototype submitted for tests. If CableLabs does not adopt an enhancement to the DOCSIS specifications based on S-CDMA technology, or if it adopts a version that is substantially different than what we propose, it is likely our future revenues and operating results will be adversely affected. It may also cause us to incur substantial additional research and development expenditures to adapt our specifications to the version adopted by CableLabs.
CableLabs has not established a schedule for adding either the S-CDMA or Advanced TDMA capabilities to the DOCSIS specifications; although, CableLabs has indicated that they want to proceed expeditiously. Delays in the establishment of a firm specification for S-CDMA in DOCSIS could harm our plans to sell DOCSIS compatible modems and headend equipment. In particular, if the final DOCSIS S-CMDA specification is not approved prior to the time when the company is ready to ship DOCSIS products with S-CDMA features included, then we could face two choices. The first would be to delay the introduction of those products until the DOCSIS S-CDMA specification is released. The second would be to introduce the S-CDMA features as proprietary enhancements on top of a standard DOCSIS product. Either one of the choices could harm revenues and operating results. We have already given CableLabs assurances that we will contribute some aspects of our proprietary S-CDMA technology to a royalty-free intellectual property pool, if S-CDMA is included in a future version of DOCSIS specifications. This royalty-free pool has been established by CableLabs to facilitate the participation of as many vendors as possible in providing equipment that is compatible with the DOCSIS specifications. As a result, any of our competitors who join the DOCSISintellectual property pool would have access to some aspects of our technology and will not be required to pay us any royalties or other compensation. If a competitor is able to duplicate the functionality and capabilities of our technology, we could lose some or all of the time-to-market advantage we might otherwise have which could harm our future revenues and operating results.
We believe the addition of advanced upstream PHY capabilities to DOCSIS will increase the overall market for DOCSIS-compatible products, and as such will result in increased competition in the cable modem market. This competition could come from existing competitors or from new competitors who enter the market as a result of the enhancements to the specifications. This increased competition is likely to result in lower ASPs of cable modem systems and could harm revenues and gross margins. Because our competitors will be able to incorporate some aspects of our technology into their products, our current customers may choose alternate suppliers or choose to purchase DOCSIS-compliant cable modems with advanced PHY capabilities from multiple suppliers. We may be unable to produce DOCSIS compliant cable modems with advanced PHY capabilities more quickly or at lower cost than our competitors. The inclusion of our S-CDMA technology in DOCSIS could result in increased competition for the services of our existing employees who have experience with S-CDMA. The loss of these employees to one or more competitors could harm our business.
>>>>>>
Gilder continues:
Just as the European and U.S. wireless standards were adopted well ahead of Qualcomm's participation, the cable modem standard emerged without Terayon. . . ---
A statement that leads the reader to believe European and U.S. standards have been adopted for cable as well as wireless.
From his opening remarks --- "The technology proved itself with better handling of data and greater capacity. It excelled in Asia, and was finally adopted as an industry standard. . .," --- there's a strong implication that Europe has set standards and that Asia's are based on TERN's technology. [Though I think my first reading was correct, that he was implying Terayon's technology was an industry standard--- with broad implications of global significance.]
He should have checked Terayon's SEC documents that refer to 1) no DOCSIS outside North America and 2) the need to be included in any other standards that do exist, and by inference don't currently include S-CDMA:
>>>>>
DOCSIS standards have not yet been accepted in Europe and Asia. If standards that are not compatible with DOCSIS standards ultimately achieve widespread acceptance outside of the United States and Canada, we could be required to redesign our products for use in those markets. We would also be faced with the additional challenge of convincing additional standards bodies that an advanced PHY based on S-CDMA technology should be included in those standards. There is no guarantee that we would be successful in convincing them of this. Even if we were able to successfully redesign our products to implement standards other than DOCSIS, this would likely adversely affect our sales and gross margin results outside of the North America.
>>>>>>
Qualcomm has succeeded against competing standards, but for Gilder's comparison to hold water, he needs to show what milestones, if any, Terayon has reached along the path of setting a defacto standard. He also needs to explain how wireless penetration differs from cable. How, for example, can their systems become ubiquitous if they don't interoperate with the installed systems with which they're competing? Gilder's no dummy --- quite the opposite --- so I have to think his minions have either been smoking controlled substances or have a terribly low opinion of their readers.
I'll skip the paragraphs claiming technical superiority over TDMA and go to the section on Asia.
Gilder writes:
Ken Ehrhart was in Hong Kong in January as Terayon and Hong Kong's I-Cable Communications anounced a broadband Internet partnership. Vince Lam, I-Cable's technical chief, chose Terayon modems after several years of extensive tests with systems from IBM, Nortel's LANCity and Com21, as well as Terayon, showed S-CDMA's decisive superiority. With cable modem Internet access under way, I-Cable plans to offer voice-over-cable services to over 90 percent of Hong Kong resicences. One vision is for I-Cable to act as an @Home of Asia, with Terayon providing the equipment. With deals or deployments in Hong Kong, China, Japan, and Korea, Zaki Rakib envisions the possibility of developing an Asian cable modem standard based on S-CDMA's superiority in high-density urban settings.
>>>
Before going further, check out Hong Kong telecom/cable stats from FINet:
finet.com.hk
You'll notice I-Cable is soon to receive a license to offer cable services, following a long list of operators who've received licenses earlier and are already entrenched. The numbers represent 1) months to deploy service 2) HK dollars spent and 3) Gbps capacity:
Hutchison Telecom
3
41
60
NTT Comm Asia
15
38
153
Pacific Century Matrix
13
101
215
PSINet
8
23
155
Teleglobe
12
16
84
China Digital SatNet
1
134
213
Asia Satellite Telecom
3
49
432
CTI International
3
124
826
Million Point Technology
6
46
300
Far East Gateway
7
16
105
Galaxy Satellite Broadcasting
3
134
340
SmarTone Mobile Comm
14
46
205
"In the future, there will be a total of 10 FTNS operators (wire and wireless) in Hong Kong namely C&W HKT (0008.HK), Hutchison Telecom, New World Telephone, New T&T, I-Cable, SmarTone, Eastar, City Telecom, HKNet-Teligent, and PSINet. Of which, 7 of them have connections with property developers. "
>>>>>
These statistics make it clear if I-Cable is to become the @Home of Asia, they're late out of the gate and have some formidable giants to slay before they succeed.
Gilder concludes his report by saying:
"I-Cable's charismatic CEO, Stephen Ng, remarked at the press conference that, several years ago, Wharf joined with SingTel and Qualcomm to present a joint bid based on CDMA technology for wireless licenses in Hong Kong, but the government denied the bid. Now he is placing a new bet -- on Terayon's S-CDMA -- and is looking to make it the standard throughout China and other parts of Asia. Terayon's fourth quarter results showed shipments and revenues up over 65% over the previous quarter, with a pro forma profit of four cents per share (compared to analysts' consensus of a nineteen cent loss). If you failed to place your bets on Qualcomm, you, too, have another chance for a CDMA star, Terayon."
Stripping away the egregious hype, we have a contract with I-Cable to enter the Hong Kong market based on a license just received and against stiff competition. We also have Gilder comparing QCOM on one side, who has IP out the whazoo and isn't sharing with anyone without a license, and TERN on the other, with S-CDMA that won't become widely deployed without adhering to standards and, here in North America, won't bring in licensing fees as they've agreed to contribute key IP should they be included at some future date. [We'll ignore the fact they currently have no VoIP.]
Then without so much as a paragraph break, Gilder slides into a mention of TERN's 4Q numbers as if the revenues were based on their burgeoning CDMA technology. If we take out the Rogers revenues, their sequential growth was 20%. If we back out the estimated Imedia revenues of $2.5 million, we get sequential growth for legacy CDMA products of around 9%. An error of around 700%.
If George Gilder had any respect for himself or his readers, he'd provide a balanced analysis and leave it to each to draw his or her own conclusion. We live in an era of readily-accessible information. Anyone only marginally above brain-dead can scan SEC documents, read annual reports, call IR departments, exchange ideas on public forums, and challenge this type of irresponsible reporting. What Gilder calls research is nothing short of demeaning -- to his organization and to the investment community at large.
I applaud everyone who's contributed to this dialogue for raising the bar on accountability.
Incidentally, the just-released "Boiler Room" is a spine-chilling account of securities fraud that I highly recommend when it hits your neighborhood cinema.
Pat |
