Technology Trader
By Bill Alpert, Barron’s
Monday, January 16, 2005
Whipped and Stung: a Satellite-TV Reality Show
CABLE TELEVISION STOCKS DROPPED last year after phone companies announced plans to whip 'em with a fiberoptic line. But if the Regional Bell Operating Companies ultimately succeed in the multichannel TV business -- by running fiber to residential neighborhoods -- the sting will be felt most sharply by the satellite TV companies DirecTV and EchoStar Communications.
"The whole competition has been characterized as RBOC versus cable," says Sanford Bernstein analyst Craig Moffett. "But there's a growing recognition of the collateral damage to the satellite operators." Cable firms sell Internet access and telephone service along with video. Satellite firms can't. Satellite-subscriber growth and margins will inevitably suffer.
The RBOC's TV plans make the future of satellite stocks very hard to predict. Last week, Morgan Stanley downgraded DirecTV and upgraded EchoStar. Credit Suisse First Boston downgraded EchoStar. DirecTV shares have ranged between 15 and 18 over the last year, with a recent price of 16.40. EchoStar shares have been more volatile, spending the last year between 27 and 40, and most recently around 33.
Bernstein's Moffett sees modest upside to EchoStar, to the vicinity of 38, because the company's recently announced price increase should lift 2005 earnings to $1.43 a share -- yielding a price/earnings multiple of 23 times, compared to DirecTV's multiple of 56 times 2005 earnings of 29 cents. Still, he rates both stocks as Market Performers.
"The sector is balanced on a knife edge right now," says Moffett. Satellite subscribers have grown in recent years, but subscriber acquisition costs have grown even faster. So, marginal returns in the satellite business are already pressured. Well-subsidized TV competition by the RBOCs won't help.
Yet RBOC progress toward a television business has been slow. So far, Verizon has only announced programming agreements with the Discovery Channel and CourtTV. And local regulatory treatment of RBOC TV remains up in the air. Cable companies spent the last couple of decades working out franchise terms with thousands of municipalities. But SBC Communications has argued that its planned TV offerings should be exempt from local regulation, just like Internet phone service.
The performance of satellite TV stocks this year will be driven by reports of the RBOC's progress -- or lack of it.
Sculley's Cold Fusion?
A startup company funded by John Sculley hopes to change drastically the economics of data transmission and storage, with a new technology for data compression. At the recent Consumer Electronics Show in Las Vegas, the company, Qbit, announced that its technique could transmit high-definition TV over copper phone lines -- allowing the phone companies to call off those multibillion-dollar plans to string fiberoptic lines to every neighborhood.
The Bethesda, Md.-based firm says it's gotten a serious hearing from consumer-electronics giants, which could use Qbit's technology to compactly store video, as well as from NASA, which could use it to quickly beam down large images from satellites.
Sculley admits he's worried about sounding grandiose. "There's always a lot of skepticism when anyone talks about compression," says Sculley, the former chief executive of Pepsi and Apple. "There's been too much history of people making promises in the world of compression that have not always turned out to be real."
Indeed, Qbit's visible patent applications (online at government agencies) are filled with opaque discussions of quantum mechanics, while disclosing no compression algorithms. Several compression experts who examined a Qbit patent application told me that it was full of mistakes and irrelevancies. "It is curious that the Qbit method has never been exposed to the scientific and engineering community for critical evaluation," says Prof. William A. Pearlman, of Rensselaer Polytechnic Institute. "I have never seen a peer-reviewed journal article or conference paper on the method."
Another scientist, who wouldn't be quoted by name, used less polite words and wondered if the Qbit patent document was an April Fool's hoax.
Qbit researchers expect such doubts, saying that most computer scientists just don't understand the math. Chief executive Dan Kilbank says, "We've leapfrogged industry efforts by 15 years."
Kilbank came up with his "Z Image" compression approach while working in quantum physics. He's got a research director who was a computational chemist at Los Alamos National Lab. "The scientists are pretty freaking smart," wrote Qbit's head programmer Thomas Gideon in his blog, after joining a year ago. "At times, working with them gives me a good headache from the stretching my brain gets."
Qbit's assertions raise eyebrows because the company says that its compression technique is "lossless," meaning that it can shrink and expand images without dropping any detail. The MPEG and JPEG compression standards used today on the Internet and DVDs are "lossy," achieving 20-fold compression by discarding picture details that the viewer hopefully won't notice. Rensselaer's Pearlman says that current lossless techniques can only achieve about two-fold reduction in the size of photo files. But Qbit says that its lossless technique is already achieving three-to-five times compression, and could conceivably achieve 10 times compression in some cases.
QBit's software is compact and quick -- decoding about three megabytes a second today on a conventional PC. That's already faster than the line speed of a typical cable modem. By the end of February, Kilbank expects to have the layout for a custom circuit that could make decoding faster still. Then, sometime after March, Kilbank says NASA will validate Qbit's claims.
If Qbit shows that its lossless compression technology isn't a hoax, it would be great news for many industries. Kilbank says that local phone companies, like Verizon Communications and SBC Communications, might not need fiberoptic lines in order to broadcast television. Cellular suppliers like Qualcomm could more easily send video.
Qbit's scheme, should it prove out, wouldn't bode well for firms that have based their businesses on today's "lossy" compression schemes -- companies like Sigma Designs, On2 Technologies and InterVideo. "People who don't adopt this type of technology are going to be fighting an uphill battle," asserts Kilbank, grandly.
Sculley modestly says that Qbit will be worth watching. It sure will be fun to see how this picture turns out.
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