Malone's settops part 2, the chips.................................................
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TCI set-top box fray enters round 2
By Emory Thomas, Jr.
MSNBC
January 14, 1998 7:24 AM PST
It's the biggest prize currently available in the battle to bring interactive TV to the masses: a 15 million-unit order by TCI (TCICP) and other cable companies for NextLevel (NLV) set-top boxes. Now that TCI has selected the primary software providers (Sun (SUNW) and Microsoft (MSFT), all eyes are turning to the silicon chipmakers. A chip decision is expected within the next month, and Intel (INTC) is considered the front-runner. But as one analyst put it, "Nobody's a shoe-in at this point."
Analysts expect the chip sets in the NextLevel boxes, slated for release beginning in about a year, to cost about $40 or less. That means the TCI/NextLevel order for boxes that provide Internet access, games and other interactive services could be worth up to $600 million over several years.
But the significance of the order lies more in its long-term strategic potential than in its short-term financial rewards. Makers of computer products, frustrated by a stagnating U.S. household market penetration of about 40 percent, are pushing hard to insinuate their technologies into new areas of the home. Virtually every household appliance - from thermostats to telephones - is a candidate for computerization, but the television is seen as the holy grail.
"We are really interested in the fact that computing is spreading into the family room," Intel spokesman Tom Waldrop says.
Cable TV companies, meanwhile, are seeking additional revenue streams, and they believe that interactive services like e-mail and video-on-demand could command new fees and higher subscription rates.
To that end, TCI chief executive John Malone is moving quickly to assemble a multifaceted set-top box to offer to the millions of TCI cable subscribers. That box will have many layers - including an operating system, a chassis, a microprocessor and so forth - and Malone is systematically naming the the providers to those pieces.
To date, the most important victories belong to NextLevel (which will manufacture the boxes), Sony (marketing partner), Sun Microsystems (for its PersonalJava software applications) and Microsoft (for its Windows CE operating system and its Solo chip that powers WebTV).
While neither TCI nor NextLevel would discuss the status of their chip selection process, Malone said during a press conference last week that "we would expect, in conjunction with both Microsoft and [NextLevel], to make the microprocessor decision shortly so we can start the hardware implementation going."
Malone and other cable executives have stressed repeatedly that they want the next generation of set-top boxes to be interoperable, meaning that any box will work on any cable system. Moreover, Malone has said he is wary of awarding any one portion of the NextLevel deal to a single company. As a result, analysts expect the TCI/NextLevel chip contract to go to more than one company based on a single set of specifications, although how that might work is difficult to determine. In any event, one or two companies are expected to emerge with the lion's share of the order.
One executive familiar with previous TCI-NextLevel negotiations says he now expects Malone to play the various chipmakers against one another in an intense bidding process whose lead player is likely to be Intel CEO Andrew Grove. "It'll go right down to the wire," the executive says. "This is going to be Grove and a couple other guys around the table."
Indeed, Intel is widely considered the leading candidate. With annual revenues of about $25 billion, it's the world's largest chipmaker, and its Pentium-class chips dominate the personal computer market. Intel, based in Santa Clara, Calif., is aggressively experimenting with digital-TV solutions. To juice demand for interactive programming, the company has invested some $300 million in outside programming and technology ventures.
"For the most part, their alliances and economies of scale should carry them through," analyst Rob Enderle of Giga Information says. "They're connected at hip with anyone even near the PC space."
But despite Intel's obvious interest (the company admits it submitted a proposal to TCI) and manufacturing efficiencies, making low-cost microprocessors for set-top boxes would take the company in an entirely new direction. Intel's strength has been its ability to make high-end, high-margin products like its Pentium-class processors, which sell for as much as several hundred dollars apiece. Only its older, lower-volume chips, such as the 486 series, sell for prices comparable to those expected for the set-top boxes, which analysts anticipate will cost cable companies $200 to $300 to purchase.
In contrast to Intel, whose deepest business contacts lie squarely in the computer realm, Motorola is considered a front-runner for a different reason. The Schaumburg, Ill., consumer electronics concern has been making a wide variety of inexpensive microprocessors for many years now. It also makes cable modems.
Most significantly perhaps, Motorola makes the chips that are currently embedded in one of NextLevel's most advanced set-top boxes. And although that box is far less complex than the one envisioned by Malone, analysts believe that Motorola's familiarity with the set-top box industry provides it with a built-in advantage.
"Motorola would definitely be at the top of the list," says Brian Eisenbarth, analyst with Collins & Co. "Motorola has been diversifying for years now, and Intel is just starting."
At least five other companies are widely considered contenders simply by virtue of their support for Windows CE. They are Hitachi, AMD, NEC, Philips and Toshiba.
To be sure, the TCI/NextLevel contract won't be a make-or-break deal for any single chipmaker. On the contrary, several other cable companies - Comcast, Cox, Shaw and others - have yet to weigh in fully on their set-top rollout plans. Furthermore, the television isn't considered the only important platform for the extension of computer-like products.
But as the digital-TV era dawns, the TCI order may represent the best way to build momentum toward an entirely new market.
Says analyst Sean Kaldor of International Data Corp., "This is a big window for these guys to step in." |
