The Wall Street Journal-20080117-Cable Firms See Gains in Set-Top Wars- Trying to Break the Grip of Motorola and Scientific-Atlanta
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Cable Firms See Gains in Set-Top Wars; Trying to Break the Grip of Motorola and Scientific-Atlanta
The cable-TV industry may finally be seeing at least a little progress in its years-long effort to break the stranglehold that two companies have on the $3 billion U.S. market for cable set-top boxes, the device that holds the key to most advanced cable services.
Last week, Comcast Corp., the No. 1 cable operator by subscribers, which has long sought to reduce its reliance on Motorola Inc., the biggest supplier of set-top boxes in the U.S., paired with electronics manufacturer Panasonic. They unveiled a plasma TV with a built-in box and a portable digital video recorder.
At the same time, Time Warner Cable Inc., which buys most of its set-top boxes from Cisco Systems Inc.'s Scientific-Atlanta, is rolling out hundreds of thousands of boxes made by Samsung Electronics Co.
"We are finally on the brink of breaking the lock that Motorola and Scientific-Atlanta have had on the market," said Craig Moffett, cable and telecom analyst at Sanford C. Bernstein & Co.
Cable operators hope that diversifying will lower their costs and give them the ability to offer a wider array of services, a critical issue right now, given mounting competition from phone companies.
Shipments of boxes have been rising in the U.S., reflecting growing demand for advanced services that require them. Demand is expected to level off at around 11 million units by 2009, falling thereafter as the market becomes saturated, predicts ABI Research Inc.
Still, Mr. Moffett warns it could be years before a broader array of devices is on the market. Indeed cable operators have been seeking for decades to break open the set-top box market, with so far little to show for it. Two years ago, Comcast announced plans to buy between 250,000 and one million set-top boxes from Panasonic -- but those boxes are still only in trials. In 2002, Cablevision Systems Inc. stopped using an advanced set-top box made by Sony Corp., deeming it too expensive.
But a combination of regulatory pressure, technology advances and market need is beginning to wear down what has been an intractable problem for the cable industry. For decades, operators had relied on either Motorola or Scientific-Atlanta, whose positions were entrenched because they made network equipment that sent scrambled program signals to households. Each company closely guarded the technology to unscramble the signals: only a Motorola-made box could decode signals sent on Motorola network equipment.
This situation was unattractive for cable operators for several reasons. Being reliant on a supplier reduces the cable company's bargaining leverage. Set-top boxes are the largest component of cable spending on equipment, according to Mr. Moffett, who says a more-open market will eventually bring down operators' capital expenses. Indeed the mere possibility of alternative suppliers has let cable operators like Comcast and Time Warner negotiate lower prices for boxes.
But operators also have a strategic reason to seek more suppliers. Set-top boxes hold the key to sophisticated video services offered by cable operators, including high-definition channels and interactive offerings like video-on-demand. In the past, operators' ability to roll out new services has been limited by what their box suppliers offered. Several years ago, some of Motorola's cable-company customers were frustrated that Motorola was later than Scientific-Atlanta in coming out with boxes with a built-in digital-video recorder, needed to compete with satellite operators. Motorola said at the time its DVR timetable was determined by numerous factors, including their decision to put a higher priority on being the market leader in building boxes that can receive high-definition signals.
To help solve this problem, the cable industry has developed standardized technology, which it calls "tru2way." It behaves like an operating system that runs on digital set-top boxes, compatible across the patchwork of systems used by cable companies. By creating a national market, the so-called open standard will make it easier for other manufacturers to make devices and for software developers to come up with new services for cable TV.
"Having more players in the space forces faster innovation and that's good for our customers," said Alex Dudley, spokesman for Time Warner Cable. Panasonic, Samsung and LG Electronics Inc., for instance, have each decided to enter the market with set-top boxes, TV sets with preinstalled boxes or other devices.
And not only will more manufacturers make the devices, they're hoping to sell direct to customers in retail stores. "Now that cable products sold in one city can work reliably in another city, retailers can see the potential," said Pete Fannon, vice president for technology policy at Panasonic, a division of Matsushita Electric Industrial Co.
Further helping break open the market is that, under directions from the Federal Communications Commission, set-top box makers are separating the hardware of the boxes from the security of the device, which determines whether a customer clicking on HBO has paid for the premium channel. This ruling is also making it easier for other manufacturers to supply boxes. Time Warner Cable is the most advanced in this process, and has installed 400,000 boxes made by Samsung.
Both Motorola and Scientific-Atlanta play down the competitive impact of the changes. Motorola says cable providers will use the new devices to complement, but not replace, the traditional model of offering a set-top box with their service. "Set-top boxes are a great business for Motorola on a global basis -- it's a solid business today and it's not going away. We have longstanding relationships with key customers such as Comcast and we see this continuing well into the future as we innovate with new technologies and accelerate personal media experiences for their customers," said Dan Moloney, president of Motorola's Home Networks Mobility business.
Despite ordering boxes from Panasonic and other suppliers, Comcast is increasing what it buys from Motorola, say people familiar with the situation. The cable firm is boosting the number of overall set- top box purchases as it tries to convert more of its subscribers to digital services that require the devices.
"Digital is the way we will deliver our TV signals in the future, so you'll need to have a digital device in your home -- it could be a set-top box or it could be your TV with a set-top built into it," said Mark Hess, senior vice president of video product development for Comcast. We "expect to continue working with [Motorola] and others well into the future."
What's more, both Motorola and Scientific-Atlanta are working hard to retain their market share by upgrading their product offerings. Their newest set-top boxes have greater capacity for high-definition channels and other features such as surround-sound audio, DVR-like capabilities and the potential to carry programming off the TV to cellphones and other devices.
"This is about expanding the choices for consumers but the bread and butter of the business is driven by the same fundamentals as two years ago," says Luis Avila, vice president for product development for Scientific-Atlanta.
