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Not many telecom equipment providers can claim a "legacy," much less a 50-year history devoted to the same broadband sector. Venerable cable TV gear maker Scientific-Atlanta Inc. can lay claim to both distinctions, and it remains one of the cable industry's financial and technological front-runners.
Will that change as the cable industry consolidates and equipment suppliers increasingly are from the ranks of diversified gear-makers such as Motorola Inc., Cisco Systems Inc. and Sony Corp.?
Last month, amid gloomy economic forecasts for tech companies, S-A posted second quarter earnings that showed order bookings up 52 percent over last year's second quarter at $707.3 million, a 69 percent increase in sales to $631.4 million, and net earnings up 112 percent to 42 cents per share.
What made the performance even more impressive was that it came during a period when earnings for a number of cable TV gear suppliers-a business that's still S-A's singular focus--stumbled mightily as customers such as AT&T Broadband slowed spending at year's end.
S-A derives 97 percent of its sales from the cable TV industry, supplying set-top boxes and integrated software (through its PowerTV division), as well as headend equipment and hybrid fiber-coax network hardware. Because the company's strategy is inextricably linked with the fortunes and competitive pressures faced by the industry, James F. McDonald, S-A chairman and CEO, has developed a strategy that places competing satellite TV services squarely in its crosshairs.
McDonald says cable operators "have to have a superior technology to satellite (service), not one that's just equal." The cable industry's best weapon to fend off competition from satellite providers is, according to McDonald, interactive applications.
"The first strategy is to deploy IP-based networks and provide client/server software on top of that to allow our customers to move into an interactive world as opposed to a broadcast world," says McDonald. "And that's been our strategy for seven-and-a-half years."
"Rolling out digital services is the key to winning back market share from satellite," says McDonald. And last year, cable operators rolled out digital TV services faster than most expected, sparking an industry-wide shortage of set-top and cable modem components.
"The demand for set-tops has exceeded everybody's view of what was going to happen," says McDonald. "We've raised our capacity five different times and we haven't finished a quarter in the last two years with any inventory, and we're still raising capacity."
The cable set-top box market has changed significantly in the past two years as Pace Micro Technologies, Philips, Sony and Pioneer New Media Technologies have cracked what was once referred to as the S-A/GI (General Instrument, now Motorola Broadband Communications Sector) duopoly. According to Joshua Wise, analyst with Allied Business Intelligence, as of late last year, Motorola BCS held approximately 55 percent of set-top market share, while S-A held an estimated 25 percent.
But McDonald says that in its targeted markets, S-A has become the leader. "One of the things we focus on is what is the market share of the top 100 (cable) systems," he says, noting that those are the markets where by and large interactive applications will be rolled out first. And in those large systems "our market share is over 50 percent."
Alluding to the nation's largest system, McDonald says, "obviously, (Time Warner Cable's) New York City is worth a whole lot more than a city out in west Texas." Historically, S-A's largest customer has been Time Warner Cable and "the majority of their systems are in major metropolitan networks." Ironically, TWC was actually the company's third-largest customer last quarter, behind Adelphia and Charter Communications, with whom S-A signed huge deals for digital set-tops, cable modems and headend equipment.
And although Time Warner has purchased set-tops from Pace and Pioneer New Media, Time Warner Cable spokesman Mike Luftman points out "we are committed to the S-A digital platform, but also to a multi-vendor approach to all hardware, including boxes." He adds that "the selection of Pioneer as a box supplier was made at the same time we announced S-A as the lead vendor. We remain committed to the S-A digital architecture and expect them to remain an important supplier of set-tops."
As S-A observes its 50th year in the cable business this fall, McDonald cites five technologies--silicon, fiber optics, storage, IP networking and software--as critical to delivering the networks and services of the future. "We're going to move those technologies into our systems as fast as we can."
"If you make architectural mistakes, they can be fatal in this business," says McDonald. "It won't be a mild problem, it will be fatal."
While diversification of revenue sources might seem to be the lesson learned by the rocky tech markets of the past year, S-A's focus on cable is well placed, according to Gary Lieberman, interactive TV analyst for Morgan Stanley Dean Witter. He notes that cable industry operators are less consolidated than in other telecom sectors, and that, "within cable, they have probably the most diverse customer base of any of their competitors."
"The biggest area for growth is internationally," says Lieberman. In fact, Lieberman recently downgraded Scientific-Atlanta's stock from "strong buy" to "outperform" because S-A lowered guidance for its transmission business from $800-825 million to $735-750 million, which Lieberman says translates into $10-50 million from international operators.
But Lieberman points out that international operators generally are behind their North American counterparts in terms of network upgrades, and S-A's integrated, end-to-end product line means the international market represents S-A's biggest potential for growth.
He also doesn't see S-A necessarily suffering from a dependence on the cable industry that increasingly sees the entry of new vendors such as Cisco Systems and Sony, or relying too heavily on any single customer.
"From the perspective of S-A being dependent on any one cable operator for revenue, they're better positioned than anyone," says Lieberman.
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