TCI lures the big fish
It's been nine months since the cable industry, with TCI Chairman and CEO John Malone at the helm, penned a letter on CableLabs stationery that will long be remembered as the shiny lure that attracted the trophy fish.
That two-page letter, signed by Malone, CableLabs CEO Richard Green, and Continental Cablevision President Bill Schleyer, was sent to a "Who's Who" of consumer electronics and information technology companies, including Intel, Microsoft, Oracle, Sun Microsystems, Sony and Thomson Consumer Electronics.
The letter also officially coined the "OpenCable" term and defined it as an amalgamation of both product and process designed to bring forth interoperable, standards-based technologies assembled into a sub-$300 digital box.
Although cable operators are still fighting to land the OpenCable trout, the process did indeed attract the biggest fish in the pond, including arch-rivals Microsoft and Sun. MSOs and CableLabs alike will have to continue to reel in more players if they hope to deploy set-tops that offer a standards-based cable modem for Internet TV applications, as well as the ability to tune standard definition and high-definition digital broadcasts. Plus, the devices are expected to be offered at retail, which removes them from MSO balance sheets.
OpenCable's origin can actually be traced to an earlier technological development, publicized in 1996, called the "harmony agreement." Harmony, as the name implies, settled lingering issues about modulation, forward error correction, conditional access and encryption, making it possible for compliant boxes from General Instrument and Scientific-Atlanta to reside in the same cable system. It also paved the way for OpenCable.
The OpenCable letter went one step beyond the harmony agreement, and was intended to elicit sizable deals from companies that were interested in becoming "anchor tenants" by occupying key locations on the set-top's suite of applications. With four deals in hand, OpenCable seems to be working, at least as far as TCI and its "friends and family" of affiliated MSOs are concerned.
Since CableLabs received 23 responses to the letter, TCI has decidedly been the most aggressive in pursuing blockbuster deals. Those deals will benefit TCI and any other cable companies partially owned by the MSO, or affiliated with it through relationships with Headend-in-the-Sky, which TCI owns.TCI's scorecard
Who are the first four? There's General Instrument Corp., which in December scored a 15 million unit order from nine cable operators, which Malone orchestrated. Then there's Sun, which picked up the PersonalJava middleware layer, and its archrival Microsoft, which landed the first order for an operating system, its Windows CE. (Sony's "Perios" and Sun's "JavaOS" real-time operating systems were subsequently added to TCI's list of OS vendors, but at press time, those agreements hadn't been finalized beyond TCI's public acknowledgement of them in late March.)
More recently, BankAmerica and Intuit signed on as the first players in TCI's exclusive "walled garden" of interactive, TV or PC-based services. They agreed to kick in about $50 per deployed set-top for their plot in TCI's garden. Based on the 6.9 million GI set-tops TCI earmarked to deploy itself, that's a $345 million reduction in price for TCI.
All of TCI's deals so far are extraordinarily complicated, even by cable industry standards. Many were wrung out in the way-past-midnight hours, and a few, like the Microsoft deal, are still arm's-length arrangements that have yet to go beyond letters of intent. But if Malone's efforts work, OpenCable could provide the kinds of scale economics he and his extended family desperately need.
That's because the advanced DCT-5000 digital set-tops TCI wants from GI aren't cheap. They're run by powerful 233 MIPS (millions of instructions per second), 175 MHz microprocessors made not by Intel, but by Santa Clara, Calif.-based Quantum Effect Design (QED) Inc.
Even with an aggressive silicon integration program underway by Broadcom Corp., the leader in chip development for cable modems and set-tops, the boxes will still cost TCI about $300 when they start rolling off production lines later next year. Box prices will drop year to year after that, GI and TCI say. The boxes TCI takes in 2000, for example, will cost the MSO $260 each, not the $300 or more that TCI will have to pay when they become available.
Other MSOs are just as eager for the better prices, but don't find themselves in as good a position to move as swiftly as TCI. Even those who signed on as part of TCI's sweeping, 15 million unit deal with General Instrument, aren't convinced.
At least two of the nine MSOs which ordered GI's DCT-5000 advanced boxes privately said they weren't pleased with what they called "GI's blue light special." They say they were given about 12 hours to decide whether or not they wanted to get favorable set-top pricing in exchange for equity warrants in GI.
"We all called each other and said, 'Hey, are you doing this? I don't want to do this. Are you going to do it'?" says one engineering executive who was involved. He asked that his name not be used for attribution in this article.
Others say they're concerned that owning a piece of a major supplier could stifle technological innovation in the future. "Say S-A or another of GI's competitors comes up with something that we think is better. But we own a piece of GI. There'll be an invisible pressure to make GI successful, and that's not always the best technology strategy," says another MSO engineering executive, who also asked to remain nameless. In fact, it's exactly the kind of pressure a standard like OpenCable was designed to blunt.
And then there are those who just don't like the economic model facing them right now. Carolyn Crawford, executive director of investor relations for MediaOne, is one example. During a briefing to financial analysts in Vail, Colo. recently, Crawford said that the reason MediaOne is sticking with advanced analog set-tops for the bulk of its systems is because of the relative costs of both types of boxes.
"The cost of a digital set-top box is nearly three times that of an enhanced analog one," she said, adding that most high-end customers want three set-tops, or $1,200 worth of gear, at a $400 per-box cost. "The return (on digital set-tops) is measured in 10s of years," she said. Because of that, MediaOne has not shifted its plans toward heavy use of digital video.
Time Warner is another example of alternative thinking. Engineering executives with the MSO are privately bemused by TCI's domination of the OpenCable spotlight, because they say the OpenCable spec is practically lifted right off the pages of Time Warner's "Pegasus" set-top platform.
Time Warner's digital video test and deployment plan has quietly slipped, too. Early plans were for beta tests to start late last year, with commercial launch of the S-A Explorer 2000 box in March 1998. Now, Time Warner executives are saying that May is the time for tests, followed by launch in late summer.S-A's rally
Meanwhile, S-A insists that it is not only on track, but 18 months ahead of GI, when measured by breadth of IP (Internet Protocol) applications support. Until silicon integration happens, though, the 400,000 to 500,000 set-tops S-A ships in '98 will be priced "in the higher-$300 range," says Jim Macdonald, chief executive officer of S-A.
McDonald said recently that shipments of its advanced digital line of headend, network and set-top equipment to nine cable operators are underway. The buyers for S-A's Explorer 2000 digital set-tops include: Adelphia Communications Corp., Comcast Corp., Cogeco Cable Inc., Cox Communications Inc., Marcus Cable, MediaOne, Rogers Cablesystems Ltd., Time Warner and Videotron Ltee.
S-A declines to discuss order specifics, saying only that the combined order load for its Explorer 2000 digital, two-way set-top now sits at 850,000 units. That number includes the 550,000 digital boxes previously placed. That means the other MSOs will divvy up the remaining 300,000 set-tops.
S-A is also the official systems integrator for the OpenCable process, which is no small task. As such, S-A is charged with producing and documenting a "network architecture reference model," that identifies scenarios for billing, customer use and third-party applications. S-A will also help define key interfaces.
In other words, explains one vendor executive who is tracking OpenCable developments, S-A will "be the watchdog" to ensure that OpenCable does indeed remain an interoperable, multi-vendor platform. Even though TCI issued and ordered off of its own OpenCable specs last year, key interfaces still need technical description, the executive says.
The breakneck speed of OpenCable is likely to continue as the summer unfolds, and there is a long list of to-dos that lay ahead. Perhaps the most telling assignment to watch is in the lap of @Home Network, which TCI picked as its content integrator in late February. In that role — finding a way to put its broadband content and e-mail services on TVs, not just PCs — @Home is sitting in a technological catbird seat.
In late February, @Home agreed to develop IP services and to provide integration services for up to 11 million advanced digital set-tops. TCI controls @Home, with shares representing 71 percent of the voting equity. Those IP services will start with e-mail accounts that @Home will provide for all of TCI's advanced set-tops, by delivering connections, geographically dispersed mail services and overall system management, executives said. On the software integration side, @Home will work to make interoperable all the broadband services earmarked for play over digital set-tops.
"That means making sure there are the correct application program interfaces, so that third-party developers can publish for the boxes," said Adam Grosser, the @Home executive who is managing the integration project. "A good example of what we're looking at doing is to create a Java toolkit that allows different MSO partners to create electronic program guides with their own look and feel," Grosser said, referencing TCI's decision to use Sun Microsystem's PersonalJava software for content development.
Last fall, @Home put together a suite of broadband applications that it considered well-suited to run on the industry's OpenCable set-top platform, Grosser said. For example, MSO executives were shown how additional content can be linked to simple channel surfing methods, so that customers not only see what is on, but the title of the program and its duration.
Other applications — which Grosser called "horizontal" in nature because they expand existing channel space — added five "channels" that closely resembled @Home's PC content "channels." "It's content that looks and feels like TV, but is more a repurposed version of the @Home service," Grosser explained.Firewire it
To address a potentially stonewalling subject, CableLabs and OpenCable recently settled on the IEEE 1394 (Institute of Electrical and Electronics Engineers) standard, also known as "Firewire," as a key interface specification for OpenCable boxes. The move is important because it provides a way to send digital information securely over the three feet of "exposed" coaxial cable that connects set-tops and TVs.
The decision also gives cable a way to pass information-crammed high-definition signals through digital set-tops, instead of including expensive circuitry in OpenCable boxes that decodes and converts the signals for display on TVs, says Laurie Schwartz, project director of digital video technologies for CableLabs.
"This is an important development, especially in the short term, because it gets us a solution for handling high-definition," Schwartz says. "If we don't want a multi-level decoder in each box, this gives us a way to pass the signal through."
Other interconnection methods wouldn't work simply because of the volume of bits — between 200 and 400 million — that comprise a digital television signal. Plus, a joint effort between the cable, computer and Hollywood industries also recently achieved preliminary consensus on the use of the technology.One for all . . .
If nothing else, the process of OpenCable demonstrates a unity, albeit murky, made possible by the success of the cable modem standardization process. While MSOs will undoubtedly take diverging paths in the coming months, it technologically doesn't matter, executives say. That's the bonus of mandating interoperability.
If all goes as planned, customers will soon be able to watch clear, digital video pictures augmented with IP applications like e-mail, Web links, and someday, video telephone. Years from now, that one letter and the sizable momentum it created could well become the marker of cable's turning point from a closed, proprietary world to one that shoulders up with the biggest names in industry.