Terayon Communication Systems Inc. on Thursday announced plans to cease investment in its cable modem termination system (CMTS) product line.

The decision marks the first bold move by the company since company CEO Jerry Chase joined Terayon in early September. But it also comes as somewhat of a surprise, considering Terayon recently announced two CMTS software upgrades.

Terayon said it will instead focus on its digital video and subscriber-side gear, and push product development into the direction of converged voice, video and data services.

The decision to exit the CMTS business calls into question the survivability of S-CDMA, one of two advanced physical layer schemes that are today part of DOCSIS 2.0, the upstream-dilating CableLabs spec for cable modems and CMTSs. DOCSIS 2.0 also supports A-TDMA. Operators deploy DOCSIS 2.0 in either A-TDMA or S-CDMA mode. Many MSOs have opted to deploy DOCSIS 1.1 networks and leverage the advantages of A-TDMA.

Terayon developed S-CDMA internally and, under company co-founders Zaki and Shlomo Rakib, fought hard to have it become part of the DOCSIS 2.0 spec. The company was the first CMTS vendor to obtain DOCSIS 2.0 qualification, but that distinction did not result in anticipated big orders from cable operators.

"Despite Terayon's undisputed technology leadership in the DOCSIS 2.0 CMTS market, we have been unable to successfully translate that into a profitable CMTS market leadership position," Chase said, in a release.

In the third quarter, Terayon's CMTS business generated revenues of $6.6 million, down from $16.8 million a year ago.

Terayon will continue to support its existing CMTS customers. "We intend to work with existing customers to create agreeable support plans and minimize disruption," Chase said.

Terayon's CMTS departure further contracts an already shrinking field of next-gen CMTS players. The field of major players now consists of ARRIS, Cisco Systems, Motorola Broadband and BigBand Networks, which entered the mix after purchasing the CMTS assets of ADC. Fringe CMTS players such as C9 Networks continue to sell to small- and mid-sized MSOs, but aren't expected to play a role with larger operators.

Terayon's exit also shrinks the number of CMTS silicon companies. With Terayon out of the picture, Broadcom Corp. will easily retain its commanding market share in the CMTS chipset sector. Time will tell if Texas Instruments will step up its efforts in Terayon's absence.

On the financial front, Terayon posted Q3 revenues of $37.2 million, down 1 percent from a year ago, and down 13 percent from the previous quarter. The company also recorded a net loss of $13.5 million (18 cents per share), widened from a net loss of 7.2 million (10 cents per share) in the year-ago period.

Looking ahead, Terayon said it expects to post Q4 revenues in the range of $27 million to $31 million, and a net loss of 12 cents to 15 cents per share, a figure that will include a $3.2 million to $3.6 million severance charge.