In a flurry of reorganization and deal making, cable-box maker NextLevel Systems Inc. took the next step towards the future of interactive TV.
On Wednesday, the Chicago company announced plans to supply up to 15 million digital set-top devices to nine cable-system operators over the next three to five years in a deal that company executives estimate could be worth at least $4.5 billion.
"The (cable) community needs to show they can make money deploying digital cable boxes," said Joel Jakubson, vice president and senior analyst with industry consultancy Ryan Hankin Kent Inc. "The industry needed a kick start -- and, to me, this is that kick start."
At the same time, the company, which is changing its name back to General Instrument Corp., said the cable operators will receive warrants to buy about 16 percent of the firm at about $15 per share.
A smart move, said Jakubson. "The message they are giving to cable providers is 'We made a mistake, but we are willing to fix it,'" the analyst said. The company had attempted to jump into cable telephony and, to a large extent, failed.
"The cable telephony market is not there yet," said Jakubson. Still, even if NextLevel jumped the gun, they aren't admitting it yet. The company still intends to pursue the telephony wild card under its current name.
A dark horse in the whole deal is cable operator Tele-Communications Inc. Last week, TCI Chairman John Malone indicated that the company was in the market for anywhere from 5 million to 10 million digital set-top boxes.
In addition, the company will be selling the digital authorization unit of its Head-End in the Sky, or HITS, organization to NextLevel for a 10 percent equity stake. The business unit provides a secure one-way backbone using satellites for cable providers to receive secure data.
For the consumers, the deal means digital interactive cable will definitely be arriving. Such interactive terminals would be backward compatible, in terms of video, audio and security systems, with approximately 600,000 one-way NextLevel digital boxes already shipped to TCI and other operators to receive the HITS service.
Two key components of NextLevel's cable box remain, as yet, unspecified: the processor and the operating system. NextLevel's interactive, digital box currently accommodates PowerPC chips from IBM Corp. and Motorola Inc. and operating systems from Microsoft Corp., Microware Systems Inc. and Netscape Communications Corp.
However, based on the cable industry's emerging OpenCable hardware-software interface specifications, each operator can choose to put into the box a low-cost CPU to run a simplified operating system or faster, higher-cost CPU to run a more complex operating system.
"This is like an empty can that operators can choose to fill any way they want," said an industry consultant close to the deal.
In his comments last week, TCI's Malone said the design his company has requested must support Microsoft's "hefty" Windows CE operating system. In addition, a hardware-software co-development deal between NextLevel and Microsoft stretches back to May 1994, raising the specter that Microsoft will be on a large percentage of the boxes.
Whether other operators, particularly the largest single operator, Time Warner Cable, will join the deal remains unclear.
Still, since the NextLevel products will comply with the industry standard for advanced cable boxes, the OpenCable specification, cable providers and consumers will eventually be able to buy the boxes at retail and move them freely from cable system to cable system.
With reporting by Peter Lambert, Inter@ctive Week.