One of the most interesting comments we have heard this week was from Dan Moloney, Motorola, President of the Home and Networks business, when he effectively said that Sony bundling set tops into their TV sets won’t kill the set top, because the leasing of set tops enables the evolution of technology.
He was speaking at a Lehman Brothers investment conference and he was trying to stop investors getting the idea that a deal between cable operators and Sony, would impact his 4 million set tops a quarter Home business.
We get the idea. Operators supply the set top, then put it on a lease that is so long that it acts as a drag on customers leaving their service. If a customer wants to upgrade they pay a penalty for changing the set top, and if they keep it long enough, the profit on the device is enormous. Operators can even swap ownership out against a financial instrument so that a leasing firm actually owns the set top and no cash is tied up. This means that whenever a new idea comes along like a DVR, the base can be moved at a controlled rate by the operator, who can elect to forgive penalty clauses where he wants people moved, or in response to cancellations that upgrade.
Our view is that leasing set tops causes concern at the cable operator and that if the service can become an entirely retail proposition, they can relieve themselves forever of being controlled by a single supplier or pair of suppliers including Cisco’s Scientific Atlanta.
But even if the set top does go away, slowly we accept, it gradually becomes a thing of the past, the issue remains of whether nor not Motorola Home and Networks will continue to thrive.
Moloney made the argument that the business had just experienced solid year-over-year growth in Q1, shipping over 4 million set tops and that this was a continuation of the past few years. The big driver for him was the shift to HD capable devices, to DVR and to MPEG 4 devices, and the widening of digital set tops to places like India and China, and he talked about a Chinese product with an ASP sub $40.
He said that when a home buys its first HD TV, it goes out and buys a second within 6 months, and that over the next four years HDTVs will triple, which he sees as a 40% annual growth rate in terms of unit shipments, though less of a revenue hike. But the entire point is that this growth will occur, but will be shared, due to the standardization going on in this market between more and more companies, many of which have better retail arrangements than Motorola.
Moloney also talked about a resurgence in the business to expand bandwidth of networks and improve their efficiency, but this is very much not part of the same business as the Home business. Sure it is part of the same business unit, because networks and home are merged into a division, but it could just as easily be demerged and sold later.
A few months ago Motorola bought a Chinese digital cable set top maker Dahua Digital, with a substantial China cable operator customer base, pointing out at the time that the market for digital cable in China was expected to grow from 10 million in 2006 to over 165 million by 2016. But if all that business is going to be sub $40, it’s hard to see just how much money Motorola will make out of it.
It is true that Motorola has been shifting out to other parts of the world with its set tops ever since it acquired Swedish Kreatel in January 2006, in the IPTV market.
But surely all of that was known and was therefore in the Motorola price, what is new is this arrival of Sony into the Tru2way camp (see last week’s issue).
Another area he touched on was the tendency in Europe to use hybrid IPTV set tops with DVB-T digital terrestrial. This is also a genuine trend, but so far Motorola is not present in this market, and it missed a perfect opportunity to enter it with the Philips set top sale that just went to Pace, which it might have acquired. Once again DVB-T is a sub $70 market, while hybrids remain good business. But with the increasing tendency for European TV regimes to allow HD to come free from a satellite, the chances are that Motorola will need a new type of hybrid, one that is currently outside its experience, with a satellite connector and a broadband DSL link.
The concern here is that Motorola in set tops may end up doing just what it did in handsets, that is chase market share at the expense of profit by going after the world’s poorer markets?
Moloney also mentioned Modulus, which he described as leading edge, citing its installation within AT&T. Again there are issues. Modulus certainly has done a job in the IPTV encoding market for H.264, but the other players in the market, especially leaders Tandberg and Harmonic, are being marginalized by commoditization as specialist chips, such as those from Ambarella, are removing their differentiation. At the same time innovators such as Broadcast International and Envivio are putting encoding on standard, off the shelf, devices and doing a better job. The same will no doubt happen to Modulus.
Moloney pointed out that recent research showed that two-thirds of 16 to 27 year olds in the US watch TV using time-shift and pointed to a future where every single US household will have some form of digital video recorder time-shift capability, which would also need the ability to act as a home server for other forms of content as well, such a photos.
This is true, and we agree that more DVR devices will ship, but he seems to be forgetting that by losing account control at companies like Comcast, through the introduction of CableCard and now this deal with Sony, that every other DVR manufacturer will have the opportunity to supply them, potentially diluting Motorola’s market share. Not to mention the fact that once TiVo has got Dish through the Supreme Court, it will come after Motorola for royalties.
It is much the same with his claim that DOCSIS 3.0 is an automatic advantage. True the cable operators in the US, and later outside the US, will upgrade to DOCSIS 3.0 but there are already a number of qualified suppliers here, and Motorola is rarely first. In the past it benefited from controlling the encryption in set tops, which helped it to get a fair share of cable modems and CMTS. It will still have enormous scale here and probably do quite well, but it’s not automatic.
Motorola’s Broadbus acquisition is also an issue for Moloney. He sees the VoD market exploding, as cable operators try to scale from a few hundred movies well into the thousands, for a higher and higher percentage of their customers. And he’s right, but much of the reason for this trend is to combat the wide availability of many of the programs that are held on VoD, over the internet. At some stage the tide may turn and US audiences may watch this same content streamed from the internet straight to their TV screen. At which point there is little need for Broadbus.
And anyway while Broadbus was a major new direction in VoD, using inexpensive disk to load video into dynamic RAM memory, and play it out from there. In this way it broke into a market dominated by traditional servers from SeaChange International, Concurrent and C-Cor’s nCube. However Swedish supplier Edgeware has just pulled the same trick, shifting storage to Flash memory, and is now being followed by all of those companies which Broadbus displaced at cable VoD installations, so Broadbus at least has a major product transition to get through, and potentially another licensing nightmare.
Finally Moloney defended his Home division’s move to place shifting, where Motorola has had a product offering since April 2006 when it introduced a version of it in set tops at the CTIA show. The idea was to placeshift content around the home, and then later outside the home in the way that the EchoStar’s SlingBox works.
The problem here is that Sling is a far better brand in placeshifting, and almost invented the genre (along with Sony and Orb) and has patents that it can protect. Sling is now entering the cable modem market and is ramping production ahead of that and may have its first major cable win any day, adding another rival that wants to eat the Motorola digital home lunch.
Moloney says that all Sony has done is join Tru2way and managed to get the cable industry to set some definitive dates around when it is going to make networks Tru2Way capable, which he said was July of 2009 or later.
Whatever Motorola Home and Networks is called come 2009, we think it is unlikely to simply be Motorola, and we would expect that name to go with the ‘for sale’ handset division. And a company so used to winning effortlessly, beset on so many sides by so many rivals with so much new technology, sporting a new name, is nothing like a slam dunk by any means, whereas Sony, strong on product quality and TV branding, could easily become the successor brand in the US cable market.