Set-top challenger faces troubles on home front: European leader Pace still hopes to grab slice of U.S. market

Cable World, March 18, 2002 by Mavis Scanlon

Pace Micro Technologies, one of three set-top-box manufacturers angling to snatch market share away from Motorola and Scientific-Atlanta, the dominant set-top suppliers in the U.S. market, has suffered setbacks in the U.K., where it is the entrenched supplier.

Pace, Europe's largest set-top manufacturer, lost more than half its market value earlier this month after it warned it would not meet sales projections. It was hit by a double whammy: Operator NTL chose rival Samsung to supply 300,000 boxes, and Telewest cut its orders by half due to its own financial problems. Its entree into the U.S. market hasn't exactly been smooth, either. Pace now expects to ship only half as many boxes as it previously expected to Time Warner Cable and Comcast, its first U.S. customers.

And so it goes. The market for set-tops has typically been boom or bust, with periods of heavy spending by cable operators followed by drastic slowdowns. Motorola's sales in its broadband communications sector fell about 30% in the third quarter, with no uptick in the fourth quarter. S-A's orders dropped dramatically midyear, with only the slightest increase in the final quarter of its fiscal year. Now, as cable operators see a slowdown in digital subscriber growth, set-top shipments are expected to plateau as well.

Growth "can't be 100% year over year forever," says Mike Paxton, a cable analyst at market research firm Cahners In-Stat Group. But digital is "still a growth market," he notes. Manufacturers need to continually improve performance and add new capabilities and drive down prices, in order to keep operators interested.

Despite the slowdown in digital growth, operators in the U.S. are far more financially stable than many overseas, just one reason companies like Pace, Sony and Pioneer (currently the No. 3 supplier in the U.S.) are itching to grow their share. But it won't be easy.

The leaders here, Motorola and S-A, have a combined market share of between 80% and 90%. That dominance is being challenged, though it will be a long time before the two set-top giants lose large amounts of share, for several reasons.

For one thing, they have long-established relationships with operators, which means another vendor can't wow an operator just with lower prices. Motorola and S-A also have the manufacturing might and technological expertise to continually innovate.

As the market for digital set-tops has grown, "Motorola and S-A realize it's going to attract new competition," Paxton says. So they "fall back on their strengths in technology and manufacturing. That--and relationships with existing cable operators--has been a large obstacle" for newcomers, he says.

Additionally, any of the smaller vendors wanting deals with American operators need to sign agreements with either Motorola or S-A, since those two companies own the installed base of head-end equipment and related proprietary technology.

Still, they are the suppliers with the most to lose. Cahners In-Stat estimates their combined market share fell to 80% last year from 85% in 2000. And while Pace was hurt by its problems with its established customer base in the U.K., it has established a beachhead here that it hopes will help it take 15% of the market over the next two to three years. To do so, it will need to sell many more boxes than Pioneer, which controls about 8% of the market.

"What this market desperately needs is competition," says Neil Gaydon, sales director and president of Pace of the Americas. "If you look at the rest of the world, every time you go to bid, there will be ten companies," he says, noting the open standards adopted by markets outside the U.S. Stateside, he says, "it's a tougher climb than in other markets."

Right now operators are focusing on video-on-demand and subscription video-on-demand, but newer boxes currently in the final stages of testing include hard disks for PVR functions. Next month S-A will start shipping the first Explorer 8000s to Time Warner Cable, which ordered 100,000 of the advanced boxes.

Dave Davies, S-A's director of strategic marketing at S-A, expects to announce further deployments for the 8000 soon, he says. "From our point of view," he says, operators are looking for choice. We are always committed to pushing the price-performance curve."

As are the new entrants, which is why the market is slowly changing. Pace's Gaydon says Pace will earn operators' trust by providing quality, reliability, support and innovation.

Pace's deals with Time Warner Cable and Comcast are "very important in terms of credibility," Paxton at Cahners says. Its challenge will be to take that credibility and turn it into orders.