Terayon sets up new chip unit: DOCSIS 2.0 boosts power thrust into U.S. market

Cable World, Oct 29, 2001 by Richard Cole

Striking quickly after CableLabs' endorsement of key parts of its technology for the upcoming DOCSIS 2.0 standards, Terayon Communication Systems is forming a new company to produce and sell the next-generation chips for cable modems.

The creation of the Imedia subsidiary, which at least initially will be wholly owned by the parent company, marks a new foray into the U.S. market, says Terayon CEO Zaki Rakib.

Terayon's biggest cable modem component customers have been foreign cable operators, including Canadian MSOs Rogers Communications and Shaw Communications, which account for about 35% of sales. Shaw holds a 9% stake in Terayon. Worldwide, Terayon accounts for 20% of modem and head-end sales, second behind Broadcom Corp., but its U.S. penetration has been small.

"The United States was missing in our portfolio," says Rakib. "We feel the 2.0 chip opens up the door for us to come into the U.S. market."

Terayon stock has gotten a big boost from CableLabs' announcement of its guidelines for DOCSIS 2.0. CableLabs said it will incorporate S-CDMA (synchronous code division multiple access) along with ATDMA (advanced time division multiple access) as Terayon has long advocated.

That gives Terayon a head start over its rival Broadcom, which supplies Motorola and other companies.

How long that window of opportunity will exist isn't clear.

"I'm pretty sure Broadcom and others will be following suit," Rakib acknowledges. Broadcom and Motorola executives had no immediate comment on the Terayon announcement.

Terayon shares rose another 12% following the Imedia and DOCSIS 2.0 chip announcement, but analysts say success for the new chip set is still well down the road.

"It's still early in the game for 2.0," says Lynda Starr, VP-research for Probe Research. "Nothing has been certified yet. And the big question is whether Terayon can really take market share away from Broadcom."

Rakib emphasizes that the 2.0 chips are more than just a marketing differentiator for his company--they sharply increase modem speeds and efficiencies for cable operators.

"Existing chip sets available now are all either 1.0- or 1.1-based, providing about 5 megabits a second upstream," he says. "But DOCSIS 2.0 provides 30 megabits a second in the upstream, and our chip set is the only chip set that is 1.0- and 1.1-compliant but is also 2.0-based."

That means manufacturers and customers don't have to wait to install the chips, Rakib notes. When head-ends and other equipment are ready, the modems will automatically upgrade to 2.0 levels.

And there are advantages even when operated on a DOCSIS 1.0 or 1.1 level, he says. Efficiency of a 50-50 mix of 2.0 and 1.0 equipment increases up to 40% more than a DOCSIS 1.0 or 1.1 network alone, says the Terayon CEO.

Creation of the new Imedia subsidiary to market chips to outside customers makes simple economic sense, Rakib says, especially when the intention is to expand its U.S. market share.

"It's not going to serve me for a long time to be vertically integrated," he says. "If I designed those chips and kept them in-house, I'm the only beneficiary of it."

Rakib vows that Imedia will be run at arm's length with its own independent financing and board to reassure competitors that the new company will keep the playing field level.

In the meantime, Terayon will be Imedia's largest--and only announced--customer, he says.