N.B - digital compression technology

Chief Executive, The, Jan-Feb, 1992 by Judith Rebak

Imagine that you had only to turn on your cable television to access a roster of hundreds of movies, or programs in a price range to match your finances, or a paid-for package of selected events from a future Olympics.

A technology called digital compression will allow cable TV subscribers to do just that--and much more--as early as the end of 1993. The process turns conventional, analog "waves" of television signals into digits, and then "compresses" them, enabling cable operators to send four channels in the space that now holds just one.

Recent breakthroughs in digital compression have galvanized the $18 billion cable industry, hungry for ways to boost its faltering fortunes. And it has set off a high-stakes competition between cable's two top equipment suppliers, General Instrument and Scientific-Atlanta, for the winning compression technology. Orchestrating it all is Cable Labs, the industry-funded research and development arm, which has stepped in to set technical guidelines and acclerate compression's development by forming a consortium with the two companies. The group is open to others, but none have signed on.

"There are digital telephone systems all over the world, but they're different, and they have to be descrambled and rescrambled. We don't want to end up like that," says Dr. Richard Green, who as president and CEO of Cable Labs will oversee the day to day work of the consortium. Green has his work cut out for him. "There are many approaches, and they're changing all the time," he acknowledges, "but we're going just as fast as we can."

It's not surprising that the cable industry is in a rush to get digital compression up and running. Annual revenue increases to operators have skidded from 38 percent in 1980 to 13 percent last year, and cable growth has stalled at 60 percent of U.S. homes, widely believed to be the saturation point.

Worst of all, the industry recently lost a crucial round in its long-running battle to keep the regional phone companies out of its turf. Washington has agreed to let the Baby Bells begin transmitting home shopping and banking services over their lines, and phone company lobbyists say that television programs will ultimately follows.

Cable operators see the explosion in programming generated by digital compression as a double-barreled weapon--one that will not only beat out competitors, but reap huge profits from the multi-billion dollar home entertainment market. Heading the list are pay-per-view sporting events such as last years' Holyfield-Foreman boxing match, which yielded a whopping $ 55 million in cable fees. Beyond that, the possibilities are endless: channels segmented by language, are groups, special interests, and cost, with programming tiered in different price ranges.

For suppliers Scientific-Atlanta and General Instrument, who between them hold 90 percent of the cable equipment market, compression means a bonanza of new products ranging from satellite uplink equipment to the "decompression box" atop a television set. Small wonder then that both are placing major--although differing--bets on the technology.

We evaluated two approaches, one similar to General Instrument's and a second one, called VQ," says William Johnson, chairman and CEO of Scientific-Atlanta. "We've opted for VQ because we think it has significant benefits in terms of its lower cost and compatibility with other systems." Scientific-Atlanta's products are said to "match" well with equipment like VCRs, and Johnson clearly intends to emphisize this attribute in compression products, which will have to operate with old and new equipment.

A former consultant specializing in corporate turnarounds, Johnson was new to the cable business when he was brought in as CEO at Scientific-Atlanta in 1987. But he successfully put the floundering company back on track, cutting costs and launching a raft of new products that have made some inroads into General Instrument's market share. However, after two years of increasing sales and earnings, the $ 494 million company has hit a bad patch. Sales for the fiscal year ending in June were off 20 percent because of cutbacks in cable spending, even though business remains relatively healthy in areas such as satellite communications.

Johnson sees little improvement in cable spending next year, but he isn't flinching. "We're actually increasing our commitment to research and development," he says. "We put $ 50 million into R&D last year."

Sales have also slumped at Jerrold Communications, the General Instrument division that is implementing its digital technology. The company went private in 1990 amid talk of a takeover bid, and so won't reveal the extent of the downturn. But it hasn't dented the confidence of Hal Krisbergh, Jerrold's president, in the superiority of his company's compression technology.

Krisbergh is touting an approach that puts ten channels in the space of one, while Cable labs and Scientific-Atlanta are talking about guidelines for four. Moreover, "our approach is more advanced because we provide HDTV as well," he says. The Federal Communications Commission is currently conducting tests to choose a high-definition television broadcast standard, and the impact of compression on HDTV signals, which use much wider bandwidths, hit home when General Instrument unexpectedly submitted two digital compression proposals. Two other competitors promptly switched from analog to digital approaches, leaving the Japanese clinging to their analog proposal--once viewed as another example of their superiority.