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Infobahn Warrior


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INFOBAHN WARRIOR

General Instrument Chairman Daniel F. Akerson is nothing if not pugnacious. Akerson, 45, boxed as an undergraduate at the Naval Academy. As president of MCI Communications Corp., he rammed through a long-stymied investment by British Telecommunications PLC. And despite his new job heading the world's largest cable-gear supplier, his family doesn't have cable service because he and his wife disliked what their kids were watching.

Akerson's toughness makes him a perfect match for General Instrument Corp., a company that is by turns admired, feared, and hated for its power in the cable-TV industry. In North America, the world's biggest cable market, GI has dominant market shares in everything from set-top boxes to coaxial cable. GI won plaudits for devising the first system for over-the-air transmission of digital TV--leapfrogging the best of Japan and Europe. But it earned the wrath of programmers such as Home Box Office Inc. when it was slow to patch holes in scrambling software, which allowed pirates with satellite dishes to watch billions of dollars' worth of programming free. Akerson admits "GI wasn't snow white," but says it eventually spent tens of millions of dollars to fix the problem.

So powerful is GI that the Justice Dept. has gathered evidence to consider an antitrust suit. Akerson says the probe is meritless and, he thinks, has "somewhat abated" lately. In fact, he wants to broaden General Instrument's influence further. He and GI President Richard S. Friedland believe GI is among a handful of companies perfectly positioned to profit from construction of the Information Superhighway. GI hopes to parlay its dominance in the analog world of cable-TV gear into the much bigger digital world to come--one including interactive TV and video games, home shopping, and computer communications. Where it lacks skills, GI is teaming up with such heavy hitters as Motorola, Intel, and Microsoft. Boasts Akerson: "My goal is to be as big as Microsoft."

Big talk for a company barely more than a third Microsoft's size. But GI is certainly setting a torrid pace. On July 19, it reported that second-quarter earnings quadrupled to $54 million on a sales increase of 63%, to $509 million. Equitable Securities analyst Jeff L. Sadler predicts that GI's earnings will jump 68% this year, to $191 million, on sales of $1.97 billion, up 42%. Long-term debt has plummeted and the stock has quadrupled to about $60 a share since 1992, when the investment banking firm Forstmann Little & Co. took GI public following a 1990 leveraged buyout.

REAL PRODUCTS. General Instrument finds itself in the right place at the right time: Cable-TV operators are busily upgrading their networks for more capacity and interactivity. And phone companies are hoping to crack the video market with networks that resemble those GI already supplies to cable operators. Whether these investments will pay off for buyers is an open question. But they're paying off now for GI. Says Salomon Brothers analyst Danielle Danese: "Everybody talks about their plans for the Information Highway. This is a real company selling real products today."

The next few years will determine whether Akerson and Friedland realize their ambitions--or if GI ends up as a niche player, merely supplying components to the general contractors of the

I-way. GI should fare well with its traditional customers, cable operators. But local phone companies--whose capital spending is eight times that of cable operators--are still on the fence. GI faces competition from many of the leading names in electronics, including AT&T, IBM, Hewlett-Packard, Apple Computer, Silicon Graphics, Sun Microsystems, Philips Electronics, and cable-TV-gear rival Scientific-Atlanta.

Strong alliances could make the difference. With Microsoft Corp. and Intel Corp., GI is developing an interactive set-top box called LinX, due next year. LinX will use Intel's 80386 microchip and a Windows-like operating system from Microsoft. Customers will use it to fetch TV programs from a network server. Later, GI plans to use Microsoft's video server software, code-named Tiger, in cable systems for picture phone service and networked video games.

General Instrument's alliance with Motorola could mark its first foray into consumer electronics. The companies are co-designing a television nicknamed Joey that is upgradable with a swap of circuit boards. Joey could take heat off GI, which like other makers of converter boxes is under orders from the Federal Communications Commission to stop, by 1997, building boxes that override advanced functions of TV sets, such as picture-in-picture. With Joey, the set-top box would shrivel to a simple descrambler. All advanced capabilities would be in a product--Joey--that's owned by the customer, not by the cable operator. Joey remains in the concept stage.

So far, these alliances are generating more publicity than profit: While GI is racking up big sales gains, it's only starting to penetrate the telecom market. In its one big phone-company order, GI will work with system integrator AT&T on a new voice and data network for 9 million Bell Atlantic Corp. customers. S.G. Warburg & Co. analyst Yossy Benderly says the deal could contribute $1 billion to GI revenues by the end of the decade. Meanwhile, GI's smaller rival, Scientific-Atlanta, is chipping away with modest deals with Time Warner, US West, BellSouth, Ameritech, and MCI.

FIRST-RATE SCRAMBLER. If General Instrument does come out a winner, much of the credit will go to its expertise in the compression and scrambling of video signals. GI's DigiCipher system converts analog television into a digital stream and squeezes out 90% of the bits without noticeably degrading the picture. Then it scrambles the bits in an effort to thwart the pirates. The result is a more secure system that can multiply tenfold the number of channels over a cable--giving cable operators the equivalent of free real estate.

GI has big plans for DigiCipher. It wants to use it for end-to-end compression and security for video: from a programming source such as MTV, up to a satellite, down to a cable operator's "head end," and then via cable to a customer. GI already monopolizes satellite scrambling in North America with its analog product, VideoCipher. It wants to convert all VideoCipher customers to DigiCipher--and then get them to adopt DigiCipher for the next transmission leg as well, to the home. But GI isn't trying to push customers to adopt its end-to-end solution by brandishing exclusive control of DigiCipher, a tactic that might run afoul of antitrust law. Rather, it is licensing the key technology to companies interested in making rival set-top boxes. Even Scientific-Atlanta is in negotiations for a DigiCipher license.

Clearly, DigiCipher will never be the monopoly champion that VideoCipher was. Aside from GI's licensing practices, it already has competitors. The main one is MPEG 2, a compression technology that, unlike DigiCipher, was developed by industry consensus. And DigiCipher II is not expected to be available in set-top boxes until early next year, more than a year behind schedule. Akerson blames the delay on having to attain compatibility with MPEG 2, on difficulties in circuit design, and on "feature creep"--new demands placed on designers.

NEW MARKETS. The coming digital video market should be big enough for GI to enjoy healthy growth, even with a slip or two. European and Asian countries are only now adopting cable TV. Revenue is growing three times as fast outside the U.S. as domestically, and Akerson believes more than 50% of GI's sales could be non-U.S. within five years, up from 25% today.

Don't expect GI to settle for riding the industry sales curve, however. That isn't Dan Akerson's style. Not at MCI, where he wrapped the deal for British Telecom to take a 25% stake: "Dan clearly grabbed responsibility," recalls his successor as MCI president, Gerald H. Taylor. Last August, Forstmann Little lured Akerson to Chicago by offering him GI's helm and a partnership stake in the lucrative investment bank. General Partner Theodore J. Forstmann says Akerson is doing "an untoppable job" and was instrumental in landing the Bell Atlantic deal.

The next Microsoft? Probably not. But GI has the positioning--and the pugnacity--to make a name for itself on the Information Highway.

A STRATEGY FOR GROWTH

With 1993 revenues of $1.4 billion, General Instrument is the world's leading supplier of set-top boxes and signal-scrambling software for cable TV. Here's how it hopes to turn that niche into big profits on the Information Superhighway:

FORM ALLIANCES GI is working with such giants as Intel, Microsoft, and Motorola to insert its communications technology into Information Age products such as set-top "gateways" for shopping, games, and video on demand.

GO DIGITAL It can carry cable operators smoothly into the digital era because it already supplies them with analog gear. Old and new components will have to work together until the conversion to digital is complete.

WORK FROM STRENGTH It has nearly

100% of the U.S. market for satellite signal scrambling, and it hopes to use that base to increase its share of the next leg--scrambling over cable.Kevin Kelly, with Peter Coy, in Chicago


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