R&D: Rush Delay

Broadcast equipment manufacturers got a prank phone call a while back. It went something like this: "Hi there. We're calling on behalf of broadcasters under a directive from the federal government. We're going to need 1,500 high-power digital transmitters, a bunch of those encoder things, a few hundred high definition routers and switchers, a lot of those HD cameras and digital editing suites...and test equipment. We'll have to have test equipment... very important. What's that you say? This stuff doesn't exist, but you'll pull your best people off profitable activities to create it? Excellent. Just give us a jingle when it's ready."
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Broadcast equipment manufacturers got a prank phone call a while back. It went something like this: "Hi there. We're calling on behalf of broadcasters under a directive from the federal government. We're going to need 1,500 high-power digital transmitters, a bunch of those encoder things, a few hundred high definition routers and switchers, a lot of those HD cameras and digital editing suites...and test equipment. We'll have to have test equipment... very important. What's that you say? This stuff doesn't exist, but you'll pull your best people off profitable activities to create it? Excellent. Just give us a jingle when it's ready."

When manufacturers called back with the goods, they got that annoying disconnected tone that makes you want to sink your teeth into a tree branch. After investing millions in research and development, they were left holding the bag while the DTV transition deteriorated into a squabble of chicken coop proportions.

"The result has been a Îplease remain seated while the room is in motion' experience for manufacturers," said one refugee from a victim vendor. "Management has been reluctant to commit R&D dollars when there is no clear direction from the government or standards bodies, at times reversing the course of existing R&D programs, or forcing concurrent development efforts in an attempt to hedge a technology bet, with the net result a badly diluted R&D budget."

Equipment that was supposed to start generating income in 18-24 months ended up shelved, gathering dust and depreciating. Companies and products without the luxury of bigness behind them either faded into obscurity or got swallowed up by conglomerates if they possessed promising technology.

Boutiques and specialty products were among those hit hardest by all the hand-wringing and backpedaling. In their wake lies a trail of arguably brilliant ideas buried beneath a political agenda (ironically disguised as a technology mandate).

Nxtwave, a company under the aegis of Sarnoff, Intel, Mitsubishi, and Disney, among others, focused on turning out high-end chips designed to improve DTV reception. Unfortunately, it could not survive the extended condition of there being nothing to receive. Nxtwave burned through around $41 million in funding from September 1999, until it was sold to Canada's ATI Technologies last June for $20 million.

NEC's DISKCAM appeared in 1998 and 1999 at NAB. It allowed recording video on an optical disk in MPEG-2. The implication for digital production time savings was profound. So was the implication to camera makers. DISKCAM quickly faded from view.

In 1998, Rebo Studios, a Manhattan-based high definition production house, folded after 12 years, unable to wait for the market for HD content to finally develop.

Even thoroughbreds suffered from the fits and starts of DTV. Grass Valley Group, the 30-ish-year-old savant in the Sierra Nevadas lasted 26 months as a standalone company before Thomson Multimedia swallowed them up for $172 million last December. Tim Thorsteinson, president and CEO of Thomson Grass Valley, said the company is still sinking about 15% of revenues÷roughly $27 million a year when Thomson came along÷into R&D.

"The R&D hurdle is a lot higher than it used to be," Thorsteinson said. "...even common platforms are driven by specialized software. It takes a lot of talented people to develop software. Software has a higher rate of R&D than hardware. Today we've got about 200 engineers, and about 180 of them are software engineers...If you don't have a big presence, it's pretty hard to make the investment required and maintain it long term."

Maintenance = Customer Support
The broadcast equipment sector is not like the PC market, where two monkeys and a cheetah answer the first wave of tech support requests. In broadcasting, you mess with one client and your entire customer base is going to read a nasty thread about you within a week.

"We probably have $500 to $600 million in servers installed that we support," Thorsteinson said. "To get all that supported in the marketplace requires an investment going forward that a smaller business would have a harder time doing."

So what exactly is a smaller business? Before Thomson, Grass Valley was doing around $180 million a year in revenue. That's not exactly peanuts, but the market for equipment inside the broadcast plant has been unpredictable, to say the least. When Grass Valley Group was owned by Tektronix, they placed R&D bets on the nonlinear editing biz and lost. They dumped the product line. (Nonlinear R&D affects bigger business as well÷many remember Destiny, Sony's first nonlinear entry.) Melville, NY-based Chyron wagered heavily on streaming media and HD and took major hits. Chyron's revenue last year was $46.2 million, compared to $86.8 million in 1997.

"A lot of R&D, especially in Î98, went into a new family of graphic products called Duet," said Rich Hajdu, vice president of Sales and Marketing for Chyron. "They were sold as HD or SD. We've sold about 40-45 HD Duets. We anticipated selling a much higher number. About 95% of sales have been SD Duet."

What does that tell you?
"It says that most American television stations are going to do pass-through for HD, and upconvert when it comes to news. Even stations rebuilding today are basically building an SD infrastructure with some amount of HD function," said Hajdu.

And why do you suppose that is?
"They can't charge more money for an HD commercial. Just to be in compliance with the FCC, they had to spend $1 million. They have no way to recoup that money. That's before you get inside the building. We're inside the building."

Once upon a time, Îtwas most fortuitous to be outside the building. Editing suites, character generators, cameras, and routers weren't necessary to reach compliance. The transmitter guys were in the catbird seat. Then, last November, FCC Chairman Michael Powell hit them right between the eyes with the low-power loophole. "There's an old saying in this country," said Nat Ostroff, vice president of New Technology at Sinclair and a board member at Ai (Acrodyne Industries). "There isn't a problem in the country that the government can't make worse.

"Powell's low-power decree punched the balloon of manufacturers' expectations. I think it was an unfair and ill-considered move. He basically harpooned every one of the broadcast equipment manufacturers."

When the DTV timetable was first introduced, transmitter manufacturers across the board watched their analog business grind to a crawl. Ai was no exception, so the company solicited strategic agreements with broadcasters to provide their digital transmitters when that stage of their build-out was reached.

"We banked on that day coming...and it did come, in the first large markets, said Ostroff. "It was very orderly. Then Powell pulled the rug out from under us."

Transmitter guys scrambled to put out low-power units, the market equivalent of going from Lexus buyers to the Hyundai crowd. Dale Mowry, vice president of Transmission at Harris, said, "Two, three years ago, a lot of broadcasters anticipated spending $2 million on the transmitter alone. This cover-your-city license removed a heavy requirement for broadcasters. You can get on the air with one of these low-power transmitters for something in the range of $160,000."

Joe Turbolski, director of marketing at Thales, said of his company, "the main thing to look at is the manpower we have here, anticipating a surge in the industry." Thales avoided layoffs by shifting its focus to low-power units, but they continue to expect that eventually, all broadcasters will migrate to higher power transmitters. "We believe the majority of broadcasters will want to protect their service area," he said.

Ai is taking a different tack. They're going retro.
"We're saying analog television is your cash cow," said Ostroff. "You're not making a dime on digital television. You'd better look at your analog facility. There's not a soul in this country thinking you'll shut it off in 10 years. That's the pitch from our point of view."

Analog? Yes...Analog
Several infrastructure equipment manufacturers conceded that analog remains a large part of their business. One maker of routing switchers said their business was still 75% analog. Then there's analog TV set sales. They're still far outpacing digital, and forced tuner integration won't do diddly-squat for the sets already in homes. If there's been one consistency throughout each FCC executive turnover during the DTV forced march, it's the casual dismissal of consumer behavior.

"What we're talking about is every American home turning in a perfectly good television set-up and replacing it," said Peter Fannon, head of the CEA's DTV Subcommittee, and vice president of Tech Policy and Regulatory Affairs for Panasonic.

According to U.S. Census figures, the median U.S. household income in 2000 was a little more than $40,000. It's a safe bet that none of the DTV cops inside the Beltway have had to subsist on $40K for a while, which is frankly a huge amount of money in a lot of non-metropolitan areas. There will easily be more than 15% of television households without a digital OTA chip for a long, long time to come, but if the 85% reach threshold is determined by set sales under the tuner mandate, these households will be blatantly ignored.

Prima facie, the DTV government shenanigans are about as anti-small business as they are anti-working class. Whether conglomerate or indie, you're looking at putting two or three years worth of cash flow into retooling if you want to hang onto your real estate. That's one thing when there are 20 other business divisions to cover the financial vacuum of one. It's certainly another for single cash-flow broadcasters, for whom there is little, if any, economic incentive for digital compliance. The Big Four realized many moons ago that the digital mandate would lead to a massive asset shift. It's not for nothing they're fighting ownership caps. And it's not for nothing that some stations are dragging their feet on DTV.

"The marketplace is anticipating a lifting of caps," said one vendor. "If you're a property owner, you're positioning. You may be able to go into strategic markets, and the station owner sitting in that market...that guy is going to have a good day."

The end result, despite tiresome lip service to the contrary, is less diversity across all sectors of broadcasting. Less diversity in station ownership means less diversity in customer base means less diversity among vendors, and ultimately, less diversity in research and development. Consequently, the federal DTV mandate is effectively shaping an environment in which DTV could not have been created in the first place.

Isn't it rich?

Deborah McAdams is a contributing editor. She can be reached at: dmcadams@uemedia.com.