How will Motorola change cable market?

The field is already littered with marquee names such as AT&T, Microsoft, Sony, Thomson Consumer Electronics, Sun Microsystems, Intel, and America Online, all of which have aspirations to bring a mix of digital services ranging from telephony to interactive television into the home.

So what can Motorola bring to this star-studded party?

For one thing, the company has already established a business model in its cellular phones that could be translated to the cable market. Just as Motorola has become a leading manufacturer of phones that are sold with wireless services such as Cellular One, it could employ a similar strategy by selling General Instrument TV set-top boxes with service through cable operators such as AT&T.

Moreover, while AT&T has the upper hand in cable services, the hardware end of the market remains up for grabs. All of the players in the evolving cable industry are interested in digital set-top boxes--basically, computers that sit atop the television--that run interactive applications such as video on demand, email, high-speed Internet access, and even connect an array of digital devices such as handheld computers, digital camcorders, and desktop PCs.

Motorola's stock price fell 7 percent today, but analysts say the acquisition of General Instrument is a good strategic move. In the market for cable modems, which Motorola leads, its share is slipping to none other than GI, said Cynthia Brumfield, president of Broadband Intelligence, a market research firm. Next year, she forecasts that Motorola's share will fall from 44 percent to 31 percent, while GI's will double to 19 percent.

"GI has been eating away at Motorola's market share," Brumfield said. "They have been closing ranks on them, so that's another motivation to get them."

With television set-top boxes becoming the cornerstone to new growth opportunities for Motorola modems, processors, and other products, the company has been looking for a way to get into the market for some time. Motorola has developed its own high-end TV set-top computer but has so far not announced any major deals for it.

The GI deal move takes on additional strategic importance in light of the cable industry's efforts to jump-start sales of cable modems and set-top boxes in retail stores, instead of just leasing them to service subscribers.

"Motorola is looking at competing against arguably better consumer electronics brand names in the retail sector," possibly including Sony, Brumfield said. Sony purchased 7.5 million shares of General Instrument in 1988 as part of a deal to have Sony's home networking and operating system software used by cable operators. How Motorola's purchase affects that arrangement is not clear.

The move also marks in interesting historical twist for Motorola, bringing the company back to its television roots that date back to the 1940s. Like other U.S. companies, Motorola abandoned the TV business with the sale of its Quasar division to Matsushita in the mid-1970s in the midst of heavy competition from the booming Japanese home electronics industry.

But the potential stakes of the interactive television market apparently provided more than enough reason to lure Motorola back to the TV business. Forrester Research is forecasting that interactive TV services will generate $11 billion in advertising, $7 billion in commerce, and $2 billion in subscription revenues by 2004.

"This partnership will enable us to expand our portfolio for network access, delivering next-generation solutions along with 'home hubs' that will handle high-speed Internet access and video entertainment, as well as carrier-quality voice services," Motorola chief executive Christopher B. Galvin said in a conference call.

The question, of course, is whether Motorola has the right formula for success with consumers in this uncertain market.

"Nobody knows for sure what the killer application will be. But there is certainly enough technology and money being thrown at it, that someone will come up with one soon," said Gerry Kaufhold, principal analyst for Cahner's In-Stat, a market research firm. "Motorola needs to be a player in that market."