Scientific-Atlanta plans software spin-off

Scientific-Atlanta and PowerTV this week began serious discussions about taking PowerTV public, probably by the second half of the year, according to several people familiar with the two companies' intentions. With formal planning at an early stage, however, market conditions and other factors could affect whether shares in PowerTV are offered this year, one source close to both parties cautioned.

PowerTV, which is 80 percent owned by Scientific-Atlanta, operates as an independent subsidiary that makes operating system software for interactive cable set-top boxes. The company also makes software applications such as an email reader and Web browser.

With the perception that Scientific-Atlanta is losing some momentum as Time Warner and other cable companies start to look at rival equipment suppliers, sources speculated that the timing may be right for disengaging PowerTV from the parent company.

"It certainly has been in their plans for a while," said Cynthia Brumfield, president of Broadband Intelligence, a consultancy. "They have a separate board and an organizational structure that makes it easy for them to be spun off."

Scientific-Atlanta declined to comment, as the company is soon to make its quarterly financial report.

The Atlanta, Ga.-based company recently told financial analysts it might let PowerTV go public in 2000. The IPO successes of Liberate and OpenTV, two more interactive TV software companies, and Wink have helped spur S-A's management into action, said sources.

Even if PowerTV only reaches a fraction of Liberate's $8.5 billion valuation, the boost for S-A could be significant. Liberate's value is nearly twice that of S-A's $4.4 billion market capitalization, based on S-A's share price of $56.38 at the end of regular trading yesterday.

PowerTV provides the operating software for S-A's Explorer 2000 set-top box, but the software is capable of running on other boxes, including those from General Instrument. These boxes will be used in Time Warner's cable system to make available services such as video-on-demand, e-commerce, customized advertising, and eventually email and Web access.

To date, PowerTV claims it has shipped more than 1 million copies of its operating system and associated software to customers.

"We still think that (one) of the things missing from some of those other companies is business fundamentals," said Bow Rodgers, PowerTV's chief operating officer.

While Rodgers wouldn't comment specifically on PowerTV's financial plans, he did say, "Our story is not just about how we have contracts and will later start shipping. We are shipping. Frankly, I think investors are getting leery of (Internet) plays without solid business fundamentals."

Industry sources say that PowerTV, which is part-owned by its employees, has lately chafed at S-A's direction and is itching to be free. "The (industry) perception is that they are hooked at the hip to S-A, while in fact they are not," said one source.

A fully independent PowerTV would be able to more actively pursue relationships with cable companies, said analysts, in much the same fashion that Liberate was able to win equity stakes from the likes of Comcast and Cox Communications after it was spun off from Oracle.

PowerTV may need to move fast to put its stake in the ground, however.

"Within the next 18 months, the key software providers will have marked their territories...At some point after large-scale rollouts, there will probably be only one or two OS providers," following the same pattern of development as the PC market, analyst Brumfield predicted.

An independent PowerTV would be going up against Liberate, Microsoft, OpenTV and others who aspire to be the technology provider of choice to companies that are interested in interactive TV. That interest is peaking in light of this week's AOL-Time Warner merger, because e-commerce over the TV could be a key new revenue source to make such costly mergers pay off.