Gateway access devices
Pace interview with Advanced-television.com February/March 2002 By Tony Morbin

At the end of last year advanced-televison.com's Tony Morbin interviewed Pace Micro Technology's Marketing Director, Andrew Wallace (right).

First, Andrew Wallace described the importance of the home gateway to Pace, and the company's future direction:

ATV: "Can you describe Pace's view of the whole concept of a 'gateway' product?"

Wallace: "I think it has evolved, but our concept of the gateway is that our customers have invested billions of dollars in delivering broadband capability for video and data into the home and the gateway is a device in which the operator is their entry into the home and their base for delivering services around the home.

"For the consumer it's a device which probably sits near the TV, at least for the next few years and which will allow them to get access to the outside world be it via video, data or telephony too sometimes making it a voice/data/video gateway."

ATV: "What are the range of services you expect to be provided, and when realistically that range would be available?"

Wallace: "I think we've become a lot more realistic over the last year about what will happen and when. Video is clearly there today, and data is clearly there today. We can deliver analogue voice through that environment to day but the real excitement there is in digital voice and we may see that in the next 12 months it's expected in the next 12 to 24 months voice over IP or voice over DSL.

"On data we should be going into trials pretty soon in the UK delivering wireless data around the home running off the cable modem that sits in the set top. Once you do that you can provide a huge number of services streamed audio, home shopping essentially all the services that you can deliver down to a PC or a PDA the breadth is really superb. And on the video front for the moment its only our IP500 product that will provide multiple TVs with discrete streams.

"We provide second duplicate TV outputs today with Sky plus is a single output though there are various ways of providing a 'slave output' of that. Going forward, what's more interesting is we are starting to provide multiple discrete outputs multiple different outputs to different TVs - that's happening in IP today. We see a demand for that across western Europe and we'll certainly be addressing that demand in the next year or two.

"Then the next thing is to ask how can we do this wirelessly instead of having to lay coax, and I think that there's a price point issue here. I don't think that will happen for two or three years."

ATV:"Wireless may be some time away, but what about cordless wireless in the home? What technologies are you looking at?"

Wallace: "Currently we are using DECT and 80211. We are in fact building a PCMCIA card into our gateway expander. To recap, the (Pace) gateway expander was built as an after market product for the existing set tops. It plugs into the ethernet port, gets direct access to the Internet IP stream. Inside the gateway expander is a radio for data, a router and essentially you can provide wireless data for multiple PCs on DECT or 80211. Its got a voice Codec but its not really being used for that."

ATV: "Given that the home gateway will provide access to various other products for voice, or PDAs or data is this development going to lead you into producing those other products?"

Wallace: "No. Pace's pretty focussed on the gateway and providing more gateways in more situations. For example our Vegastream acquisition some two years ago was about providing gateways for voice and data but not for Video - in the SoHo world. So Pace is really focussing around the gateway. We would drive creation of the other products if it would help us make a product development leap faster but we are not interested in getting into competitive provision of handsets or PCs or videos. Those sorts of things are about driving creation of the concept, but our strengths are in gateways."

ATV: "In terms of platforms, you are looking at the whole spectrum and one of the few actually doing that. What is the strategy, what are the platforms that you are dealing with and can you break it down into percentages, and how you expect that to go in the future."

Wallace: "The strategy is that as a developer that is totally focussed on the set top or gateway, it makes sense for us, and gives greater economies, to focus on any form of delivery of digital TV and to an extent, data as well. It doesn't matter what the front end is.

"Today its 65 per cent cable, 25 per cent satellite and then the rest comprises DTT, DSL etc. In the short term that cable TV percentage will definitely increase driven simply by our penetration into the US where we've just started shipping large quantities to Time Warner Cable. So we will go more toward the cable side for a while, but our Xcom business down in France (bought Feb 2000, 162 million FF turnover previous financial year) is also growing very fast and delivers principally free to air broadcast products so there's growth on both sides."

ATV: "That's already a big shift from being predominantly a supplier to the satellite industry just two years ago."

Wallace: "Cahners Instat announced a couple of weeks ago that we are now the third largest supplier (of set tops to the cable industry) and that's based on actual shipments for the first half of the calendar year 2001, and we're almost twice the size of the next people on the list, which is Pioneer. We are smaller than GI (now part of Motorla) and S-A (Scientific Atlanta), but S-A in particular are going down and we're coming up and will cross over at some point.

"And don't forget the first half of 2001 was before we'd started shipping in the States, so we are going to be shipping considerable product volumes into the US and looking forward to closing the gap substantially between number two and number three over the next year to 18 months, specifically for digital cable. We're still number one in Europe and Phillips is number two."

ATV: "DTT is listed among your 'other platforms' and although you are shifting a lot of product, the DTT market itself clearly has its problems which the UK player suggests would be rectified by an early switch off of analogue transmission. This is something Pace has previously supported, so what would you say is the case for switching off analogue nearer to 2006 than 2010?"

Wallace: "First we have done a lot of work and the technology is basically there. We have a choice of products, some produced by our Xcom team down in France who are focussed on low end entry products, and some by our own teams here (in the UK), and at IBC you would have seen both demonstrated. We are starting to drive some more interesting looking set tops.

"There is the small DTT adaptor from France which is about that (demonstrates with hands a cube about the size of a building brick) size and shape. And there's the DTR500 which is a bit like a slightly larger version of the cable modem and it will either sit on its side or stand on its base so the technology is there.

"We've been working increasingly closely with the BBC, ITV and others essentially the owners of the free-to-air content available on digital multiplexes and we are highly likely to launch a product about the middle of next year aimed at DTT free-to-air that's free distribute, non-subscription DTT as an unsubsidised retail product. Price? The press are talking about £99 to £150. We are more comfortable with the upper end of that range but I think the important thing is that there will be a variety of products out there and one of the challenges is to make sure the consumer can understand them and the differences between them.

(Editor's Note - Pace announced its 'free to air' box on Friday 18/01/02 at a cost of £99).

"The (UK) government is doing quite a lot of work in the background on this.
The government is certainly supportive its been reasonably proactive including (Prime Minister) Tony Blair reaffirming his support for the 2006 to 2010 switch off target. If you ask me right now why should we do it in 2005 rather than 2010, I don't know.

"Right now there is a digital action plan out there which is two to two and a half pages long. Its not enough. There needs to be a lot more work done on the details of how we can achieve it and what roadblocks need to be knocked down to achieve those dates. The government is starting to do that but it does need to put more leadership into it.

"Pace's view is that the research we've done shows 30 per cent of the UK population don't even know there is likely to be an analogue switch off/digital switch this decade, and 92 per cent are looking for someone else to pay for it. That's not really surprising given that no one has yet marketed free to air services to them. So anyone who has not been attracted so far by multichannel subscription TV has had nothing else proposed to them so its not surprising they are looking for someone else to pay. The key task for the second digital revolution in the UK is to start to establish non-subscription digital TV.

"That's not just good for consumers in the sense that the more competition there is the better, its also good for 'UK plc' from an export perspective.

"We are already getting enquiries from western Europe, looking at what's happening here where the UK may be the first to have a really concerted push for a digital free-to-air market and we'll see how that goes. I phrase that carefully because there is some interest in free to air digital volume already in Western Europe but I don't think its happening by national broadcasters driving to the digital switch.

"Whether we can do it by 2006 or 2010 I've no idea, but what I do know is that we've got from zero per cent penetration in 1998 to 40 per cent of the population being digital households today and we've done that in 3.5 years, so I'm sure the next 40 per cent will be just as hard as the last 40 per cent but if we can get the next 20, 30, 40 per cent in over the next few years, then that's the time to look even more carefully at the longer term plan and assess whether its feasible. If we keep running at similar or even half these rates then we will achieve the targets we've set out. There's a lot to do but its not an unrealistic target.

ATV: "How is this affected by the UK digital players and market being in a bad way financially?"

Wallace: "Well they are, and they're not. Investor sentiment has changed for them in that investors are much, much more focussed on an earlier break-even than they were and companies which were in the middle of their investment phase have been caught at a difficult time and so every customer we work for has done two things. They are much more open minded about the technologies and marketing approaches they can use to reduce their cost of acquisition and their liquidity, and secondly they are much more focussed on achieving positive cash flow early.

"Clearly therefore press is bad for many them at the moment and this is a period when they are in investment, but no one expects to build a national digital network without running at a loss for a period and then reaping the benefits later on. While sentiment has turned against that sort of approach, but the only way you can build large businesses is by investing."

ATV: "How does this reduced enthusiasm for long term investing by shareholders in companies such as NTL and UPC affect your own sales and growth."

Wallace: "The braking factor on our growth is the speed at which the investors in our customers provide them with the money to expand . Secondly it's the priority that our customers give to growing. Essentially growing and taking on more customers is the life-blood for our customers. That's not the same as network build. For example I don't believe the UK cable companies have done much network build for a year or 18 months but they've still got numbers of homes passed with analogue and they only increase the RPU (revenue per unit) by moving to digital so they are continuing that roll out but its not a network build per se. So there's a gate limited by how much money their investors will give them, but there's a second gate which is about what priority they give to expansion of those services.

"We see a delay in decisions by those who hadn't made (investment) decisions, but those who have decided are really getting on with it and very few of them are holding back."

ATV: "Germany appears to be one of the places where investment is going ahead, with a lot of new players establishing themselves. How is Pace faring in the German market?"

Wallace: "Its important to us. It is the next major market after the States (USA). Its in selling phase now so I don't think we'll be shipping significant volumes before the back end of 2002 with volumes sales really kicking off in 2003. But its taking a lot of time, senior people flying to Denver, and we're getting on very well talking to the major players which are Callahan and Liberty, but its much too early to say how that translates into business.

"But Pace is uniquely positioned, whether they go for a typical European solution with DVB a choice of conditional access systems, choice of middeware etc, Pace is well positioned because of the volume of cable set tops we've shipped into the UK Increasing numbers of Middleware providers have either ported onto or announced plans to port onto our standard UK set top and an increasing number of conditional access providers are on the same set top so we are very well established in DVB European cable with UPC.

"In the event that Liberty or Callahan decide they want to go with a Motorola solution Pace is also very positioned because of what we are doing with Comcast and because of our experience going back to 1997 with TCI."

ATV: "In terms of Middleware options employed on Pace set tops, how does that break down?"

Wallace: "The 65 per cent on cable are pretty much all using Liberate, and the 25 per cent on satellite are mostly running Open TV. That's a historical statistic for the last financial year to be updated on the 8th of January (see separate report posted January 9th). We also shipped over the last year small amounts of Media Highway, we're not shipping significant Microsoft yet, but we are very confident based on our working relationship with Microsoft of rolling out a very high performance set top in Portugal in March (not affected by recent statements made by TV Cabo). We probably now have the closest working relationship with them (Microsoft) in the five years we've been working together."

"So there are some good relationships there. We have announced some work we are doing with Open TV on cable, and there's a lot going on behind the scenes with different middleware operators positions."

"The other key thing we have said is that in Europe we think that MHP is fine, but not as a mandatory standard - its too late for that. We don't see our customers wanting it, and it puts all of those businesses that have invested in large installed bases already, those that led the market, into a position where they have a large legacy to handle. So it doesn't make sense as a mandatory standard for the UK market.

"We do believe in some form of mandatory minimum, but that minimum is so low in terms of spec its well below MHP.

"You asked about the move from manufacturing to engineering technology at Pace, but this is more of a perceived change than a real change as we were already outsourcing 75 per cent of our manufacturing. Although it was a big move that was difficult to do, and took some heartache, it was clearly logical to drive the rest of our manufacturing to where it was most cost competitive.

"We are currently going through a round of bidding for our manufacturing and what we've discovered is that if we go to the top three or four manufacturers, such as Flextronix, we find that if we put all our business with one of them, then we are in their top five customers. Whether we do put all our business with one or not, we'll have to wait and see. Even if we split our business between two major sub-contractors, we are still in their top ten.

"The business still focuses on technology development. Slowly the way people perceive us is changing, though at heart we are the same, in the product shipping business. Somebody else is making them now because making them is not the critical bit - which is designing them, integrating them and selling them. Those things that others can do better, we have passed to others.

"On the financials - the expectations are for positive growth of revenue and profits - expecting five per cent growth in 2001( results announced 9/01/02) and we have kept investors up to date on shipments, where we are gradually expanding into the US. (In the market) ..decisions that need to be made are slipping, but shipments for established roll-outs aren't. Its hard work in sales, as ever, but a lot of it is actually business as usual, with the US driving growth for Pace.

"The total US market is flattening - but we are there to bring competition in and to bring prices down. Our customers in the US know they need to see us do that, and bring that heat to the rest of the competition to get us in there. Pace has talked about four per cent then ten per cent market share in the United States - I'm not sure what the latest figure is but the point is that you don't need to get a very significant share of the US market to drive significant growth at Pace.

ATV: "What about future technologies and the introduction of hard disc drive, the PVR?"

Wallace: "PVR has only just started and we are very excited. The numbers are still small but in terms of growth its going much better than expected - we've double dour production there. Wireless data is starting to get accepted. Its always about low cost - and because of the way investors are looking at the market that's more so than a year ago, but for us that's great as we are leading that drop in prices. That's being achieved by extra integration.

"Games and download technology are other areas of growth - though (broadband delivery) is taking longer to happen in the consumer space than expected, and in the business market it's a smaller market, but its getting there."

Interview conducted December 2001