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Component Shortages Crimp MSO New-Service Rollouts

As the cable industry embarks on accelerated rollouts of digital TV and advanced services, shortages of optical fiber, digital set-tops and cable modems have threatened to put the brakes on ever-expanding MSO ambitions.

While shortages of digital set-tops and modems are largely seen as temporary and soon rectified, fiber shortages will remain an issue well into the foreseeable future.

"Yes, yes and yes on all counts," responded Charlie Dietz, senior vice president of engineering for Insight Communications Co. Inc., when asked whether he's experiencing problems obtaining fiber, set-tops and modems.

Likewise, Alex Best, executive vice president of engineering for Cox Communications Inc., said that this year, "We've had problems with set-tops, modems and fiber."

With regard to set-top boxes, Best said: "Basically, demand outstripped capacity. We just grossly underestimated our needs from the cable side."

In part, he added, Cox's increased demand for of set-tops was driven by a need to compete with the red-hot direct-broadcast satellite market. While "in our systems, we haven't run out of boxes, we did ask our systems to put only one [digital] box per household until we get beyond this capacity crunch," he added.

Best said the crunch is supposed to dissipate with his suppliers-Scientific-Atlanta Inc. and Motorola Broadband Communications Sector-in another month or so.

For Insight, the lack of availability of boxes "has definitely slowed us down," Dietz said. "We can't market and deploy services as fast as we'd like."

Insight-one of the industry's most aggressive operators-recently turned on its fourth cluster to full two-way capability.

Referring to a point-of-deployment module in his possession, Dietz said there aren't a lot of companies that can support the POD module at this point. He added that Insight is looking at second-source vendors besides primary vendor Motorola for digital boxes.

With more and more operators activating two-way, real-time networks, demand has surged for digital set-top boxes.

Worldwide, set-top vendors will roll 10.4 million new digital boxes off production lines this year, a whopping 138 percent jump over last year's numbers, according to Paul Kagan Associates Inc. senior analyst Leslie Ellis.

Helping to power the intense demand are unanticipated takes rates for digital cable, Ellis said, pointing out that once-optimistic 20 percent rates have been blown out of the water and replaced by projected digital penetrations of 50 percent to 60 percent and higher.

"It's a hand-to-mouth market right now," she added.

The raging demand for set-tops will continue next year, as Ellis anticipates an even hotter market, pushing as many as 18.1 million set-tops worldwide off production lines. North American operators' appetite for those boxes will account for more 90 percent of the mix in 2001.

The shortfalls have opened the door to set-top vendors outside of traditional industry suppliers Motorola and S-A to help quench operator thirst for digital boxes.

Best acknowledged that Cox was talking with Pace Micro Technology plc, which has scored big wins with Time Warner Cable and Comcast Corp. in recent months. "Had [Motorola and S-A] not this capacity issue, the likelihood of us going to other sources would've been minimal," he added.

While an executive from Motorola's set-top division was unavailable for comment, S-A vice president of marketing Perry Tanner said his company has bumped up its digital set-top production capability four times over the last 18 months.

Last year, S-A said it was boosting capacity from 250,000 to 500,000 units per quarter. Earlier this year, the company announced it would double capacity to 1 million units per quarter effective this month, and more recently bumped up capacity projections again to 1.3 million units per quarter effective in January.

S-A-which is supplying set-tops to seven of the top nine MSOs, Tanner said-has been rewarded for its increased production efforts by winning contracts announced in May with Adelphia Communications Corp. for 1.6 million "Explorer 3000" set-tops and with Charter Communications Inc. for 1.3 million Explorer 3000 boxes.

S-A's fiscal fourth-quarter forecasts (for April, May and June) are expected to hit 750,000 units shipped.

Adelphia experienced problems obtaining digital set-tops earlier in the year. "We were hampered from time to time," spokesman Bill Pekarski said.

But the MSO clearly sees light at the end of the tunnel. The signing of recent contracts with S-A and Motorola "will give us a steady supply ... by September, we should see a large inflow of boxes," he added.

Boosting set-top output, Tanner said, is governed by several factors, including basic bricks-and-mortar capacity; production machinery in place or on order; labor; and materials and parts. "Parts availability is the limiting factor," he added.

S-A must compete with other telecommunications and electronics-devices vendors for components such as flash memory, which is not only used in set-tops, but also in items such as cellular phones. Consequently, companies such as Nokia Corp., Motorola and S-A "are all fighting for the same materials," Tanner said.

He added that S-A is working with operators such as Charter and Adelphia to plan 18 to 24 months down the road instead of 90 days.

Digital TV is not the only cable service that's keeping operators and their suppliers hopping to meet demand. Cable modems also have been in tight supply this year. "We're definitely starting to see some shortfalls," Dietz said.

While Cox hasn't run out of modems, Best said, it has had to "throttle back the marketing efforts" with respect to data rollouts. "The demand of all of the systems switching to [Data Over Cable Service Interface Specification equipment], I think, placed a heavy burden on the primary chip maker for DOCSIS modems," he added.

A cable-modem shortage is somewhat ironic given the fact that Cable Television Laboratories Inc. has certified nearly 60 modems from almost 30 vendors as DOCSIS 1.0-compliant.

But an executive of a top-six MSO, who asked that he not be identified, said some certified modems never went into production, some models that won certification were superseded by newer versions and some were "specialty" modems, such as models outfitted with universal-serial-bus interfaces.

"There really weren't 50 shipping products," the executive said, adding that at least one of the certified vendors the MSO chose as a primary supplier had trouble ramping up to volume-production levels.

Component shortages-including shortages of flash-memory chips and other electronic components-have meant that "vendors just can't crank out modems as fast as they wanted to," the executive added.

Adding fuel to the fire, the executive said, his company's data business is growing quicker than estimates hammered out last year. "We're growing significantly faster than those projections from a year ago," and take rates for Internet service are occurring faster than expected, he added.

With Excite@Home Corp.'s and Road Runner's networks also growing faster than expected, and operators (with vendor support) becoming better at launching data-ready nodes, more serviceable areas are coming online.

If the MSO's auto-provisioning efforts were progressing more than they have, it would find itself in an even worse position as far as meeting demand, the executive said. While the company's contract suppliers have not met shipping targets, "it's almost impossible to find modems on the spot market," he added.

But he tempered his remarks by saying, "I don't see any reason to change our strategy for what we expect to be a temporary and rather mild shortage of cable modems." He expects his vendors to have caught up with deliveries this month.

Industry executives often cite an episode that few can actually document: a catastrophic fire at an RF-tuner-component factory that some say occurred in the Far East.

Others-including John Burke, vice president and general manager of Motorola's cable-modem-product business unit-said it occurred in the Southwestern United States. The plant, Burke said, was an RF-tuner-component wafer-fabrication facility, and the fire effectively shut it down, causing major supply disruptions.

Noting that Motorola's cable-modem business has been very strong, Burke acknowledged that throughout the second quarter of this year, the modem-market leader has been struggling to meet increased demand. He said Motorola fell victim to key component shortages, with RF tuners, in particular, being difficult to obtain.

Reacting to the situation, Burke said, Motorola has forged relationships with second- and third-source RF-tuner suppliers, including Microtune Inc.

Burke also cited shortages of such basic electronic gear as capacitors and resistors as blocking efforts to meet demand.

As with set-tops, modems are comprised of components, including flash memory, which are used in many other electronics devices. With electronics behemoth Motorola now integrating the former General Instrument Corp. into its operations, it can reallocate product to cable-modem lines as needed, Burke said.

While on any given day, Burke said, the company struggles with electronics-components problems, "at this point, everything is really back on track" as Motorola burns off back orders and cable operators become more accurate in their forecasts.

Motorola now manufactures modems in plants in Taipei, Taiwan; Singapore; and Nogales, Mexico, with multiple production lines in these facilities producing DOCSIS modems.

"In general," Burke said, the blip in modem production this year was "a positive sign for the industry. High-speed Internet access is growing by leaps and bounds."

Also showing no signs of letting up is the most frustrating product shortage for MSOs this year-optical fiber.

"The fiber issue has affected us the most," Best said. As a result, upgrades have been delayed in several Cox systems. "We'll come up somewhat short in a lot of systems," he added, which means that Cox won't be able to launch new products in those systems-a circumstance that "could impact revenues."

The optical-fiber shortage has occurred for almost a year, Dietz said. Whereas two years ago, Insight could get an optical-fiber order filled within three or four weeks, it takes between four and six months today, he added.

Using one system as an example, Dietz said he ordered a DS3 trunk line from the local telephone company, but even the telco couldn't get its hands on fiber to fill the order, warning that it would take four to 16 weeks to fill it.

Insight's saving grace, Dietz said, is a long-standing relationship with its fiber provider, which he wouldn't name. But, he added, "Nobody's got extra capacity."

Two optical-fiber makers, Corning Inc. and Lucent Technologies, said they've spent hundreds of millions of dollars to boost capacity to meet demand.

Corning manager of marketing communications Paul Rogoski blamed in part the ever-increasing number of bandwidth providers entering telecommunications markets.

"Every week, there's an announcement of another bandwidth provider," Rogoski said. "Demand is surpassing capacity industrywide, and it will probably remain so for 18 months or so."

He added that Corning recently announced investments of more than $750 million in its plants in Wilmington and Concord, N.C., as well as overseas in Wales and Australia, to boost capacity by 20 percent.

"Our capacity should be coming online by the end of the year," he said. "It's a difficult situation for everyone. There's more fiber now than there's ever been. The market is flooded with fiber, but it's all spoken for."

Ironically, Steve McAbee, global communications director for Lucent Optical Fiber Solutions, pointed out that there was a fiber glut just two years ago.

Lucent embarked on a $350 million expansion program, and it added another $650 million investment this year to boost fiber output by more than 60 percent. Still, "the market's going to take some time to correct," McAbee said.

With customers primed to experience the new world of digital TV and high-speed Internet access, cable operators will be challenged to obtain equipment over sustained periods to satisfy subscribers.

But the situation is not completely foreign to operators. With respect to coaxial cable and other key pieces of equipment, "This kind of thing has been going on for years," Time Warner Cable chief technology officer Jim Chiddix said.