Vyyo Bets Big on Cable Overlay

A little company called Vyyo (Nasdaq: VYYO) might be the the cable guys' weapon of choice to keep pace with speeds and feeds made possible by the new telco fiber access networks. (See Fiber Spreads in the USA, Cable Firms, Sprint in Fixed/Mobile Deal, and Report: IPTV a Potential Goldmine.)

Vyyo’s products widen the radio frequency spectrum in cable access networks, allowing them to deliver as much bandwidth over coax as the telcos can deliver over fiber. (See Cable Is the Voice of VOIP.)

Cox Communications Inc. (NYSE: COX) and other large MSOs have already tested the Vyyo technology, and Wall Street sources believe Cox will soon announce a plan to begin moving the gear into its networks. (See COX Boasts Triple Play.)

For Vyyo, which reported only $200,000 in revenue last quarter, the future looks very bright. “We believe we could be doing tens of millions of dollars in revenue in ’06,” says Vyyo VP of corporate communications Walt Ungerer in an interview with Light Reading. “The stars appear to be aligning for us,” VP of technology Al Johnson adds.

As a result of a $90 billion fiber infrastructure investment, the cable guys have brought the fiber as far as the node, but wish to leverage the existing coax access network to reach the home. Vyyo’s amplifiers (which reside at the node) widen the RF spectrum over the last mile from 860MHz to almost 3GHz. A small device called a "tap" sits on the pole by the home and recieves the RF signal.

Johnson thinks the technology can double the operator's downstream bandwidth offering, and quadruple its upstream bandwidth offering. In a scenario where one node is servicing 100 households, it could be possible for a cable provider to deliver 100 Mbit/s of bandwidth to each home served by that node.

The only other option is to build the fiber all the way out to the home, but that would cost an estimated $1,500 to $2,000 per household. Meanwhile, the Vyyo overlay solution, analysts say, costs only about $125 per home.

Vyyo’s visibility rose considerably this week after a research note from Needham & Co. analyst Anton Wahlman Monday suggested a deal with Cox may be brewing. (See Cox's Robbins Ruffles Feathers.)

Wahlman believes Cox will deploy Vyyo gear in greenfield build-outs in storm-damaged New Orleans, and then go further. “If Cox decides that this is a good idea to deploy in New Orleans, it could decide to preemptively install such taps in its other systems around the country,” Wahlman writes. “Clearly, such a deployment would take a few years, but Vyyo would be a likely key beneficiary.”

Cox, of course, isn't saying much about its relationship with Vyyo. “We don’t have any kind of a business agreement with them; we haven’t bought any of their products that I know of," says Cox spokesman David Grabert.

"Lots of people have been asking if we’re going to be using the equipment in a build-out in New Orleans, but all I can tell you is that we’re very committed to that city. It’s still very competitive, and we don’t really need to be telling BellSouth what we’re doing.”

Cox isn’t expected to buy the whole Vyyo solution at once, but will begin replacing its existing 1GHz taps with Vyyo’s 3GHz taps on an ongoing basis. As competitive pressure from telco fiber grows, Cox may then buy the amplifiers that push the RF spectrum up to 3 gigahertz.

A Cox deal would provide Vyyo with a steady stream of revenue, which analysts say could begin showing up in early 2006.

But here's the bigger picture. Sources say other cable operators such as Charter Communications (Nasdaq: CHTR) are very aware of Cox’s plans for Vyyo, and may see good reason to follow suit.

How is it that these huge cable companies would throw in with a tiny company like Vyyo?

Vyyo says it is the only company offering the 3 gigahertz overlay solution today. The company has also taken pains to ensure that its patent portfolio is air-tight.

If the Cox deal comes to fruition, Vyyo could quickly become an attractive target for an acquisition by the likes of Motorola Inc. (NYSE: MOT) or Cisco Systems Inc. (Nasdaq: CSCO), Wall Street sources say. (See Cisco to Acquire Scientific-Atlanta.)

This is not to suggest Vyyo is a slam dunk. Other overlay solutions have been tried -- and have failed -- before. In the DSL world, Celite Systems closed after it couldn't find a service provider willing to pony up for its "broadcast DSL" solution. (See Celite's Out.)

Vyyo is no stranger to businesses that look good on paper, but underperform in the real world.

The company's core business, broadband wireless access systems, has seen lumpy sales and dwindling customers as lower-priced competitors have flooded the market.

In 2002 Vyyo bought Shira Software Ltd., a privately held Israeli company that sold prepress and publishing software. But the company showed sustained losses so Vyyo's new "software division" was discontinued in August 2003, and all Shira employees were terminated.

Still looking for a winner, Vyyo purchased all shares of a small company called Xtend in 2004. Through this deal Vyyo acquired its 3 gigahertz overlay solution for cable operators.

So Vyyo and its principals have taken their lumps, kept placing bets, and now appear to have a hand that might pay off. With the company's management predicting "tens of millions in revenue in 2006!" one gets the impression they may not be bluffing.

— Mark Sullivan, Reporter, Light Reading