Several broadband IP stocks recovered today after taking a hit on bad news from the Broadband division of AT&T Corp. (NYSE: T) Friday. But the episode raised questions about the viability of the emerging market for IP services over hybrid fiber coax (HFC) networks -- and about how suppliers might ultimately be affected.

HFC networks encompass the fiber connections extending from a cable TV operator's head-end systems to neighborhood hubs, where converters and other gear -- including optical equipment -- are now being used to deliver Internet services over cable links to homes and businesses. (See Last Mile Lexicon for more basic information.) AT&T has made a major commitment to this market and says that as part of its announced restructuring (see AT&T to Split 4 Ways) it will offer AT&T Broadband tracking stock by 2001.

Nevertheless, in a letter circulated to suppliers late last week, AT&T Broadband said it won't take further shipments of supplies from now through mid-January, in an effort to reduce its inventories and balance its books. "We want to make sure our capital budget and spending line up, and this seemed a prudent move," says spokesperson Steve Lang.

AT&T Broadband was clear that the move didn't signal any loss of interest in the broadband cable market. Lang says the provider is still on track to spend its annual allotment for network enhancements and buildout.

AT&T also stressed that the cutoff applied to all suppliers, from office supplies to lighting. But the market focused on network equipment, and the news deflated the stock price of several of AT&T Broadband's key suppliers, including Antec Corp. (Nasdaq: ANTC), CommScope Inc. (NYSE: CTV), C-COR.net (Nasdaq: CCBL), Harmonic Inc. (Nasdaq: HLIT), and Scientific Atlanta Inc. (NYSE: SFA).

Of these, Antec seemed hardest hit: Its share price fell more than 16 percent Friday but rebounded about 5 percent, or $0.42, to close at $9.12. The firm, which makes fiber amplifiers and splitters as well as equipment for running voice over cable TV networks, says its earnings will be "materially affected" by AT&T's announcement, because Antec relies on AT&T for 40 percent of its revenue. Antec plans to release new earnings forecasts this week, and says it plans to work with AT&T to minimize the damage and to increase shipments of HFC gear to other customers. "We have product categories where demand always exceeds supply," says spokesperson Jim Bauer. That might help Antec reduce its own inventories, he suggests.

Another vendor who admits to the announcement's negative impact is Harmonic, which has a contract to sell DWDM (dense wavelength-division multiplexing) and other optical gear to AT&T Broadband (see Harmonic Sells DWDM Gear to AT&T). The vendor now will lose "2 million to $3 million" in quarterly revenues, it says. Harmonic's share price fell about 4 percent Friday and closed at $10.44. Today its shares slid another 4 percent to close at $9.88.

In other fallout, a press release issued by CommScope caused as much trouble as it cleared up. In that statement, CEO Frank M. Drendel said the announcement wouldn't materially affect CommScope, but added that overall "current order rates" were down and that "the ability of certain customers to get new financing for some of their projects" was in question. Because of this, CommScope revised its guidance for 2001 "to the mid-teen range from the 20% previously given." Shares fell $0.12 to $18.

Some vendors who have big AT&T Broadband contracts said the damage will be minimal or nonexistent. Among these were Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), which boasted in March 2000 that it was part of AT&T's "multibillion dollar project" for broadband Internet over cable TV networks. "The impact won't be material," said a spokesperson.

Other vendors are ominously silent. Motorola Inc. (NYSE: MOT) did not return calls from Light Reading,, although its General Instrument division is the premiere supplier of set-top boxes to AT&T Broadband. And prior to its merger with Motorola, General Instruments relied on AT&T for about 30 percent of its overall revenues, according to its 1999 SEC reports.

Motorola's stock price was down about 1.13 percent by midday, trading at $21.81.

Does all this signal more dreaded "slowdown" news from a key carrier? Is the bottom dropping out of the hoped-for HFC market, a target for several optical suppliers?

No, say analysts. "This is a short-term solution for AT&T," says Alan Bezoza, analyst with CIBC World Markets. "They've implemented a new inventory management system that showed them they have 45 days too much inventory. There's no issue with the HFC market as a whole."

Others say it's about time AT&T Broadband did something about its cash flow problems. "Of the seven largest cable operators, AT&T were the only ones who reported a cash flow problem in the September time frame," says Lawrence Harris, VP at Josephthal & Co.. All others, he maintains, reported cash flow growth of at least 10 percent in the quarter. Perhaps this inventory move will help.

As to the HFC market, Harris remains positive. "I think the CommScope release referred mostly to cable providers who've been overbuilding, such as RCN," he says. "We see no slowdown at other incumbent cable operators, other than this with AT&T."

Still, he acknowledges there are some key challenges for HFC suppliers in today's increasingly bearish market. For instance, while sales of set-top boxes and cable modems will "stay robust," he notes that future spending on HFC transmission gear will depend on how well vendors can show that their products "lower costs and increase revenues."

-- Mary Jander, senior editor, Light Reading http://www.lightreading.com