Scientific-Atlanta Wins $195M SBC Deal
The $195 million contract will stretch over the next few years as Scientific-Atlanta supplies the encoders, satellite dishes, video routers, and ongoing maintenance and upgrades.
The deal marks one of the last major planning steps in the IPTV portion of SBC’s Project Lightspeed, a $4 billion initiative to deliver the triple-play of voice, video, and data using fiber-optics all the way to the household. SBC hopes to deliver high-speed connections to 18 million U.S. homes by the end of 2007 (see SBC Sheds Light on 'Lightspeed', SBC Speeds Up FTTH Plan, and Inside SBC's IPTV Factory).
"This contract award is another important step in building a new, efficient, IP-based video network,” said Lea Ann Champion, SBC’s senior VP of IP Operations and Services, in a prepared statement.
SBC’s search for a supplier happened quickly, underscoring the RBOC's need to bring to market a triple-play offering to rival the cable operators. “The RFP went out in December of 2004, the field was narrowed down to three finalists in January, and the contract was just awarded,” says SBC spokesperson Wes Warnock. “So it was definitely an expedited contract.”
The Scientific-Atlanta equipment will reside in a three-part national architecture that includes a video operations center, two national “super hub” offices, and 41 hub offices, according to Warnock.
He says the video operations center will act as a "command center" that will monitor all of the content traveling through SBC's IPTV network. The two super hubs will sit next to dish farms that collect broadcasting signals from national networks such as ESPN. That content is then sent out to the hub offices, which control the provision of IPTV services to customers. The hub offices, which will reside mainly in metro areas, also will aggregate the feeds of local television channels, adds Warnock.
“The SBC IPTV architecture represents a significant milestone in the delivery of video to the home over DSL,” said Scientific-Atlanta CEO Jim McDonald in the company's press release. “The state-of-the-art IP video super hub offices and IP video hubs we are creating will provide SBC companies with the performance needed to support services on one of the world’s most advanced video processing networks.”
Scientific-Atlanta will work with chief Lightspeed integrator Alcatel (NYSE: ALA; Paris: CGEP:PA), which is providing the network access, aggregation, and switching equipment that will connect customers to the video hub offices (see Mais Alors! Alcatel Bags $1.7B SBC Deal ). It will line up alongside Microsoft Corp. (Nasdaq: MSFT), which in November 2004 won a $400 million contract to provide the software that will manage and deliver SBC's IPTV service (see SBC Awards Microsoft $400M IPTV Deal ).
Warnock identifies the residential gateway (the set-top box) as a key remaining piece of SBC’s IPTV plan, but declined to say which vendors were in the running for that contract. “We will announce that in the next couple of months."
News of the deal sent Scientific-Atlanta's share price up by 33 cents, just over 1 percent, to $28.22 by the close of the markets on Thursday.
That slight uptick is likely due to the expected slim margins on the hardware. Merrill Lynch & Co. Inc. analyst Tal Liani believes the financial impact of the deal is modest, assuming "operating margins around 10 percent, in line with our current estimate for the company’s infrastructure business."
With Liani expecting $90 million of the deal to come this calendar year, and a further $52.5 million in 2006 and 2007, he says Scientific-Atlanta's estimated fiscal 2005 earnings per share (EPS) could increase by just 1 cent to $1.50, while fiscal 2006's EPS could rise by 4 cents to $1.41. The company's fiscal year ends June 30.
In addition, Liani believes any follow-on set-top box business from SBC will likely have a similarly modest impact on the vendor's earnings potential.
And while the team at Scientific-Atlanta was celebrating its deal, the mood will have been less cheery at some of its key rivals. Harmonic Inc. (Nasdaq: HLIT) saw its share price drop by 46 cents, nearly 5 percent, to $9.56 on Thursday, while Tut Systems Inc. (Nasdaq: TUTS) saw its stock drop 23 cents, nearly 9 percent, to $2.41.
— Mark Sullivan, Reporter, Light Reading