The Drip Portfolio
I picked up a lot of pertinent company information, too much to present in one column. What I plan to do is divide this into a three-part series. The first part (this week) will talk about cable and broadband. Next week I'll talk about Scientific-Atlanta's place in this market. The week after I'll look at their financials.
First, let me give a very brief history of cable (from memory) and the preconceived notions that I had. Cable TV originally appeared in isolated communities. Companies would erect large antennas to collect signals and distribute them to their subscribers. Back in the '60s, motels on the Delaware shore advertised CATV, which was a big improvement over the alternative: one television station from Salisbury, Maryland.
A number of years ago, when I was in my first year of engineering, I attended a talk on the future of electrical engineering. The professor was very excited because it had become possible to manufacture sufficiently clear glass for fiber optics that they could be used for communication. He explained the vastly greater bandwidth possible, and how this would change the nature of communications. The professor was right; today fiber has enabled us to communicate to an extent never thought possible. Instead of coaxial cable carrying signals one way from a receiver, cable companies are building out fiber networks that enable a vast amount of two-way communication.
What do you think of when you hear the words "broadband cable"? I thought, "Big deal, 150 stations or so of more garbage." I'm not much of a TV watcher, except for the Discovery Channel, History Channel, and Jerry Springer (sorry... I can't help myself). However, the advantage with broadband is much greater. Those of you whose cable companies provide it already know this. When I (finally) get broadband cable, I'll be converting to a cable modem so I can cut some of the time that I waste waiting for websites to load on my screen. The folks at Scientific-Atlanta showed me some very interesting other applications.
First, let's look at what broadband creates for the cable companies. With two-way communication, they become a network for their subscribers instead of an antenna. They can carry back and forth all forms of communications: Internet, telephone, television, and commerce. The technology is finally available for you to order a movie online, see it when you want to see it, pause, fast forward, or reverse it just like it was a tape in your VCR. Telephone service is also possible, which has led AT&T (NYSE: T) to invest in cable companies to penetrate the local telephone market. And you can buy things directly over your cable network that probably wouldn't work too well over the Internet -- such as a pizza from the place down the street. Internet access is possible on your PC through a cable modem, too, or on your set-top box.
One of the interesting features of the newer set-top boxes is that they turn your TV into a PC with the help of the cable network. With a wireless keyboard, you can write e-mail, surf the Web, or even run computer applications right on your TV. We've all heard the hype about the "Network PC" that Larry Ellison at Oracle (Nasdaq: ORCL) envisioned. I never could see myself buying one of those, since for only a few hundred dollars more I could buy a real computer. That concept also fails my "mother in-law" test. Why would she buy a Network PC that she would have to set up and struggle to learn to use?
Instead of buying a Network PC, why not just use the set-top box? My mother-in-law has one of these for cable TV anyway. If she could send e-mail over cable to her grandchildren by picking up a keyboard, she wouldn't hesitate. She also might surf the Web if it could take just a couple of buttons to push to get there. It doesn't take a lot of complex instructions, and you are using something that people are comfortable with anyway (the TV). When in the near future (according to my cable provider -- ha!), I can surf the Web through my set-top box, I will. Not that it is better than the computer, but I can see the use of being able to Web-surf on the TV in addition to my PC. I will probably hit websites during commercial breaks, or if I feel more industrious, look up items on the Web that I see mentioned on TV. I think Larry Ellison was on target, he just missed the bull's-eye.
Ultimately, I see developments in broadband cable opening up the Internet to many more people. On a selfish note, I see cable bringing many more Fools to our site, making our business grow and benefiting all of us in the community. Oh, yes, cable will certainly open the market up for Amazon (Nasdaq: AMZN), eBay (Nasdaq: EBAY), and all the many other e-tailers, too. I also feel that we'll see a local form of e-commerce develop through the cable companies, such as your local florist, pizza delivery place, or grocery store.
Next week, we'll discuss how Scientific-Atlanta's products (and their competitors) fit into this revolution. In the column two weeks from today, we'll look at Scientific-Atlanta's financials and try to decide whether they fit in a Drip or Pathfinder Portfolio.
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