Drip Portfolio Scientific-Atlanta's Cable Internet

George Runkle visited Scientific-Atlanta's headquarters in Lawrenceville, Georgia, and spoke with its CEO, Mr. James F. McDonald, about the company's market, technology, and business. The future for cable lies in the interactivity of the medium, and the amount of bandwidth that digital cable provides. Cable Internet is poised to change your home entertainment experience.

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By George Runkle (TMF Runkle)
December 7, 2000

I recently visited the headquarters of Scientific-Atlanta (NYSE: SFA) in Lawrenceville, Georgia. The company is a leading communications equipment provider and it has a free Drip program. I first visited Scientific-Atlanta last year, so the goal this year was to see where things are going. I met with James F. McDonald, President and CEO; Thomas Robey, Vice President of Investor Relations; Paul Sims, Director of Public Relations; and Paul Richards, Vice President of Marketing and Business Development. Most of my discussion was with the CEO, Mr. McDonald.

We first discussed current product demand. Right now, the industry is beginning to convert from analog cable to digital cable. There are currently about 100 million households that have television (per Mr. McDonald, and the National Cable Television Association). Of those, Mr. McDonald told me that about 14 million have
satellite TV, and eight to nine million are already converted to digital. So, about 80 million homes still need to be converted to digital service.

Right now in the cable business there are two competitors, Scientific-Atlanta and Motorola (NYSE: MOT). Motorola, which has come into the business by its acquisition of General Instruments, chose to move into digital cable by competing with satellite using broadcast technology to increase their bandwidth. Scientific-Atlanta decided to "build architecture for the future" using a two-way technology that would allow interactive applications and ongoing expansion.

I brought up the question of wireless replacing cable. According to Mr. McDonald, this is not really feasible at this time because of the limited bandwidth of wireless, which is not good for TV or high-speed data (3G wireless will be about 384 Kbps, which is fast, but won't handle video). Satellites provide ample speed, but since they broadcast one way, they don't allow interactivity. Satellites alone don't allow movies on demand, for example, or other interactive activities. So, while wireless certainly has expansion possibilities, it won't be replacing cable to the home anytime in the foreseeable future.

We also talked about the difficulties telephone companies are having converting over broadband. Let me give the example that lead into this discussion. I used to have BellSouth (NYSE: BLS) for phone, cable, and DSL (digital subscriber line). For phone there was one technology, then there was the cable coming to the house for the TV, and then there was DSL for my computer. It's a patchwork of technology that has been put together to upgrade their system. To their benefit, cable companies don't have this burden of legacy copper wire systems and switches to work over.

With cable, you can have phone, TV, and high-speed Internet all on the same connection, which is what I have now. The digital cable allows interactivity, cable phone service is much less expensive and provides more options, and cable modems are generally faster than DSL. The main limitation to cable is how many homes attach to the nodes at the end of the fiber. To increase bandwidth, the cable company has to lessen the number of homes attached to the nodes. I'd like to add that the DSL software I used to have was quite reliable in making my computer crash, while my cable modem doesn't require any software installed on my computer and has caused none of the conflicts of DSL.

To sum up, there are three services that cable providers deliver: Video, data, and voice.

Satellite TV costs about $58 per subscriber on the average for 150 to 160 channels. This holds digital cable to that price range, too. So, why would a person go to cable for television? According to Mr. McDonald, it holds the next technology, which is interactive on demand. This will allow subscribers to get programs off the servers. No longer will you have to rush home in time to watch your favorite movie, you can just start it whenever you want. You'll run it like a VCR, pausing it when the phone rings, or replaying scenes you missed when your mother-in-law interrupted you.

The most interesting vision that came out of our meeting was the use of the set-top box as an integrated part of a total system in the house (click for a definition of set-top box). Computers in the house will be wirelessly networked into the box to access the cable modem. Other TVs in the house, PDAs, and cell phones will be able to interact with the box to download content or access the Internet. Many of us are finding it more cost effective to network our computers in our homes. In my house, my sons share the Internet connection with me, we use one printer, and we share disk drives for back-up. It's a much more efficient technology that allows higher-cost equipment to be shared. In the future, according to Mr. McDonald, we'll be using the set-top box as the server.

(For more information on home servers, check out this article on ZDNet -- Home Servers: The New Data Butlers. The author predicts that the personal computer will be the server for your extensive home network, however, a leased set-top box would be cheaper and could be more easily replaced as the technology advances.)

Our company visit wrapped up with a quick demonstration of a mix of Scientific-Atlanta set-top boxes, Explorer 2000s and 3000s, which come with a keyboard and allow a wide range of applications. In addition to TV, the Explorer Set-Top Series allows you to access on-demand movies, email, and the Web right through your set-top box. The product's ease of use should help open up a more interactive, personalized Internet and multimedia experience for users. To discuss this article and the company, visit us on the Drip Companies board.

P.S. I received my confirmation of purchases from "Temper of the Times" for Scientific-Atlanta and Nortel Networks (NYSE: NT). One share of each company was bought on November 6, 2000. I paid $44.44 for Nortel and $69.00 for Scientific-Atlanta. As soon as the necessary paperwork comes to me, I'll start with the optional cash purchases and I'll keep you all updated on how I do (given the recent price declines, I'm happy to buy more Scientific-Atlanta now). As you might recall, I'll be posting here how well I do dripping into my Pathfinder Port, which holds Scientific-Atlanta, Nortel, and Enron (NYSE: ENE). By the way, don't forget to order our Industry Focus 2001, which will cover in-depth a number of industries you may wish to invest in. Until next time, stay Foolish!

Drip Portfolio


12/7/00 as of ~8:30:00 PM EST

Ticker Company Price
Change
Daily Price
% Change
Price
CPBCAMPBELL SOUP0.631.96%32.44
INTCINTEL CORP0.561.77%32.31
JNJJOHNSON & JOHNSON0.940.98%97.06
MELMELLON FINANCIAL CORP1.062.23%48.81
PEPPEPSICO INC1.633.59%46.94

  Day Week Month Year
To Date
Since
7/28/1997
Annualized
Drip1.78%(0.20%)(4.50%)4.72%25.34%6.94%
Comparable S&P 500n/an/an/an/a16.21%4.57%
S&P 500(0.59%)2.15%2.17%(8.56%)43.12%11.24%
S&P 500 (DA)(0.57%)2.11%2.13%(8.41%)45.74%11.84%
NASDAQ(1.57%)4.06%5.96%(32.36%)75.38%18.17%

Trade Date # Shares Ticker Cost/Share Price Total % Ret
10/7/9837.4877MEL34.8348.8142.24%
9/8/9749.5166INTC24.2432.3133.59%
11/14/9716.236JNJ80.1197.0622.39%
7/28/005PEP48.0046.94(2.21%)
4/13/988.465CPB53.8132.44(37.77%)

Trade Date # Shares Ticker Total Cost Current Value Total Gain
10/7/9837.4877MEL1,305.641,829.87551.51
9/8/9749.5166INTC1,200.411,600.01403.19
11/14/9716.236JNJ1,300.691,575.91291.28
7/28/005PEP240.00234.69(5.31)
4/13/988.465CPB455.50274.58(172.05)
 
Cash: 
Total: 
0.04
5,515.09
 


Key
• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.

Note
Drip Port launched with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to own $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging and our relatively significant starting costs, we do not expect to seriously challenge the S&P 500 for the first three to five years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. Final note: our investment in Campbell Soup is frozen due to fees instituted in its investment plan. Click here for a history of all Drip Port transactions.