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June 26, 2000

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Subject:  Re: S-CDMA Challenge
Author:  stocksure

FrozenCanuck asked: Am I missing something? Is S-CDMA really more robust from a signal integrity perspective, or is the portfolio manager full of doo-doo? I mean, if the quote was from somebody with a science background I'd be more inclined to have faith....but how many portfolio managers actually understand this stuff?

It appears that this portfolio manager, whoever he is, is a Gilder subscriber. Remember how Terayon took off in February? That was partly because Gilder touted the company's S-CDMA modems for their ability to work over networks with low signal/noise ratios when compared to their TDMA counterparts, such as the ones that used Broadcom's chips. Unlike wireless networks, using CDMA-based modems doesn't allow any real bandwidth gains. The actual bandwidth bottleneck source on these networks is the fiber that exists on their back end, whether it happens to be an OC-12 SONET ring, an OC-48 ring, a four-channel OC-12 DWDM system (AT&T's trying out the last one of these in certain regions via its Lightwire project), or something else.

However, the ability of Terayon's modems to handle transmissions over networks with high noise levels does provide one major benefit: it allows cable operators to offer internet access services without making some costly upgrades, such as the implementation of advanced two-way headends, and the rollout of fiber closer to network nodes. This is why Terayon's modems have been especially popular with cash-strapped foreign cable operators looking for an easy way to offer internet access.

Nonetheless, I expect Broadcom to wipe out Terayon within the next few years, for the following reasons:

1. Cable companies are all going to have to make these upgrades anyway in order to offer services that they're dying to provide, such as digital TV with its 200+ channels, video-on-demand, and interactive TV. These services are potential cash cows for the cable companies, and they're not going to postpone rolling them out forever, even if they can offer internet access using their existing equipment.

2. Two years from now, if you buy a cable modem from Terayon, you'll most likely still just be getting a cable modem. It might be cost less than the one you might buy from them right now, but that's about it. Meanwhile, in two years, perhaps sooner, if you buy one with Broadcom's chips in it, not only will you be getting a cable modem, you'll also be getting the following:

1. An all-silicon TV tuner chip
2. A network encryption processor
3. A home networking/V.90 modem chip
4. An ADSL/VDSL chip
5. A Bluetooth chip
6. Digital Furnace's upstream bandwidth-increasing software
7. Embedded voice-over-IP gateway software

What's more, given Broadcom's astounding ability to integrate disparate products and cut costs, the selling price of this chipset line will probably be on par with what Broadcom's current cable modem chipset is selling for. On top of this, by means of utilizing its set-top box-related expertise, it'll also most likely be possible to integrate the chipset into a set-top box reference design, as the following press release shows:

A while ago, a debate emerged on this board regarding whether Broadcom was in a Gorilla Game or a royalty. I'm far from an expert on the subject of gorilla gaming, but based on my limited knowledge, I have to say that at least in regards to its set-top box and cable modem, Broadcom is definitely in a gorilla game.

People tend to attribute the company's lead in these markets to its outstanding engineering/R&D department, but this is only half the equation. As the Terayon example shows, even if a competitor is able to one-up Broadcom by means of possessing some sort of technological advantage for their offering, and even if the competitor doesn't happen to be Terayon, but some industry giant such as Intel, TI, Lucent, etc., the given company's end-product will still be a vastly inferior one due to its inability to exploit the huge value chain that Broadcom has at its disposal by means of its amazingly diverse product line, the product of years of work and billions of dollars worth of brilliant acquisitions. Within a couple of years, I expect this value chain to become so powerful that it'll result in a proprietary open architecture (please forgive me if I'm misinterpreting some Gorilla-speak here) of such strength that even Microsoft and will be envious.

One thing that all of this FUD being spread around related to Terayon vs. Broadcom and Cable vs. DSL has been good for is to show the fallibility of three of the most highly respected and quoted minds on Wall Street: Gilder, Jubak, and Cramer (alright, maybe two of the most highly respected minds on the Street :-).

I still have a lot of respect for Gilder, and don't doubt for a moment that he's both an extremely intelligent person, and has a great deal of technological acumen related to the companies he discusses. It was by means of Gilder's report that I first got interested in both Qualcomm and Avanex, two companies that I have a good deal of respect for; and although he only re-enforced my opinions of them, I also agree with much of what he's had to say on JDS Uniphase and Network Appliance as well. However, as his Terayon recommendation shows, sometimes he gets so wrapped up in his notions of paradigms, ascendant technologies, and other such BS that he misses some very obvious facts about the real-world implementations of the technologies he admires on the part of businesses. A similar statement can be drawn by means of discussing his recommendation of the ill-fated Globalstar, although that's a whole other subject altogether.

Jubak, on the other hand, is quite good at understanding business strategies, market trends, and so on in regards to tech companies. His ability to combine such knowledge with an understanding of market psychology and company balance sheets has allowed him to post market-beating returns on his investments. However, like most Wall Street-type investors, he seems to know very little about the intricacies of a company's technology itself. Very often, as numerous technology-illiterate Cisco and JDS Uniphase investors can attest, this doesn't prove to be much of a problem. You just catch onto a major trend such as data or optical networking, identify the market leader, and ride the wave. However, as his comments on Terayon show, having such little technology-related knowledge also can make you susceptible to being snowed over by a third-part argument that you don't fully understand.

And then there's Cramer. Unlike Gilder and Jubak, whom I apologized for before criticizing, I have no respect for this guy. Not only does he appear to be, in my opinion, a bona fide imbecile, he's also single-handedly made me think twice about automatically respecting the intelligence of someone simply because he/she might have a Harvard degree.

Cramer manages hundreds of millions of dollars for his clients, but chooses to invest this money in companies that he knows almost nothing about, both from a technological and a business perspective. He even indirectly admits this from time to time, and tries to justify it by saying that he doesn't need to know these things since he's such a good trader. But is he really? Sure, he's alright at calling market tops, but back in early October '98, he was screaming at everyone who'd listen that we were in for a repeat of 1987, with the Dow set to go to 6,000. Later on, he even joked that he was the one driving the panic selling during the October 8 bottom. I'm sure his investors weren't laughing at either that or the 2% return he posted that year, a time frame during which the NASDAQ was up over 80%. In my opinion, if you want to be mindlessly entertained, don't listen to Cramer. There's plenty of good "Mr. T vs. E.T." sites out there on the internet. And if you want to be entertained by means of self-delusion, don't listen to Cramer either. The Psychic Friends Network is ready to take your calls. Not only will it cost you a mere $4.95/minute as compared to the hundreds or thousands that Cramer could make you lose if you follow his advice, the false prophecies that they spin out will usually leave you feeling good about yourself.


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