Spyglass, GI ink TV set-top pact

In an effort to jump-start the development of Net-based TV cable technologies and services, Web software developer Spyglass and cable equipment manufacturer General Instrument have teamed up on a three-year, $20-million joint venture, the companies said today.

The two companies will establish a development center for cable hardware and software in order to devise interactive applications for GI's digital TV set-top boxes. GI's DCT cable set-top boxes are competing in the emerging market for next-generation interactive cable services, and the deal is expected to help GI attract customers to its technology platform while adding new sources of revenue.

Having the software and development capabilities of Spyglass at hand is "a selling point [for GI], a means of saying 'We've got a differentiating feature that makes our platform more attractive'" to cable operators, said Cynthia Brumfield, an analyst with Paul Kagan Associates.

As another part of the agreement, GI will purchase 700,000 shares of Spyglass stock, or five percent of the company, and receive warrants to purchase an equal amount in the future, the two companies said in a statement.

The GI-Spyglass agreement is another example of how the convergence of the TV and computer, along with the highly competitive nature of software development for information appliances, is resulting in a wave of partnerships. In July, Microsoft, along with three other companies, said it would acquire a 7.5 percent stake in Thomson Multimedia in a deal that will ensure its Windows CE operating system would be used in interactive TV products.

Microsoft has all but sewn up the PC environment as a development platform, but as cable companies seek to add new PC-like capabilities to traditional TV set-top boxes, the field is attracting a new set of competitors.

GI, unsurprisingly, would like to be in control not only of the hardware development of the platform (a role not unlike that of Intel in the PC world), but software as well.

The development center is a "clearinghouse" for the creation of software and programming tools for the cable and satellite industry, Spyglass executives said.

"They stay in control of [set-top] boxes and their own destiny. They aren't just selling iron. They now have the ability to add more value and reap revenues from that," said Paul Chapple, manager of TV technologies for Spyglass.

Spyglass develops browsers and other software products for both hardware and software companies. It not only licenses its browser source code but also provides engineering services, such as designing user interfaces. Currently, such services provide over half of Spyglass's revenues, company executives have said.

Chapple said the company will work with GI to incorporate whatever technologies GI's customers want in their digital set-top boxes, whether it be Java and Windows CE or some of Spyglass' own technology.

Among those customers: TCI, which invested in GI in 1997 and in turn ordered, along with eight other cable operators, at least 15 million set-top devices over the next three to five years in a deal valued at around $4.5 billion.

TCI and Microsoft agreed in January to use Windows CE in at least 5 million interactive TV set-top boxes.

Today's deal could be a signal that integration of CE into the set-top environment isn't going as well as Microsoft had hoped, some analysts say.

"Windows CE is poorer at multimedia services than most system integrators had hoped," said Richard Doherty, president of The Envisioneering Group consultancy.

Developers are getting frustrated at the inability to deliver on promises to fix these issues such as the lack of a version of Netshow for Windows CE, he said. Netshow is Microsoft's software for streaming audio and video content over networks such as the Internet or cable systems. Also, other difficulties have apparently arisen in moving WebTV technology to the Windows CE platform.

"The WebTV browser is an efficient Internet client, but making that same magic happen in CE is keeping engineers at its licensees like Sony and Philips awake at night because they have to bear the brunt of CE version work," Doherty noted.

In other news, Spyglass reported a fourth-quarter loss of four cents a share, up from a 38-cents-a-share loss from the year-ago period. Today's announcement apparently did not impact the recently closed quarter, which ended on September 30.

Revenues for Spyglass' fourth quarter increased to $5.9 million, 84 percent better than the year-ago quarter and about 10 percent better than fiscal 1998's third quarter. The company reduced its operating expenses by 34 percent, according to a statement, and enjoys 70 percent gross margins.

Spyglass lost $589,000 for the quarter, and $8.0 million, or 60 cents a share, for the entire year.