Epanding arsenal

As an industry, Internet companies have a tremendous hunger for standardized protocols. Standards are the bedrock of interoperability, giving hardware and software developers a bass note on which to riff.

But occasionally a protocol just doesn't develop on schedule. That may be the case with Terayon Communication Systems' synchronous CDMA (S-CDMA) technology. The system may be superior for transmitting the upstream traffic involved in cable voice and Internet but seems destined to wait while the cable IP industry takes smaller steps to two-way transmission.

Faced with that delay, Terayon - the fourth-largest manufacturer of cable modems and cable headends - is busily diversifying into a provider of the equipment necessary for a wider broadband access menu, including DSL, satellite and wireless.

"S-CDMA is only one weapon in our arsenal," said Terayon CEO Zaki Rakib. "We are diversifying our products across multiple markets. Just like any company, we started with one technology, rode that wave and now we're developing others."

Rakib and his brother Shlomo founded Terayon in 1993 to build cable modems based on S-CDMA, a spread-spectrum technology used by the Israeli armed forces to send coded messages. Most other modem companies use TDMA technology.

Most analysts agree that CDMA affords better performance than TDMA, offering greater capacity and superior immunity to the electrical "noise" that can disrupt data transmission.

Last year, in anticipation of preparing its DOCSIS 1.2 standard, CableLabs requested that Terayon deliver a prototype cable modem for consideration as the basis for a standard. Since then, however, CableLabs has decided to hold off on issuing a 1.2 spec to avoid giving operators an excuse to sidestep DOCSIS 1.1.

In response, Terayon won DOCSIS approval for a conventional TDMA modem and started acquiring companies that expanded its focus beyond chips and cable modems. Recent acquisitions include IMedia, whose technology allows cable companies to customize video for their customers; Telegate, which produces advanced systems for cable telephony; Radwiz and Access Network Electronics, which developed IP network routing for the small office/home office sector; and Combox, which provides digital video broadcast solutions for cable and satellite networks. On Aug. 1, Terayon announced plans to buy Mainsail Networks, which designs integrated multiservice access products for next generation optical networks.

Terayon aims to become a one-stop broadband shop for converged carriers, a la Cisco Systems. "If I'm offering carrier data-over-cable solutions, I have an opportunity to get incremental business as voice, video and data begin converging over IP," Rakib said. "Synergies can be created with lower research costs."

The result of this diversification should be a large shift in Terayon's revenue stream. In the company's most recent quarter, 90% of sales came from cable operators and 10% from DSL providers. Looking two to three years ahead, Rakib foresees a more diversified breakout: 50% of sales from MSOs, 30% from DSL operators and 20% from wireless suppliers.

"This will become a notable trend - carriers filling out their deployments with multiple access modes," said George Levine, an analyst with Gorham Consulting. "Consolidation and competition will make broadband providers more likely to deploy every asset they've got to win subscribers."

Meanwhile, S-CDMA endures. Terayon has joined with chipmaker Broadcom to develop next generation DOCSIS cable modem specs that incorporate S-CDMA. Terayon offers S-CDMA as a proprietary extension in the cable modems it now sells to customers such as Rogers Communications and Shaw Communications in Canada.

"They stand a very good chance of being incorporated into DOCSIS 1.x somewhere down the road, either by themselves or in tandem with a TDMA system," said Tim Long, an analyst with Merrill Lynch. "In the meantime, they've retooled for growth in other broadband areas and made their prospects that much better."