Arris to Start IP Home Gateway Trial This Year

Arris Group will start field trials of its IP home gateway this year, and market tests involving subscribers are due in early 2011, James Lakin, president of advanced technology and services, told us. The devices entered customer testing labs for evaluation in Q2 and could emerge for pilot production in early Q4, Lakin said.

The device, shown as a prototype at the NCTA show in May, is based on technology that Arris acquired last year with its purchase of Digeo, Lakin said. The technology includes Digeo’s Moxi interface and delivery platform that had been deployed in standalone products with cable operators including Charter. The IP home gateway prototype featured six MPEG-2 tuners, DOCSIS 3.0 modem with eight channels down as fast as 320 Mbps and a 500 GB hard drive, but the final products will depend on customer needs, Lakin said. The box also supports Multimedia over Coax, and DLNA. Arris hasn’t disclosed who the gateway will be sourced from, but its suppliers for other products include Flextronics, Plexus Services and Unihan.

"There are a lot of moving parts, and to the extent that our customers want to be aggressive and we can deliver them a service, we'll get there,” Lakin said. “Time isn’t the most important thing to us right now” concerning the gateway. “It’s getting the product right."

The gateway is expected to start producing revenue for Arris’s broadband communications systems (BCS) business by early 2011. It will arrive in the wake of the FCC’s AllVid plan to spur competition and drive broadband adoption through standardized, cross-industry gateways and adapters that can bridge TV, satellite and PTV as well as the Internet. Arris has asked the FCC to steer clear of mandating gateway architectures, because technology and consumer preferences change too quickly “for the Commission to anticipate."

The FCC wants “everything to go to retail through the television set, and we have been trying that for the past 7-8 years,” Lakin said. “The CE companies have tried mightily to incorporate OCAP and other stuff in their products, but the problem is, it adds so much cost."

With the gateway box, Arris is “working pretty closely with a number of different customers,” said Lakin, declining to disclose potential partners. Arris’s largest Q2 customers were Comcast and Time Warner Cable, which accounted for 23.6 percent and 18.9 percent of revenue, the company said. Arris posted $280.3 million in Q2 revenue, up from $278.5 million a year earlier.

While Arris has focused on the gateway since buying Digeo, it continues to offer standalone Moxi products. Among them is the three-tuner whole home Moxi HD DVR, which starts at $599 for a model with a 500 GB hard drive that can be expanded to 6.5 terabytes. The device can be paired with the Moxi Mate ($299) that delivers content in other rooms. The Moxi Mate software was upgraded two months ago to allow live TV, Lakin said. The Moxi DVR and Moxi Mate are sold through Arris’s website and Amazon.

"One of things we considered was whether we wanted to continue to market” Moxi products, and “the conclusion was that we learn a great deal about consumer behavior” by continuing to deploy them, Lakin said. “There are a whole list of new features that we are continuing to develop on that platform. We get a lot of good direct primary feedback from those subscribers regarding their preferences and behaviors."

Meanwhile, Arris’s Q2 profit narrowed to $19.7 million from $22.9 million a year earlier, with an increase in revenue to $280.3 million from $278.5 million. The revenue was short of some analysts’ projections and at the low end of Arris’s forecast for $275 million to $295 million. Arris’s Q2 gross margin narrowed to 40.4 percent from 42.1 percent a year earlier, as sales shifted to lower-cost cable modems and Embedded-Multimedia Terminal Adapters (E-MTAs) from higher-margin cable modem termination systems (CMTS) that are installed at a cable operator’s headend. E-MTAs combine a DOCSIS cable modem and an analog telephone adapter. Arris’s business appeared to have “decelerated” since early June, when the company was more upbeat, said CL King analyst Lawrence Harris. Comcast said Wednesday that subscriber growth slowed unexpectedly in June and July after growing the first five months of the year. In response to the change, U.S. cable operators may slow capital spending, which could weigh on Arris’s earnings, analysts said.

Arris’s shipped 1.4 million modems and E-MTAs in Q2, up from 1.17 million the previous quarter and 1.27 million a year earlier, Harris said. The shipment levels were the highest since Q4 of 2008, he said. More than 24 percent of modem and E-MTA shipments were DOCSIS 3.0 versus 14 percent in Q1, Harris said.