Kate Bulkley, Media Analyst.

Caught out by the Pace of change

By Kate Bulkley

Broadcast News

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For Broadcast December 08, 2011

Set-top box manufacturer has had a tough year, says Kate Bulkley.

When things aren’t going too well in your own house, it’s sometimes comforting to look to your neighbours for a little comparison. So even though broadcasting and programme-making have hit some potholes in recent times, spare a thought for others around you.

There is a massive UK company that’s only just on the radar for much of the TV business, which has had an annus horribilis to match even the Queen’s in 1992. Pace is the world’s biggest supplier of TV set-top boxes, competing with Cisco and Google-owned Motorola, although its main UK customer is BT Vision (Sky gets its from its own-brand Amstrad, and Virgin Media uses the Tivo system).

But now Pace is wondering if there is a future in this area of manufacturing. Will viewers need these boxes in the next few years? Won’t connected TVs and devices like the iPad and content stored in the cloud make boxes redundant?

That debate was happening when 2011 began and Pace’s difficult 12 months has brought renewed focus to the question – its share price peaked in February at 234p, but fell by 81% to 43.5p by October. Earlier this week, it had crept back up to 67p, but the next six months are thought to be critical for the company and its chief executive, Neil Gaydon.

The reasons for the troubles are varied: a US customer deferred a big order early in the year because of concerns about its own business; the Japanese tsunami hit component-making factories and badly affected supply, causing a profit warning; and a $12m (£7.6m) restructure was announced to stop the “over-engineering” of boxes deemed too expensive to compete.

That would have been enough to bury many companies, but more was to come: a massive flood in Thailand struck factories making hard drives for PVRs, which make up 34% of Pace’s profits. The result is that up to $50m could be lost in operating profit next year on expected revenues of $2.3bn. Even without the Thai floods, sales margins are set to fall from 8% to 7%, and Pace faces a tricky cash-management issue because it has nearly $400m debt on top of these other costs.

Despite the bad news, Gaydon says plans are in place to move Pace from a hardware business to a software and hardware company, and its company acquisitions of recent years will move it up the food chain into value-added business including customer care for pay-TV operators like AT&T in the US.

“Outside of the US, Cisco and Motorola/Google are minnows in this business,” says Gaydon. He also believes that Google TV, Apple TV and Tivo, as well as the connected TVs coming from Sony, Samsung and others, will pale in comparison to the next-generation Pace set-top box that will handle home networking (to connect devices such as iPads and smart phones), Wi-Fi, security and content (DRM), as well as providing the ability to integrate services like YouTube into one on-screen EPG.

Broadcasters and programme-makers want to know where their channels and shows will be found in the future, and how Pace and others make this happen should be compelling viewing.

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