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The April 16, 2003 Issue Provided by System Dynamics Inc.
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Sony: The Passage to Competitive Set-top Boxes

North American cable operators have been trying without success to break the iron grip of their two principal vendors, Motorola and Scientific-Atlanta, who control the "conditional access" systems used to encrypt premium services such as HBO and Showtime. The choice of one of the two CA approaches in a given cable system effectively requires that all additional cable boxes be purchased from the same vendor, since only that vendor's boxes will work with previously-purchased equipment.

While other companies make CA systems, running multiple CA systems in a single cable system has been uneconomical, since it would require broadcasting premium channels simultaneously in both CA formats. Few if any cable systems have sufficient spare channel capacity for this.

At the "BroadbandPlus" conference in December, Sony offered MSOs a way out. It announced a system called "Passage" which it says would allow a cable system to operate two simultaneous encryption systems with only a little additional bandwidth. This would open the door to competitive CA systems - and to competitive set-top box vendors, led by Sony.

We interviewed Greg Gudorf, recently promoted from vice president of business planning to Senior Vice President of Sony's Digital Platform Division of America (DPA).

Sony passage architecture --> Click for larger pictureSony's Passage technology is based on the realization that only a small portion of the MPEG digital video stream needs to be encrypted to scramble the picture. Instead of encrypting the entire stream, only "critical" packets -- a small fraction of the total -- are encrypted. The "non-critical" packets are transmitted in the clear along with the encrypted critical packets down the cable system to the home, where a digital set-top box (STB) reassembles the stream. Using an alternative CA system in parallel with a legacy system requires duplicating only the critical packets. Sony says the alternative-encrypted packets are "invisible" to legacy STBs and the legacy-encrypted packets are invisible to alternative STBs. MSOs could choose to select 2% to 10% of the packets as critical, using more for especially-critical content such as pay-per-view fights.

Greg told us that Sony has already done lab trials with three MSOs, using both S-A and Motorola technology. It is preparing to do a field trial "with both friendlies and customers to prove it in the real world with pay-per-view and VOD", probably later in the second quarter.

Greg made sure we understood that Sony is not in the conditional access business; the consumer device is where they want to be. Sony's set-top technology gives MSOs a lot of flexibility, since it includes browser-based presentation rather than being limited by embedded code. Today's devices are set-top boxes, but tomorrow Sony envisions this technology as being embedded in televisions, other audio/video products and more.

Greg said that Sony will "work with all players -- conditional access, set-top box, content and chip makers" and its web site includes a list of partners from all these categories whom Sony is working with to ensure their products are capable of supporting it. He believes "Passage is the way into the cable business for us" and said Sony will provide a royalty-free license to all partners except other box makers.

Charter Communications -- the third-largest U.S. MSO -- has signed a licensing agreement for Passage, and other MSOs including Comcast (the largest) have publicly expressed their interest. If Sony can prove that Passage works as claimed, and MSOs buy and deploy it, the door will finally be opened to a competitive market in set-top boxes.

We have long believed that a truly competitive market, with boxes available at retail as well as leased from MSOs, would provide customers with a wide set of choices of features, functions and price -- and would accelerate the shift from analog to digital television.

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