5030 Sugarloaf Parkway
Lawrenceville, Georgia 30044
Telephone: (770) 903-5000
Fax: (770) 236-6777
Sales: $2.51 billion (2001)
Stock Exchanges: New York
Ticker Symbol: SFA
NAIC: 33422 Radio and Television Broadcasting and Wireless Communications Equipment Manufacturing; 33429 Other Communications Equipment Manufacturing
Scientific-Atlanta leads the way with new innovations and vision for the digital interactive age.
1951: Scientific-Atlanta is founded.
1971: New President Sidney Topol sets out to double company's size.
1980: Scientific-Atlanta is world's largest supplier of satellite earth stations.
1986: Scientific-Atlanta begins "retooling, refocusing" under new CEO William Johnson.
1993: James McDonald becomes CEO, overseas large investment in interactive digital cable technology.
2000: Scientific-Atlanta expands production several times as digital business booms.
2001: Share price falls and layoffs are announced in the wake of falling orders.
Scientific-Atlanta, Inc. is a leading manufacturer of set-top cable boxes and other satellite transmission equipment. Long a leader in the construction of satellite earth stations, Scientific-Atlanta grew rapidly in the 1970s as a result of its involvement with the cable television industry, only to scale back and restructure its operations in the 1980s. In the 1990s, the company was one of the first to invest heavily in developing interactive digital cable technology.
Scientific-Atlanta was founded on October 31, 1951, by six professors at the Georgia Institute of Technology. Hoping to market a device that recorded the patterns of antennae, the six pooled $600 to start the company. By 1956 the fledgling firm had completed development of its first product, built its first plant, and amassed 30 employees.
During the 1960s Scientific-Atlanta earned a place in the space and defense industries as a manufacturer of electronic testing equipment for antennae. By the end of that decade the company had added instruments for testing telephones and acoustic devices with defense applications. As a military contractor, the company distinguished itself by manufacturing unique electronic instruments for the federal government. According to Business Week, Scientific-Atlanta was a company "fascinated with communications esoterica." Nonetheless, with revenues of just $16 million a year, it was clear that the company had yet to reach its potential.
In 1971 Sidney Topol, an executive at the Raytheon Company with a background in physics and satellite technology, was named president of Scientific-Atlanta. A fervent believer in strategic planning, Topol set out to double the size of Scientific-Atlanta by implementing a long-term program. The first tenet of this plan was to reduce or sell off operations in which the company was losing money trying to beat much larger companies at their own game. Scientific-Atlanta's tentative interest in microwave carriers, for example, fell into this category, so Topol phased it out.
Scientific-Atlanta instead applied its energy to opportunities in new fields with large growth potential and few barriers to entry. The company sought out products that were either low-cost and high volume or had a very high price tag. "You've either got to make 10,000 of something worth $100 to $200, or several of something worth $500,000 or $10 million," Topol told the New York Times. The company planned to make the low-cost, high volume end of this equation profitable through aggressive research and development and a strong marketing effort. In its annual report, as reprinted in David C. Rickert's Harvard Business School case study of Scientific-Atlanta, the company stated: "Scientific-Atlanta operates under a disciplined business plan that concentrates on design, manufacture, and sale of standard technical products for the communications and instrumentation markets." More specifically, Topol recounted in Dun's Review, as restated by Rickert, "I asked what products we needed for growing markets, not what markets we should go after because we had a product."
Growing with Cable in the 1970s
The answer to that question was telecommunications products, primarily the satellite earth station, a large mobile dish used to receive signals transmitted from communications satellites orbiting the earth. In 1973 the company displayed a portable satellite earth station at a communications trade show in California. It planned to sell the portable stations to companies in the relatively new and rapidly growing cable television field so they could transmit their programming to a large number of stations in different areas. The stations, in turn, would send the programming to consumers' homes over their cable networks. At the time, however, observers told Scientific-Atlanta executives that satellite transmission of cable television programming would take place only in the distant future.
These predictions proved incorrect and as the cable television industry boomed in the mid- to late 1970s, Scientific-Atlanta grew with it. The company's profits ballooned by 40 percent a year from 1972 on as Scientific-Atlanta came to dominate the market it had largely pioneered. In 1976, as sales rose to more than $45 million, the company greatly expanded its manufacturing, laboratory, and office space at its headquarters. It sold two-thirds of the 3,000 satellite earth stations purchased by cable companies during the 1970s, enabling its clients--broadcasters such as Home Box Office (HBO) and Showtime/The Movie Channel--to become pillars of the cable broadcasting industry. Scientific-Atlanta's strength in satellite earth stations helped to enhance its overall sales of cable television equipment, and the company also began to market other components necessary to operate a cable television system.
In addition to its satellite products for the cable industry, Scientific-Atlanta manufactured testing and measuring devices for telecommunications, industrial, and laboratory use. The company added to its instrumentation operations when it acquired the San Diego-based Spectral Dynamics Corporation, a manufacturer of scientific devices, in 1978 for $17.4 million. Spectral Dynamics brought with it European sales subsidiaries in Germany, France, England, and the Netherlands. With these additions, Scientific-Atlanta boasted a sales network that covered 40 countries and was supported by a worldwide service network that adjusted and repaired its instruments. Both Scientific-Atlanta and Spectral Dynamics relied on continual research and development to bring new products to market, thereby enhancing market share and fostering company growth.
By the end of 1978 Scientific-Atlanta's sales had reached $94.2 million, with earnings of $5 million. In addition to four plants in Atlanta, the company had opened facilities in Alabama, New Jersey, and Scotland. The following year the company added to its testing equipment holdings when it purchased Adar Associates, Inc., a company based in Burlington, Massachusetts, that manufactured automatic testing devices.
By the start of 1979 Scientific-Atlanta employed 2,700 people. That year the company also introduced Homesat, a subsidiary formed to market satellite equipment to homeowners who lived in areas too remote to receive adequate television reception. The service's first customer, a New Mexico ranch owner, paid $20,000 to set up his own satellite earth station.
In addition to its two main areas of operation--communications and instrumentation--Scientific-Atlanta also entered the field of home security and energy management during the 1970s. The company marketed wireless home alarm systems and provided equipment to utilities that enabled them to monitor home energy use.
By the dawn of the 1980s Scientific-Atlanta had become the world's largest supplier of satellite earth stations. The company moved to increase its cable-related operations when it bought Systems Communications Cable, Inc., based in Phoenix, Arizona. Scientific-Atlanta paid $5.5 million for the firm, which manufactured coaxial cable for use in cable television systems.
Bottoming Out in the 1980s
Scientific-Atlanta's dominance of the cable television equipment field began to waver in the early 1980s when the company developed quality control problems with its set-top converters, units placed on top of television sets to facilitate the broadcast of cable channels. These difficulties caused Scientific-Atlanta to post its first quarterly loss in 13 years at the end of June 1982, when the company reported that it had accumulated a deficit of $2.3 million. Eventually, Scientific-Atlanta was forced to abandon the manufacture of set-top converters in its American plants and contract with a Japanese electronics firm, Matsushita, to have them made overseas. Currency fluctuations between the yen and the dollar made this a far more risky and expensive proposition for the company than had domestic manufacture of the sets. Scientific-Atlanta's delay in marketing its set-top converter, which had been long-awaited in the industry, resulted in a sharp dip in the value of the company's stock.
In 1983 Scientific-Atlanta's fortunes took a decisive turn for the worse when the bottom dropped out of the cable industry. In its infancy, cable services had grown feverishly, but the business had now matured and slowed and in the early 1980s cable entered a period of consolidation. As companies went out of business or were swallowed up by others, the demand for cable satellite transmission equipment dropped dramatically.
In late 1984 Scientific-Atlanta was dealt another blow when it failed to win a contract from the HBO and Showtime cable operations to develop equipment to scramble their signals, which homeowners were pirating out of the sky with their own satellite dishes. With this decision, the company's competitor, MA/Com, Inc., earned the right to market the technology that would set the standard for all future scrambling of cable satellite transmissions. Scientific-Atlanta found itself knocked out of the leading role in the industry it had largely invented.
Facing this roadblock head on, the company decided to investigate other markets. In June 1985 Scientific-Atlanta announced that it would introduce a new line of products in the area of business communications. Using a newly developed satellite dish, the "very small aperture terminal" or VSAT, which dispatched and received encoded signals transmitted in a new, highly reliable "KU" broadcast band width, the company proposed to market private video networks to large corporations; with Scientific-Atlanta's equipment, companies could transmit high-quality video images from their headquarters to branch offices or between field offices through satellite technology. Meetings, demonstrations, training sessions, and other types of programming and data could be more easily conveyed from one location to another. By offering video transmission--in addition to the ability to convey raw data such as figures and documents over fiber-optic telephone lines--Scientific-Atlanta hoped to make its system more useful and appealing to businesses than those of its competitors in the telecommunications industry.
In the early stages of the project, Scientific-Atlanta signed up nearly a dozen companies for its service, including General Motors and J.C. Penney. Despite these successes, however, analysts remained skeptical that there would be sufficient demand for Scientific-Atlanta's elaborate and expensive service to make the company's investment in the project pay off. Moreover, the company's lack of affiliation with any major satellite company to provide the other crucial link in its network caused worry.
Retooling in 1986
By 1986 Scientific-Atlanta's efforts at rejuvenation had in fact faltered. Operating profits dropped dramatically as the company "ran into very competitive markets," Chairman Topol told the Wall Street Journal. In an effort to stem Scientific-Atlanta's decline, Topol brought in an outside consultant, William E. Johnson, to take over the helm and help the company restructure itself and return to profitability. Scientific-Atlanta "had grown so fast in technology and marketing that it grew short on logistics," one board member informed the New York Times.
To Johnson, Scientific-Atlanta's problems stemmed from years of rapid growth, during which the company had become involved in a large number of new technologies, none of which it managed well. In addition, bureaucratic red tape had mushroomed to hamper financial reporting systems and as a result Scientific-Atlanta had taken its eye off the bottom line; competition in the industry was getting fierce, and the company's costs were spiraling. These conditions were caused in part by unsound personnel decisions.
With Johnson at its command post Scientific-Atlanta embarked on a process he called "retooling, refocusing, and restructuring," according to the Wall Street Transcript. The company withdrew from a number of operational areas, selling seven out of 25 of its business ventures, including its home satellite business and coaxial cable subsidiary. Partly as a result of these changes the company posted a net loss in 1986 of $9.2 million.
Once rid of its less promising areas of operation, Scientific-Atlanta focused on more profitable concerns, such as its satellite communications networks. The company enhanced its holdings in this field when it bought Advanced Communications Engineering, which helped Scientific-Atlanta take second place in this growing field. Despite the earlier skepticism of industry analysts, the company discovered a strong demand for satellite communications networks among corporations and in developing nations, where land-based cable communications systems were prohibitively expensive.
Meanwhile, Scientific-Atlanta's traditional market for its satellite equipment--the cable television industry--began to show signs of life, particularly in Europe. To formulate other successful products Scientific-Atlanta began to pour renewed effort and money into research and development, revamping many of its product lines with all new technology to keep the company on the cutting edge of the industry. A particular area of growth was in commercial applications of high-definition television technology, which helped the company broaden its customer base.
Not content to simply alter its product lines, Scientific-Atlanta also moved to significantly control its costs. The company pared its workforce, firing 1,000 workers, and instituted a wage freeze. To reduce problems in its manufacturing operations, the company replaced its domestic assembly lines with cellular manufacturing teams. In an effort to control expenses at its overseas manufacturing outfits, Scientific-Atlanta worked out an agreement with its Japanese supplier to reduce the impact of currency fluctuations on its bottom line. Along with these changes, Scientific-Atlanta eliminated three-quarters of its senior-level management; this turnover allowed the company to revamp its corporate culture, reducing the number of financial reports necessary by two-thirds and incorporating engineers in the early stages of new-product design in an effort to control manufacturing costs. Productivity was increased and the time it took to manufacture many items shrank markedly.
Despite these changes, however, Scientific-Atlanta's instrument divisions, which manufactured equipment for testing and monitoring, remained insufficiently profitable. Nonetheless, by the beginning of the 1990s the company's overall performance had improved dramatically as earnings increased 121 percent over the last half of the previous decade to reach $36 million in 1989 and rose again to hit $44.3 million one year later.
In the 1990s Scientific-Atlanta continued its aggressive development of new technologies to improve its market share. In early 1991 the company introduced a satellite network for smaller businesses and began to market signal encoding devices to a number of companies. Still, a general economic recession, intensified by cuts in cable industry spending, resulted in a 20 percent drop in sales for the year. As a result, Scientific-Atlanta planned further restructuring in the form of staff cuts and consolidation of manufacturing operations; but the cost involved in these moves reduced the company's earnings for 1991 to only $1.1 million. Despite this bad news Scientific-Atlanta's directors remained hopeful that the company would prosper in years to come as it made efforts to reconfirm its record of technological innovation and aggressive marketing.
Betting on Digital in the 1990s
James F. McDonald, a 21-year IBM veteran originally from Kentucky, took over as chief executive in July 1993. McDonald had overseen layoffs and consolidations at Gould Inc., a $1 billion electronics firm, several years earlier. The Atlanta Constitution reported he faced an analogous situation at Scientific-Atlanta, which lacked a clear focus across its broad product line. The cable industry, which accounted for most of the company's business, provided the company a focus. By 1997, the company would sell off several units, including its venerable microwave instrumentations unit. In January 2000, Scientific-Atlanta sold its satellite networking division to ViaSat Inc. for $75 million. McDonald also consolidated manufacturing and administrative functions across the company's divisions.
Scientific-Atlanta signed development deals with numerous providers, hoping to win an early lead in the emerging interactive television business. However, the company's main competitor, market leader General Instrument (GI), found quick profits producing cheap set-top boxes for analog cable systems and digital boxes. However, Scientific-Atlanta had hedged its bets: the company was also developing software and two-way fiber for use by cable companies. In 1994, the company invested in PowerTV, a Cupertino, California start-up that was developing software and graphics hardware for various makes of digital set-top boxes.
"If you're there too early or too late with a new technology, you lose," McDonald told the Atlanta Journal in late 1998. Had Scientific Atlanta invested too much, too soon in the digital technology? Revenues and profits had continued to edge upward. The company made a profit of $81 million on sales of $1.2 billion for the 1997-98 fiscal year, though the stock price seemed undervalued.
Investors regained confidence as sales of the new Explorer, a $350 digital set-top box, took off in late 1998. However, General Instrument already had a competitor, the DCT-5000, in development.
Scientific-Atlanta expanded throughout 1999 as demand for both its Explorer cable box and its stock grew. However, General Instrument's lower priced devices were attracting more cable systems. These allowed for the extra channels available through digital cable, but not for full interactivity such as cable telephony and web surfing. These features, noted McDonald, provided cable networks an advantage over satellite broadcasters.
Explorers sales rose in 2000, and so did sales of satellite transmission products. The company signed several international deals, equipping cable providers in the United Kingdom, Germany, and Argentina with transmission equipment. Set-top boxes were going to Britain and Canada. The company also had a significant presence in Latin America and the Pacific Rim.
By mid-2001, Scientific-Atlanta had increased its workforce by a third, to 12,000 employees. In the works was a plan to bring NTN Communications' popular interactive trivia service, typically found in bars, to home cable boxes.
Share price was cut in half in the summer of 2001 as orders dropped. Angry investors, incensed by McDonald and others selling off millions of dollars worth of shares, filed 16 different lawsuits alleging misleading statements in the company's March third quarter reports.
Scientific-Atlanta began laying off workers at its Juarez, Mexico plant due to the slowdown in business. However, some still felt there was room for growth, as only 22 percent of U.S. cable customers were expected to have digital service by the end of 2001.
Principal Subsidiaries: PowerTV (80%).
Principal Competitors: Antec Corp.; ARRIS Group, Inc.; Motorola, Inc.; Pace Micro Technology PLC; Sony Corporation.
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