Hot Box Sets GIC Shares on Fire

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By Cory Johnson
Staff Reporter

This is a tale of wires and boxes. Cable stocks are soaring in the wake of a $1 billion

deal

between

Microsoft

(MSFT) - Get Report

and

Comcast

(CMCSK)

, the nation's fourth-largest cable company. The speculation is that if 11.5% of Comcast is worth that much, other cable companies like

Cablevision

(CVC:NYSE),

Cox Communications

(COX)

and

Tele-Communications Inc.

(TCOMA)

-- up 42%, 10% and 11% this week, respectively -- will surely be attractive to other cyberpartners. But at least some of the smart money on Wall Street is looking at another, more likely winner in Microsoft's push toward a PC/TV convergence.

Makers of so-called set-top boxes -- the $400 computer devices that sit on top of the television to interpret cable TV signals -- are certain to gain from Microsoft's big move, analysts say. So traders on the Street have been bidding up the shares of set-top box makers like

General Instrument

(GIC)

and

Scientific-Atlanta

(SFA)

.

"I can't tell you for certain if any of the cable companies are in play," says Simon Rose, senior vice president of

Prime Charter Ltd.

, who's been buying General Instrument for client accounts since before the Microsoft deal was even announced. (Honest! He spoke with us about it

last

week.) "But I can tell you for sure ¿ hey, I don't have to tell you:

Bill Gates

told you Monday in the news conference: He's going to accelerate Comcast's deployment of high-speed, broadband pipes. And he's going to need digital set-top boxes to do it."

Analysts agree. "With this investment, Comcast is clearly looking to bring additional investment to roll out advanced technology," says David Doft, media and entertainment analyst for

Furman Selz

. "And companies like Scientific-Atlanta and General Instrument are bound to see some benefit." The firm has not done underwriting for any companies mentioned in this article.

But while Scientific-Atlanta is up 15% this week, it has yet to unveil a

digital

set-top box that any sort of broad bandwidth cable service would require. But Chicago-based General Instrument, up 11% this week, has been a longtime partner to Comcast and has already provided the company with 300,000 DCT-1000 digital set-top boxes. "We think this Microsoft investment will help spur the rollout of digital cable," says Dick Badler, a spokesman for General Instrument. "And since we're the only player with a digital product right now -- and Comcast is also buying our cable modems -- we have to look at this as terrific news."

General Instrument has already sold four "head ends" to Comcast. (Head ends are the giant computers that reside at the local cable company headquarters to interpret satellite signals and send a digital signal though coaxial cable to digital set-top boxes.) These can typically cost a half million each. On April 7, Comcast also signed a letter of intent to purchase anywhere from 5,000 to 50,000 Surfboard cable modems from GIC. Gates and company may urge Comcast to accelerate the installation of such modems to create a bigger market for Microsoft's Internet efforts. General Instrument is also a "preferred partner" to

@home

, a Silicon Valley start-up creating an Internet service for cable subscribers. Comcast owns 14% of @home.

General Instrument has announced plans to split itself into three publicly traded companies, and Badler says the company will announce the date of a shareholder vote on the split within the next two weeks. The spinoff will turn the old General Instrument cable business into

NextLevel Systems

(as well as creating separate businesses called

General Semiconductor

and

CommScope

), and analysts say it will create a more pure cable play.

Prime Charter's Rose, for one, is playing right now. "The amount of bandwidth that new digital technologies take up as the computer, the TV and the telephone become one box is just huge -- broadband is king," he says. "And General Instrument is king of the hill."