TeleCruz: Forbes ghost article

Cruz Control

In the future, we'll be able to surf and shop on the web on television--but where will the interactive technology reside: in the set-top box or the set itself?

"Where does it make the most sense logistically? The television," says Kris Narayan, the CEO of TeleCruz, a tiny upstart in San Jose, California. TeleCruz designs a system-on-a-chip that equips a TV set's innards with modest e-mail and web capabilities without the need for fancy external electronics. In September Panasonic will begin selling a TeleCruz-enabled, 27-inch TV with a wireless phone connection and keyboard for $100 more than a regular set.

TeleCruz lets a television display crisper graphics than interactive set-tops because the signals are processed before they hit the screen. In set-tops, text and graphics streams can degrade because they must first travel through coaxial cables designed to carry video.

About 13 million digital set-top boxes will be sold in North and South America this year. Narayan, 39, hopes to tap the market for TV sets, which has twice that volume in the U.S. alone. Only 60% of cable users have set-top boxes. The rest use cable-ready TVs. Narayan hopes that the boxless masses will relegate the family TV to the bedroom and buy a new TeleCruz set for the den.

Narayan got a vote of confidence from Gemstar--TV Guide, the leader in interactive TV Guides; in 1998 it tried to buy the company. TeleCruz, privately held, rebuffed the offer but sold an 8% stake to Gemstar for $9 million of the $70 million it has raised so far.

But Narayan has plenty of competition. AOL Time Warner, AT&T, Motorola and Scientific-Atlanta all back the external box rather than the internal approach. AOL and AT&T already offer limited video-on-demand and plan to add video recording and internet access within a year.

"If you want any of these advanced services, you need some sort of set-top box, which people basically perceive as free," says Robert Van Orden, a vice president at Scientific-Atlanta.

Worldwide, sales of digital set-top boxes are expected to nearly triple in four years, to 96 million. Today's boxes provide little interactivity, but cable providers are upgrading customers to digital cable as fast as they can.

Narayan's chipset, made by Toshiba, is inferior to that of set-tops or PCs. Its Mips Technologies microprocessor is about as fast as an old 133-megahertz Pentium. It has a mere 16 megabytes of memory, a standard 56K modem and decent graphics and audio processors. Forget opening big e-mail attachments. At least the chipset is cheap, selling to TV makers for as little as $18.

But the extra $100 the new Panasonic model will cost raises an obstacle in the TV business, which is marked by small margins and suicidal price-cutting. By contrast, consumers can pay just $10 extra a month to lease a digital cable box. Another hurdle: For now TeleCruz sets can be used only with internet services offered by AT&T WorldNet and EarthLink, depriving customers of a broader choice of providers.

Narayan, an electrical engineer, became interested in interactive TV while working at Cirrus Logic in 1995. After tinkering with ways to show laptop presentations on TV screens, he knew that he could improve upon the fuzzy graphics and bleeding colors. In 1996 he started TeleCruz to build an internal chip to deliver better graphics. Easier said than done. TV guts give off electromagnetic interference that can wreak havoc with a chip. So he had to design an aluminum shield around it.

TeleCruz makes its money by selling the chips and software and collecting a commission when a buyer signs up for internet access with its partners EarthLink or AT&T. TeleCruz began shipping in October, generating sales of less than $1 million in 2000. Narayan expects to gross $14 million this year and to break even in 2002 on revenue of $70 million.

Narayan is also targeting India, China, South Africa and Brazil, where TV sets far outnumber PCs. TeleCruz powers India's fastest-selling TV, a $325 model. The U.S. market may one day open up for Narayan if the cable industry settles on a standard for interactive TV, which regulators have said must happen by 2005. If that occurs, digital cable could migrate from the box above the TV set to the inside, just as analog cable did.

Narayan plans to embed future versions of the TeleCruz chipset with broadband speed and VCR-like capabilities. Hedging his bets, he'd like to sell chipsets to the cable-box makers themselves. "The world is headed toward an integrated TV," he says. "We're aiming where the world is going, not where it is."