Boxing clever

Despite the delayed arrival of digital broadcasting, Peter Morgan told Melanie Tringham that there are good opportunities for Pace’s set-top boxes

Last summer, Pace Micro Technology could do no wrong. It was a glamorous young company, coming to the stock market with high-tech digital decoders and receivers for the burgeoning entertainment industry, and the potential to make its founders millions.

When it floated, investors’ overexcitement sent the share price soaring. Offered at 172p, the shares opened at 205p and peaked at 242p. The future could not have been brighter.

Since then, however, two senior directors have decided to leave, digital broadcasting in the UK has been delayed, two profits warnings have been issued and the share price has plunged to 53p. Despite last week’s announcement of a 20% increase in the first year’s profits, chairman Peter Morgan is in a big PR drive.

‘If you talk about the North American market, we would say that digital broadcasting has taken off,’ says Morgan. ‘The first and biggest broadcaster, DirectTV, has got three million subscribers, Primestar 1.8 million and Echostar 513,000.’

Pace has angled itself a US stake by becoming a licensed manufacturer of digital cable receivers for General Instruments, the biggest manufacturer of decoder boxes in the US.

For the rest of the world, digital still has to arrive: ‘It was thought the market for digital broadcasting was well on its way,’ he says. ‘What has emerged is that the market is not quite on its way and that’s had a big impact on us.’

But Morgan remains upbeat: ‘There appear to be three opportunities. The first is where the broadcaster of entertainment programmes complements this by providing the viewer with information, and interactive facilities and electronic commerce, and boxes are being built according to that.

‘The second opportunity is stand-alone transactions, where you bring in someone like Microsoft for customers who want to go to their bank and buy a unit trust or look at their bank account.

‘The third opportunity is video on demand, from fibre optic cable into twisted copper pair, where you need a set-top box that isn’t a broadcaster’s set-top box but allows the telephone company to compete with the broadcaster.’

Pace Micro Technology began as a mail order software company. Moving into modems, satellite receivers and decoders, Pace has spent millions developing digital receivers to receive satellite and cable broadcasts.

Welcomed to the stock market last year as a home grown, high-tech company, it has promoted itself as remaining independent and ahead of the game.

The problem for Pace is that it is transforming itself from a smallish, private concern into a publicly accountable medium-sized firm, while also waiting for the big digital market to take off.

‘The problem we have is our performance relative to expectations,’ says Morgan. ‘When we were launched a year ago, all the media said the digital world is upon us, and that did raise expectations. But the company’s in a sound condition, with sound management and good margins,’ (23% was the figure announced last week).

It is the management that has attracted some concern, however. A public falling out in February with Barry Rubery, a founder and joint chief executive, coincided badly with two profits warnings.

Morgan explains Rubery’s departure as a disagreement over management style: ‘If you are three people running a company, you only have financial accountability to yourself. Once you become public, you have to be much more predictable; you’re expected to give some indication of your prospects and then perform to those indications.’

Morgan was appointed in April last year to chair Pace. He was drawn to it because of his IT past as an IBM man. Starting out as a sales trainee, he became sales director of IBM UK and, in the late 1980s, executive director of IBM UK.

A devoted family man, Morgan says he turned down a position that could have paved his way to the IBM board, because of the upheaval it would have caused his family.

He was head-hunted to become director-general of the Institute of Directors, a post he held for five years, raising his profile in a way that would not have happened had he remained a UK-based executive of a foreign company. He now combines the Pace job with the chairmanship of Swalec.

The dilemma that now faces Pace as it grows is how to cope with size. It markets itself on the fact that it is small, dynamic and, with the last 20% of manufacturing at its plant in West Yorkshire done by hand, it can cater for variations of set-top box. Moreover, Pace’s size has given it the advantage of reacting quickly to changing technologies.

‘We have never shipped more than 100,000 boxes,’ says Morgan. ‘The rest we subcontract. I don’t know what motivates the big companies to invest in this industry. They have big infrastructures to maintain, and they need the volume, and the automated factories.’

The other issue the company will face is the question of the integrated TV set. The Japanese consumer electronics industry, which dominates the world of television, will be building TV sets with digital decoders built in, threatening to put set-top box manufacturers out of business.

But Morgan does not see these TV sets as a threat. ‘People replace their TV set once every nine years. Do you think they’re going to want set-top box technology that’s that old?’

An alternative development is the separation of the set-top/computing technology from the screen, so that viewers can at least keep pace with screen technology without replacing the entire equipment.

Morgan expects the broadcast technology market to replicate the volatile one of the personal computer. ‘If you think about PCs at the top end of the market, they have new functions and communications facilities, but the prices are coming down, and that’s what we will be able to do with our set-top boxes.’