Moxi Couldn't Have Asked for Deeper Pockets

The cash-crunched digital entertainment startup is getting a reprieve, thanks to an acquisition backed by Paul Allen

High-tech mogul Paul Allen is adding high-profile startup Moxi Digital to his home-entertainment arsenal. Allen-backed Digeo, a maker of set-top-box technology, announced on Mar. 29 that it was acquiring the two-year-old Palo Alto (Calif.) company that's making a set-top box that brings TV, video, music, and the Internet into the home. The combined company will receive a heavy dose of funding from the Microsoft co-founder's investment company, Vulcan Ventures -- enough to bankroll Digeo through 2004, say Digeo executives.

The deal wraps up a roller-coaster three months for Moxi. After operating undercover for two years under the code name Rearden Steel Technologies, Moxi launched in January with great fanfare and a promise to redefine the home-entertainment business. Founded by former WebTV brainchild and CEO Steve Perlman, Moxi has gotten much attention from press and analysts. Its demo of an all-in-one media hub won best-of-show at January's Consumer Electronics Show in Las Vegas.


  As first detailed by BusinessWeek, however, troubles were brewing beneath Moxi's gilded surface, including a cash crunch (3/04/02, "Moxi: Jazzy Product, Sizzling Start, Lots of Trouble"). Four top executives, among them CEO Perlman, departed in recent weeks. And despite an all-star lineup of first-round investors, including AOL Time Warner (AOL ), Cisco Systems (CSCO ) and EchoStar Communications (DISH ), Moxi began an urgent hunt for a buyer.

The Digeo deal could be a positive outcome for the Silicon Valley startup. While it's likely that Moxi investors took a haircut from its first-round valuation of $267 million (Digeo won't say how much it's paying for Moxi), Vulcan has committed to bankroll the combined 328-person company with enough money to last three years. Digeo won't disclose the size of that investment, but most analysts believe it must be significant.

Moxi spent nearly all of its $67 million in funding during its 27-month life. Vulcan's investment, coupled with the fact that all of Moxi's 111 employees will be offered jobs at the combined company, means it's likely the Moxi technology will get resources to continue its development. "The vision will continue onward. That's the most important thing," says Kevin Fong, a Moxi board member who will now join Digeo's board.


  The synergies don't stop there. While Moxi and Kirkland (Wash.)-based Digeo share a similar overarching vision -- bringing many forms of entertainment into the home through a powerful set-top box -- they've taken different paths. Digeo focused its attention on cable companies, developing a customer relationship with Charter Communications, where Allen is chairman of the board. Moxi's sole entree has been in the satellite area, through a tentative agreement with EchoStar to conduct customer trials. By teaming up, each company's weakness is addressed -- to some extent.

Digeo may even help cure some of Moxi's warts. The Silicon Valley startup had raised the ire of several employees and investors when it signed a lease late last year on a vacant Palo Alto office building, partly owned by Perlman, at well above the going market rate. Now, say Digeo executives, the leases have been renegotiated down to market rates, and Digeo's Palo Alto employees will move into Moxi's office buildings, filling in much of the empty space.

The company will boast joint headquarters in Kirkland and Palo Alto. Digeo Chairman Allen and CEO Jim Billmaier will continue in their respective positions. Moxi CEO Rita Brogley, who replaced Perlman on Feb. 20, will stay on as executive vice-president for business development and marketing. Perlman, who became Moxi's vice-chairman after stepping down as CEO, won't have an official role with the combined company, say Digeo execs.


  A Moxi-Digeo combo still faces plenty of challenges. First, most cable and satellite providers are heavily invested in cheaper, simpler set-top boxes and have been slow to pay extra for souped-up technology developed by the likes of Moxi and Digeo. In fact, analysts estimate it could be three to four years before cable companies begin replacing existing set-top boxes.

Second, it's unclear how much Digeo's relationship with Charter will really help win cable acceptance for Moxi. Because Allen is chairman of both companies, other cable outfits won't likely be influenced, say analysts. Instead, they'll have to see a resounding success at Charter. "It's your classic big gamble," says Josh Bernoff, principal analyst at Forrester Research. "[Allen] will either own home entertainment, or it will be hundreds of millions flushed down the toilet."

The good news for Moxi is that it lives on, now with Digeo at the heart of that wager.

By Ben Elgin in San Mateo, Calif.

Edited by Douglas Harbrecht

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