There's been some interesting consolidating going on in the video market that's worth an update, as it leaves Harmonic (HLIT) in a stronger position to be the next company acquired. You probably remember that Cisco (CSCO) acquired Scientific-Atlanta in early 2006. Scientific-Atlanta's strength is set-top boxes for cable systems, and their main competitor, General Instrument, was acquired by Motorola (MOT) at the end of 1999.

In the last six months, Motorola has been acquiring companies and technology to give them the pieces that they need to compete with Cisco in Internet Protocol Television (IPTV). MOT still can't compete with Harmonic in the "head end" at the broadcast studio, cable TV central office, or telephone company IPTV central office, but they have bought companies in video on demand, switched broadcast, DSL routing, ad insertion, video software and MPEG-4 encoding technology for a total of around $600 million.

In February, Ericsson agreed to buy Tandberg TV with similar technologies for $1.4 billion, so it looks like MOT got a pretty good deal overall. Alcatel-Lucent, the fourth big competitor, has been very successful in Europe and uses Harmonic equipment in its bids.
Once Tandberg is acquired, Harmonic will be the only independent video company with a complete head end solution. It also happens to have the technically best solutions. So any company that acquires HLIT freezes out the other independents, and if MOT makes the bid, Alcatel-Lucent winds up buying gear from a competitor.

One of the interesting areas of security is Biometrics -- using technology to scan fingerprints, retinas or the whole body to positively identify someone. The leading company in this area is L-1 Identity Solutions (ID). The company was formed by the merger of Identix (fingerprints) and Viisage (facial features). It has a $1.5 billion market capitalization, almost 10X sales, and is not making any money, yet the stock is near its 52-week high.

When most people think of biometric identification, using fingerprint readers, retina scanners or full-face video scan and compare, they immediately think of applications like stopping terrorists from getting on planes, or allowing access to top-secret government facilities. But it turns out that the real market is commercial applications to reduce the time required to wait in line while someone checks an ID. In the last year, Pay By Touch supermarket systems that combine a fingerprint scan with a seven-digit phone number have replaced credit and debit cards for three million users in the U.S. In Japan, more than two million people use a palm scanner plus a debit card and PIN to get cash from an ATM. The Dutch bank ABN AMRO uses voice technology to verify a customer's identity for telephone banking.

You may have seen the built-in finger scanners on many new laptops, especially those shipping with Windows Vista, or on high-end cell phones. You can buy the same technology for your house and garage door locks, or a safe. It even comes in some memory sticks and flash drives, just in case you lose it or a bad guy gets hold of it. If you log on to your company's computers from home, they may be tracking your typing rhythm to be sure you are you.

The sudden commercial interest in biometrics comes from the two benefits of all advancing technology: It got better and cheaper. Fingerprint and palm scanners used to have problems with farmers and others who worked with their hands, children or other people with small hands, sweaty hands, and so on. And the terminals cost a bundle to build and deploy. Now, with ever-cheaper and more powerful microelectronics to improve functionality and reliability, plus the Internet for virtually no-cost communications, biometrics can grow rapidly.

At the same time, Federal regulations are tightening. Banks are now required to have two-factor identification -- something you know plus something you have -- to reduce online fraud due to identity theft, since the simple stored account number and password is too easy to hijack. So they are using the password -- something you know -- plus things like RSA tokens, fingerprints or keystroke dynamics -- something you have or are -- to identify you. I used an RSA token for years to get on my Bloomberg system, but tokens can be lost or stolen -- some people have been known to forget to bring them to the Money Show -- and they are expensive. Bloomberg moved to fingerprint ID a couple of years ago.

At this point, the big drivers for biometrics adoption include: 1) Retail, which accepts a lower level of security in favor of convenience, and 2) Banking, which accepts a lower level of convenience in favor of security. In the retail world, there is always a clerk watching the transaction, so a thief only gets one or two chances to fake their ID. In online banking, a sophisticated hacker could get hundreds of tries, so banks demand more complex systems. But eventually these two applications will converge into something that is both more secure and more convenient than today's systems. At that point, we should see an explosion in biometric revenues, as systems move to Internet and cell phone transactions. That will also drive the current proprietary systems into a common standard; so for example, any fingerprint sensor on any laptop will let the user log in directly to any website.

Ever heard of TowerStream (TWER)? Most likely not. This company just came public back in January, recently listed on the NASDAQ and currently isn't followed by any Wall Street analysts. But this is a company facing a serious opportunity as a dramatic technology shift to a much higher speed, much lower cost wireless alternative to cable modems and DSL emerges. TWER is a wireless Internet Service Provider (WISP) that uses WiMAX technology.

TowerStream installs fixed WiMAX transmitter/receivers (transceivers) on tall buildings in major cites, connects them via a mesh network and sells access to them only to businesses by undercutting the local phone company's prices and offering more features. Their business model is simple and elegant: Negotiate control of the tops of tall buildings, use the DirecTV/Dish installers to put antennas on the customer premises and offer software-upgradeable services at a discount.

Right now TowerStream's transceivers are live in eight cities, including New York, Boston, Chicago, Miami and Los Angeles. In January, they acquired from Speakeasy the famous Seattle WiMAX installation that was the first city-wide installation in the U.S. They'll be in 10 cities by the end of this year, 20 by the end of 2008 and 30 by the end of 2009.

There was some interesting news in the PC market recently that dealt with some semiconductor heavy weights. Intel (INTC) has entered a joint venture with Asustek, the world's biggest producer of computer motherboards, to make laptops that will cost only $200 to create mass markets in less developed countries. The Eee PC ("Easy to learn, easy to work, easy to play") will be introduced this summer under the Asustek brand name, and their 2007 sales target is a modest 200,000. The competing XO computer uses an Advanced Micro Devices (AMD) processor and is available in the U.S. Don't rush to get one -- the 7" screen would drive you nuts. But if you are one of the one billion people in the world who has never owned a computer and can only afford to pay $200 for one, it's going to be a big seller.

With the summer driving season heating up and oil prices over $50 per barrel for the foreseeable future, there's no doubt that consumers are feeling the pinch at the pump. So now, in my opinion, is a great time to talk about new energy technologies—technology that is being developed to find more oil and ways to use it effectively.

One of these technologies that I'm most interested in is coal-to-liquids. Basically, this is a process that extracts oil from coal and it can be used as gasoline, diesel or jet fuel. One of my favorite companies in this field is Rentech (RTK), as they have been working for 25 years on a clean version of the coal-to-liquids process. Plus, with their version they're able to turn coal into gasoline for less than $35 per barrel.

This technology may seem a bit out there, and not even on your radar screen, but it is on the minds of both houses in Congress. Recently, both houses in a bipartisan agreement put together a coal-to-liquids financing package. If it goes through in the energy bill this summer, it could include $30 billion in loan guarantees for coal-to-liquids plants, a 51-cent-per-gallon tax credit for coal-to-liquids fuels through 2020, automatic subsidies if the price of oil drops below $40 a barrel and permission for the Air Force to sign 25-year contracts for almost a billion dollars a year of coal-based jet fuel. Wow!

Energy is a hot topic right now, and for good reason -- prices have soared over the past couple of weeks. They started up after a powerful cyclone hit Oman, which shut down a major terminal that ships 650,000 barrels of oil a day. It continued, pushing oil over $67 a barrel, when the Department of Energy announced on June 14 that both a drop in refinery utilization last week due to maintenance downtime and an increase in gasoline inventories for the summer driving season.

I have been on the road a bit more than usual lately, and it sure looks like a lot more RVs and general traffic than the last couple of years. It could be the weak dollar has convinced Americans to vacation at home this year, but high gas prices are not affecting traffic.

Just a few months ago, the official OPEC line was that they are "comfortable" with oil around $50 a barrel. Now they are saying they are "comfortable" with oil between $60 and $65. That's because they don't think there's any low-cost oil left to be found, and they are not worried about the alternatives being available in sufficient volume to make a difference in the next 10 years. They are right on both counts. Many of the new energy technology out there could show incredible growth, without putting a dent in oil prices for five to ten years.

In the "oil shock" in 1981, after long lines at the gas pumps, Exxon spent $40 billion to find new oil. Now, with oil prices about double those "oil shock" levels, Exxon spent about half as much on exploration in 2006 as they did in 1981, while paying much higher prices for labor, drilling rigs and everything else.

BP, the old British Petroleum, has been pumping oil from Alaska's Prudhoe Bay for almost 30 years. Their original estimate for the life of the field was 25 years. To keep it going, they spend billions of dollars maintaining old equipment and pipelines. Recently, they discovered a leak that forced them to shut down a fourth of their production -- 100,000 barrels a day -- and the news caused oil prices to jump. But the entire field is at end of its life and in the oilfield equivalent of intensive care. It will be gone soon.

The same story is playing out at older oil fields around the world. Worldwide oil production is supposed to hit 87 million barrels per day by the end of 2007, but it is going to be tough. This could be the year of peak oil production. With the low level of new discoveries and the high cost of finding oil, it will take just a few more of the old monster fields going into depletion mode to start annual production shrinking
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What does this mean for us? With the hurricane season officially underway, even a return to normal from last summer's extraordinarily quiet period would be an additional shock to the system. A higher-than-normal year, as is being forecast by the same folks who blew the forecast last year, would be a disaster for oil prices -- but great news for energy technology stocks. (You can find one of my favorites in this area in the June 20 post.)

Sprint (S) is talking about a joint venture spin-off of its WiMAX operations, which would be good news for the industry. The speculation immediately turned to a joint venture with Craig McCaw's Clearwire (CLWR), and in one of the most blatant "please call us" statements I've ever seen, a Sprint spokesman said: "Having a coordinated, cohesive use of the 2.5 spectrum makes a lot of sense from our perspective and from theirs."

Clearwire has already signed up 258,000 customers for fixed WiMAX in 39 cities in the U.S. Sprint has a successful lower-speed cellular data service, EV-DO, that can reach 203 million people in the U.S. and had $1.2 billion in revenues in the December quarter.

Sprint needs a future network that can handle many more users and much higher speeds, and Clearwire would love to have those customers feeding into a jointly-owned network.
The reason this is good for the industry is that while it may reduce equipment purchases from Clearwire plus Sprint somewhat, it forces many, many other companies to adopt WiMAX or be at a 10X cost disadvantage on wireless data services. That's good news for WiMAX equipment providers.