Zenith and the HDTV Challenge

This case was written by Will Mitchell at the University of Michigan’s Business School.

“Zenith is committed to establishing an American leadership position in high definition

television,” commented the CEO, , Jerry Pearlman, in 1988. High resolution flat tension
mask (FTM) color monitors, a technology in which Zenith has uncontested leadership,
is a cornerstone in Zenith ’s strategic thrust.

Now it was February 1993, and the Federal Communications Commission (FCC) had
just announced that more tests would be necessary before deciding on the high
definition television ( HDTV) standard. Japan’s analog system had already been
rejected. Europe’s strategy was having a myriad of problems, the most recent being
Philip’s announcement to suspend plans to mass produce TV sets compatible to the
European Community’s ( EC’s) preferred HDTV standard.

Ironically, the United States, which abhors formalizing industrial policy , may end up
with the most advanced (digital) standard. Japanese and European policy makers
worried more about setting a homemade (analog) standard than about achieving a
world class (digital) standard. Adopting an advanced standard and doing advanced
research does not, however, guarantee significant industry participation. The success
of the HDTV industry depends not only on the TV manufacturers , but also on the
simultaneous adoption of the new technology by broadcasting stations, program
producers and transmission companies.

Zenith lost $51.6 million in 1991 and $106 million in 1992, even though operating
expenses were cut by $38 million in 1990 and $59 million in 1991. At the same time
the company had committed nearly it’s entire display R&D budget to FTM ($65 million
over 5 years). In 1989 Zenith teamed up with AT&T , and in 1991 with Scientific
Atlanta, to consolidate its position in the emerging HDTV industry.

A number of critical questions needed to be answered. Should Zenith’s technological

lead in FTM’s be further developed or should Zenith begin developing new
technologies? Even if new technologies were pursued for the long run, how could
Zenith best capitalize on it ’s superior FTM technology today? Would HDTV really be a
breakthrough product or would it remain an “amorphous” technology? Were the
consumers really “asking” for a clearer picture? Would the Japanese eventually adopt
the U.S. standard? Was it pragmatic to assume that the U.S. could really gain an up to
five years head start by quickly adopting a digital standard? And should Zenith
capitalize on its superior HDTV technology and enter into alliances with leaders in the
Japanese electronics industry in order to learn and strengthen its future position in
consumer electronics?

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HDTV

For the first time in almost fifty years the definition of American television was about to
change with the development of HDTV. Today’s television will be replaced by a
system that offer s sharp, clear and larger images with excellent audio and is “smart”
like a computer.

Initially, HDTV sets will probably be large screen models. However, HDTV will require
the integration of a number of technologies: semiconductor, software , multimedia,
displays, compression, VCR, c ompact disc (see Exhibit 1 for details).

The HDTV standards winner would gain the right to royalties on any HDTV set or
broadcasting system using its technology. Dale Cripps, editor of the HDTV newsletter ,
estimates royalties at $5 a set or about $110 million/year assuming 22 million HDTV ’s
will be sold at the peak of acceptance. Royalties from broadcasters could amount to a
few million more. The head of the Advanced TV Advisory Committee, former FCC
Chairman Richard Wiley, encourag ed contenders to combine forces to move toward
the standard faster. Thus, contestants may be forced to share their bounty.

Electronics Industry and HDTV

In 1992, the consumer electronics industry was waiting for a new growth stimulus. U.S.
annual sales of consumer electronics were $33 billion, Japanese sales were $35 billion
and European sales were $42 billion. Historically, the industry has been driven by
major innovations and life cycles of the gramophone (1920s), the radio (1930s), the
B/W-TV (1950s), the color TV (1960s), Hi-Fi (1970s) and the VCR (1980s). Recent
product introductions such as CDs, DAT and 8mm camcorders, however , have not
presented major technological breakthroughs, nor has the trend toward product
proliferation refueled sales.

Table 1: World Electro nics Industry 1

Product 1991 World Sales
(in $ Billions)

TV Hardware 7.0
VCR 3.0
Camcorder 3.0
TV Advertising 29.0
Movies 6.0
Video Cassette Rental 14.0
Video Games 5.0
PC Hardware 50.0
PC Software 12.0

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In 1991, annual sales growth rates of consumer electronics have decreased from 50%
to 3.5% with 99% of all Japanese and U.S. households hav ing at least one color TV,
80% a VCR and 65% a stereo system. Unfortunately, many fear that the move to
HDTV will be far less successful than the move from black and white to color.

In response to lower margins, shorter product life cycles, lower sales growth and
competition from Taiwan and Korea, the industry has been consolidating. In Japan,
Akai was taken over by Mitsubushi and Aiwa became a subcontractor for Sony.
Thompson, the French company (82% owned by the state), took over Thorn. Major
German manufacturers, Blaupunkt and Telefuken have also been acquired by
Thompson. Both firms are dependent upon product, process and competent
technology from Japan. For example, DAT and VCR technology are supplied by JVC,
video-disk player technology is supplied by Pioneer and comcorder technology is
supplied by Hitachi. Philips, a global electronics firm of Dutch origin, reported a loss of
$2.5 billion in 1991.

In 1992, three firms, Sony, Matsushita and Sharp h eld the strongest position in the
emerging HDTV industry. Unlike their weakened world competitors, these companies
sustain their R&D spending at more than 6% of sales. As a result, HDTV may be the
opportunity for a few Japanese companies to take a major lead in consumer
electronics.

Distribution Trends

During the 1980s, the users of VCR ’s and CD players drew annual increases of 15% to
20% in sales for retailers. Traditionally, manufacturers have used a two step
distribution process in which the distributors provide after sales service through parts
availability, advertising support and warehousing. However, this distribution system
has become too expensive due to shorter product life cycles, lower margins and
increased product variety. Further, as cost reductions in manufacturing have become
more elusive, producers have focused their attention on distribution costs. Labor, for
example, only accounts for 10% to 20% of manufacturing costs. Thus, manufacturers
of late are enforcing minimum order requirements from retailers. Hitachi, for example ,
requires a $15,000 minimum order.

As a result of their distribution economies and purchasing power v ís-a-vís

manufacturers, electronic superstores have replaced small retailers, distributors and
department stores. They enjoy large advertising budgets and an assortment of 2,000
to 2,500 stock keeping units (SKU) along a large continuum of price points. In
addition, they receive price discounts for early purchase commitments. In 1991, Circuit
City (a leading U.S. retailer), had sales of $5.5 billion through 200 stores. It dominated
the metropolitan areas and offered extensive customer service , such as home
installation. In 1990, 220 retailers account ed for 70% of total consumer electronic
sales in the U.S. Twelve accounts alone represent ed 65% of Thompson ’s sales in the
U.S.

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HDTV and Multimedia Trends

As a digital system, the TV will change from a passive receiver to an integrated

interactive entertainment center. As a telecomputer with multimedia capability, HDTV
will affect electronic products and entertainment markets. While digital HDTV is being
developed, intermediate technologies have arisen. Large monitors with integrated
video recorders and CD players are a case in point. These intermediary systems are
lower in both price and quality. Offering systems at this intermediate stage of industry
evolution, however, educates consumers, establishes brand names, develops
distribution systems, influences standards and produces feedback for future HDTV
designs. Further, alliances in this market might develop standards in software and
hardware which might become important in HDTV.

A computer attached to a HDTV could, for example, customize a movie ’s sound track,
colors and ultimately the viewing perspective. Furthermore, the high demands that
video processing poses on semiconductors has accelerated the rate of semiconductor
innovation benefiting all areas of computing. In 1991, total world semiconductor sales
were $55.5 billion per year. By the end of the decade, the consumer electronics portion
of semiconductor sales alone is forecast to reach $48 billion in annual sales.

Japanese HDTV

Initially, Japan led the world by pursuing an analog transmission technology: MUSE
(multiple sub-nyquist sampling encoding). This technology—developed in 1965 as a
hybrid digital-analog system—is already obsolete according to some analysts. 1

HDTV is still relatively expensive in Japan. Sharp has announced a low -end HDTV
which will cost one million Yen , compared to current HDTVs for Y3 -Y5 million. This
price reduction has been achieved at the expense of picture quality. Sharp bases its
strategy on a market forecast that at a price of Y1 million, 16% of all Japanese
households would buy a HDTV set. Given the trend toward large screen TV s in Japan
(50% of TV screens are 32 -inches or longer), the ministry of Post &
Telecommunications (MPT) projects that 40% of all Japanese households will own a
HDTV set by the year 2000. This represents a market value of $9.6 billion. 2

Sharp’s product introduction was backed by the Japanese broadcasting organization

(NHK), which increased HDTV broadcasting from one hour to eight hours in November
1991. Sony and Matsushita Electric Industrial have already spent hundreds of millions
of dollars developing manufacturing facilities for HDTV. Based upon historical
evidence of substitutions, the price of HDTV must decrease to within three to four
times the price of a color TV , for a mass market to emerge (it took the color TV twelve
years after its introduction to outsell B /W). This would correspond to an installed base
of about $40 billion worldwide by the year 2000. 3

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As of 1992, three main groups were developing the chip set for MUSE. NHK, NEC,
Toshiba and Matsushita were able to reduce the number of chips needed for the
Japanese HDTV standard, MUSE, to about 100. Fujitsu, Hitachi, Sony and TI working
in tandem, have nearly completed co -development of a thirty chip set for MUSE. LSI
Logic and Sanyo announced that they intend to reduce the number of chips required to
less than ten. Logic-Sanyo were the first to attempt building a chip set with only
application specific integrated circuits (ASIC). Meanwhile, LSI Logic has joined
another consortium including NEC, Matsushita, Mitsubishi Electric, VLSI Technology
and Sharp, which plan to reduce the number of chips down to 19. In each of these
consortia, no U.S. firm contributes digital signal processing. TI is responsible for
developing frame memory circuits. VLSI is working on color processing and LSI on
circuits for sound processing.

To arouse public interest in HDTV, the Ministry of Post and Telecommunications (MPT)
provides Japanese cities with systems through the High Vision Program. The High
Vision Center Project was started in 1987 to set up pilot tests in Japanese cities for
public HDTV theaters and public centers for interactive access to large scale
databases. The Key Technology Research Center in conjunction with the Ministry of
International Trade and Industry (MITI), the MPT and the Ministry of Finance , are
subsidizing development of critical HDTV components. This is achieved through low
interest loans, extending a 26% permanent tax credit and allowing accelerated
depreciation of assets in the electronic sector.

European HDTV

To counter the threat of Japanese domination of HDTV , the EC has invested nearly $2
billion to create a rival system , MAC. MAC has largely been developed by Thompson
and Philips in a public policy vacuum. In December 1991, Thompson announced a
$6000 TV which uses an intermediary D2MAC standard. On December 19, 1991, EC
Telecommunication Ministers agreed not to force an immediate conversion of current
broadcasters and satellite channels to MAC. Channels launched after 1994, however,
will be required to cane MAC broadcasting equipment.

With the demise of British Satellite Broadcasting, the only European broadcasters
currently offering D2MAC TV are Canal Plus and Antenne 2, both French companies.
Thompson and BIS, a Bosch -Philips joint venture, delivered a thirteen hours per day
HDTV service from the 1992 Winter Olympic Games. The project was funded by the
French government, the French Telecom and the EC Commission. Without software
or broadcasters, MAC has been advancing slowly.

The European market is expected to reach $20 billion by the year 2000, with an
installed base to 500,000 units. By 2004, only 9% of European households will own
digital HDTV sets. Since Europe has a negative trade balance of $35 billion in
electronics, however, European champions like Bull, Thompson, Philips and Siemens

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may lobby to protect the market. Both Europe and Japan, who support the analog
HDTV system would, it seems , eventually adopt the digital system.

United States HDTV

The American electronics industry is losing the war in consumer electronics according
to a study commissioned by the Department of Commerce and performed by the
International Trade administration. The study found that Japan has more than doubled
the number of U.S. electronic patents that they have received since the mid 1970s.
Further, their patents have been licensed more frequently than those of Americans. 4
This report predicts that, at the current pace, Japan will become the world ’s number
one electronics producer by the early 1990s. This comes as quite a shock to people
who think electronics will be the largest employer by the end of the century. A National
Science Foundation report on Japanese HDTV research warns that Japan is focusing
on the new technology as a catalyst to gain dominance over the semiconductor,
computer and telecommunication world markets.

A U.S. firm, ITT Semiconductor, sells more than half of the world's microprocessors
used in conventional TVs for such features as frame within a frame. IIT’s Devoe
claims that many U.S. firms serving niche military markets have the technology to
compete in HDTV , but want to avoid “slugging it out in the marketplace .” Japanese
semiconductor manufacturers were rebuffed when Fujitsu ’s proposed purchase of
Fairchild Semiconductor was blocked by then U.S. Commerce Secretary Malcolm
Baldrige in 1987. Instead, a series of alliances are forming.

Zenith

Zenith’s current strategy is in keeping with the company ’s history of parenting

standards. The company invented the remote control in 1956, the FM radio stereo
transmission standard in 1968 and the multichannel television stereo (MTS)
transmission system in 1986. “There are more fundamental inventions from Zenith in
today’s television than from all the Japanese companies combined, ” says James I.
Magdid, a senior advisor with Needham & Co., Inc. in New York. 5

Since 1988, Zenith has phased out or cut back operations in several key (non -high
resolution) products. Total nonvideo products accounted for only $78 million in sales in
1991, down from $136 million in 1989. (See Exhibits 2–6.) In 1991, Zenith reduced
capacity in magnetics production as well as announcing plans to phase out automotive
electronics, low end color computer monitors and monochrome monitors. In 1990,
power supply and other electronic component production was restructured and
downsized worldwide. Finally, in a major move in 1989, Zenith sold its computer
products division to France ’s Groupe Bull.

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Computer products accounted for over half of Zenith ’s sales in 1988 and was its only
profitable division. The $450 million that Zenith received from the sale allowed it to
significantly reduce debt and focus more R&D spending on their FTM and HDTV
technologies. These actions improve d their balance sheet, but the market value of the
company still continued to decline through December, 1990, reducing Zenith’s market
value to nearly half its book value at one point. By March of 1992, however, the
market value had rebounded to about 75% of book. (See Exhibits 2-6.)

In addition to product line phase -outs, Zenith has rationalized operations worldwide.
Because of the price competitive nature of consumer electronics, cost sensitive
producers have chosen Mexico for its low labor costs and “the perceived benefits of
the possible (North American) free trade pact.” The number of workers at the
Springfield, Missouri plant was reduced by 75% in March , 1992 when TV assembly
was consolidated in Mexico. This plant is scheduled to be shut down sometime in late
1993.6 Zenith predicts that “virtually all of its television production will be located in
Mexico” by the end of 1993. “The cost savings of Mexican production, where hourly
wages are only about a tenth of those in the U.S. , have proved too critical to pass up
for loss-making Zenith.” Jerry Pearlman predicts that Zenith ’s costs would be $400
million higher if it were not for their Mexican operations.

Following these restructurings, Zenith operates in two major segments: consumer

electronics and components. Consumer electronics accounts for 85% of total sales,
with color TV representing 75% of these sales. Approximately $100 million sales in
color picture tubes are derived from OEMs. Component products include power
supplies and low resolution displays.

During all this cost cutting, Zenith increased R&D spending on HDTV and FTM
screens. Through 1991, Zenith had spent $25 million to develop the DSC -HDTV
system. This is a fraction of the $1 billion spent by Japanese firms to develop what
many consider to be an inferior standard. Zenith has had similar success with a
shoestring budget for FTM monitors.

What remains to be seen is if Zenith can capitalize on its technology and create a
manufacturing base capable of supporting demand for HDTV. Zenith’s current CRT
manufacturing facility is a 40-year old cookie factory that was converted to CRT screen
manufacturing in 1967. The spaces are small and cramped , while the factory lacks the
modern systems that typify today ’s high-tech manufacturing. For instance, there are
no automated materials handling systems so the workers must lift bulky CRT screens
on and off a conveyor belt. Similarly, workers must manually perform the exacting
operation of mating the shadow mask with the phosphorous coated screen. Yet, for all
their apparently antiquated work habits, in 1992, Zenith workers—running three shifts a
day—turned out 3.6 million picture tubes a year. Working with aging equipment and
techniques, they still manage to manufacture a picture tube in 22 hours. Matsushita, in
Troy, Ohio, does it in just under 24 hours at a new, well-equipped plant.

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Since current CRT plants are at capacity, Zenith need s to develop new manufacturing
plants to supply an increased demand spurred by HDTV. These plants will probably
be located in Mexico. A more fundamental question is whether Zenith should sink more
money into CRT manufacturing when investment is needed for future technologies.

Not everyone associated with Zenith is excited about the high resolution standard. In
March 1991, Sal Giordano, owner of Nycor, a New Jersey based holding company and
8% shareholder of Zenith, sent proxies to all Zenith shareholders asking them to vote
for the Nycor nominees for the ten member Zenith board. The letter indicated Nycor ’s
dissatisfaction with current management strategy and outlined their plan to turn the
company around. “The most serious problem at Zenith has been and continues to be
management’s lack of a clear strategic plan. Though Zenith management has
trumpeted the existence of a long term strategy for the company, to date they have
failed to articulate to stockholders any plan which explains how Zenith will return to
profitability. 7 In an effort to fend off this attack, Zenith issued $15 million in common
stock (a 5% interest) to Korea ’s Goldstar. Goldstar and Zenith have been working
together on several trade and technology agreements. Nycor candidates were
defeated two to one at the shareholders meeting , giving a strong vote of confidence for
current management ’s strategic direction. (See Exhibit 9.)

Zenith and AT&T

Since Zenith did not have capabilities in digital compression and semiconductors to
bring its system from the drawing board to the lab, the company teamed with AT&T in
1989 to develop the Digital Spectrum Compatible (DSC-HDTV) system. Under this
agreement, AT&T Bell Laboratories develops video compression and AT&T
Microelectronics develops semiconductors. The DSC-HDTV system has unique digital
transmission properties, based on technologies developed by Zenith, to prevent
interference with standard TV signals and to transmit snow-free, ghost-free pictures
and compact-disc quality audio.

AT&T and Zenith have become extrememly successful bringing the HDTV system
together. As noted by Paine Webber analyst Jack Grubman, AT&T uses compression
technology in its core long-distance business. “They know how to do it better than
anybody, if they can transfer that to another application, so much the better. ”8 In
addition to technology transfer, Zenith ’s $25 million investment in DSC -HDTV “has
been more than matched by the substantial investments of (their) HDTV partners,
particularly AT&T. ”9 Over a thirty-nine month span, this partnership was able to
develop and improve Zenith ’s paper system into a working prototype.

Harris Allied Broadcast Division and Hewlett Packard (HP) announced plans in 1993 to
develop broadcast equipment for the DSC-HDTV system and to license DSC-HDTV
technology if the FCC adopts the Zenith-AT&T system. Harris would support the rapid
deployment of HDTV modulation and transmitting equipment to broadcasters following
FCC adoption of the new broadcast standard. Likewise, HP would develop HDTV

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encoders (the electronic systems used by broadcasters to process and compress
signals).

In 1993 the digital HDTV Grand Alliance was formed. It merges technologies from the
three groups that had developed all-digital HDTV systems for consideration as the U.S.
standard: Zenith and AT&T, General Instrument Corporation and the Massachusetts
Institute of Technology, and a consortium composed of Thomson Consumer
Electronics, Philips Consumer Electronics and the David Sarnoff Research Center.
Zenith and the other Alliance members are pooling their resources, skills and
technologies to create a “best of the best” solution for the HDTV system being
proposed to the FCC. The system elements for digital video compression, transport,
scanning formats and audio all were selected by the Grand Alliance in October 1993.

In early 1994, after extensive competitive laboratory testing, the Grand Alliance
selected Zenith’s VSB (vestigial sideband) technology as its terrestrial broadcast and
cable HDTV transmission subsystem. The 8-VSB system assures broad HDTV
coverage area, minimizes interference with existing analog broadcasts and provides
immunity from interference into the digital signal.

AT&T has become particularly aggressive in the last few years in its bid to excel in
semiconductors, an increasingly important element within the communications
industry. AT&T’s Bell Labs was a pioneer in the software industry and developed both
the C language and the UNIX operating system s to meet in-house software
development needs. Large internal demand for semiconductors has made AT&T the
world’s largest producer of standard cells , with annual sales of about $250 million.
Purchasing the world’s third largest standard cell producer, NCR, propelled AT&T even
further into the lead. In 1992, AT&T had eleven manufacturing plants and twelve
design centers for semiconductors. Despite AT&T’s large internal market, their
penetration into external markets has been limited.

Antitrust concerns initially hampered AT&T ’s ability to compete in the computer

industry. In 1985, AT&T finally entered the merchant semiconductor industry but with
little success. Two years later, over fifty middle and senior level managers with
extensive industry experience were brought in to revitalize AT&T ’s semiconductor
initiative. AT&T is developing semiconductors not only for HDTV , but also for video
conferencing, cellular telephones and network computing.

GoldStar and Scientific Atlanta

Support for Zenith ’s DSC-HDTV has also come from GoldStar and Scientific Atlanta.
In addition to GoldStar ’s $15 million capital investment in Zenith stock, GoldStar has
entered into a licensing agreement to market Zenith ’s FTM screens for televisions in
Korea. The agreement calls for GoldStar to pay a fee to Zenith for each TV CRT , on
top of a substantial up -front fee. The deal allows Zenith to expand its technologies to
previously untapped overseas markets.

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In late 1992, Zenith and GoldStar announced the joint development of a digital high-
definition VCR for home use. The new digital HD-VCR, developed for the DSC-HDTV
system, is designed to record HDTV signals on standard Super-VHS videocassettes.
The HD-VCR also would be able to record and play back programs in today’s TV
format using standard VHS tapes.

Scientific Atlanta is a technological leader in satellite and cable transmission of

television signals. In December 1991, Scientific Atlanta pledged its support for the
DSC-HDTV system as the U.S. standard. Under agreements developed with Zenith
and AT&T, Scientific Atlanta develop the transmission and conditional access systems
and equipment necessary to allow secure satellite transmission of the DSC -HDTV
signal to make HDTV programming available to all markets and to support a timely
market introduction.

In addition to satellite signals, Zenith and Scientific Atlanta announced that under a
separate agreement they have developed a common transmission structure for
carrying the Zenith/AT&T digital HDTV signal and Scientific Atlanta's digitally
compressed conventional TV signal through cable plants to the home. This will
combine Scientific Atlanta ’s Vector Quantization digital compression system for
conventional TV signals with Zenith ’s four level vestigial sideband modulation
technology for cable transmission. Similarly, Scientific Atlanta will utilize a common
transmission structure in the satellite system for carrying the DSC -HDTV digital signal
and for Scientific Atlanta ’s digitally compressed conventional TV signals.

Hence, both the HDTV signal and the Vector Quantization digital compression signal
will have end-to-end transmission capability over satellite and down the cable to the
home. Programmers and cable operators will benefit from the flexibility and cost
advantages. The U.S. consumer will share in these benefits not only because of
transmission efficiencies , but also because the same high definition television set tuner
will accept HDTV signals off the air or down the cable, resulting in lower cost TV sets
and cable boxes. By combining forces (with AT&T and Scientific Atlanta ) on digital
compression and trans mission, Zenith will be able to bring high performance, low cost
digital video to the cable industry, and at the same time lay a compatible transmission
foundation for the smooth adoption of HDTV.

HDTV Technology
HDTV systems mandate the integration of various technologies, from the production
and transmission of programs , to the television terminal at the user ’s home. There are
many emerging technologies capable of achieving the requirements of HDTV. With
rapid development of high resolution displays, compression technologies, DSP chips
and VLSI capabilities the arena is wide open when considering which technology would
ultimately be dominant (see Exhibit 1 for details). Following is a brief description of
each parameter.

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High Resolution Displays

High resolution displays are much more than just a component of HDTV systems. As
Robert Duboc of Coloray puts it , “Displays become the tail that wags the dog .”10 Within
the HDTV industry, the high resolution display is the single most expensive component
and the component that most effects image quality as perceived by the viewer.
Outside of the HDTV industry, high resolution displays are already used for everything
from computer screens to car consoles. The defense, airline, space and medical
imaging industries have employed high resolution displays for years. Sales are
expected to reach $9.3 billion by 1996, 40% of which will be in consumer electronics
with the balance in computers.

High resolution displays for HDTV must be defined with numerous parameters.
Resolution is quantified as the number of horizontal strings of dots (scanning lines) tha t
fill a screen (frame) and the rate by which new screens appear (refresh rate). Screen
dimensions are stated as the ratio of the screen's width to height (aspect ratio).

There are various technologies in the development stage that provide improved clarity
and contrast from that of the traditional CRT terminal (see Exhibit 1 for details). In
1992, Zenith had the lead in flat tension monitors (FTMs), but considering the research
being put into this area and the options available , the future is highly uncertain with
regards to which technology will emerge most effective , yet economically viable.

Software Availability

An important variable in determining HDTV demand will be the availability of software.

HDTV broadcast equipment will require a large initial investment by broadcasters not to
mention larger camera crews (up to 3 times as large) since flaws are magnified. Some
of these extra costs are mitigated by decreased production costs realized by
eliminating film.

A study by the Transition Scenarios Group of the Advanced TV Advisory committee

has determined that broadcasters in large markets will be ready to broadcast HDTV
within eighteen months of a standard. Smaller broadcasters will, however, be at a
disadvantage due to capital demands for new equipment. A TV station might have to
pay between $12 million and $22 million to convert to HDTV. The average price of a
TV station sold between 1987 and 1990 was only $19.7 million. HDTV stations might
also service a smaller area causing perhaps a 20% decline in revenues.

To alleviate conversion costs, Zenith -AT&T have developed a simple up-conversion

process that will allow local TV stations to convert their existing NTSC equipment to
Zenith’s DSC-HDTV format. Through a two-step process the conventional NTSC
signal is stepped up to a high definition fo rmat compatible with DSC -HDTV. “With a
minimal investment, TV stations would be able to move to high definition signal and the
up-converted locally produced signal. ”11

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The FCC has given away HDTV licenses to 1700 stations to encourage investment by
the existing broadcasters in HDTV. There will be no competition for HDTV licenses.
The value of these licenses is estimated at $1 billion. Alfred Sikes, chairman of the
FCC, states that “it's not a give away, it’s a transition from one fo rmat (of broadcasting)
to another.”12 Two months before the license announcement was made, 100
broadcasters petitioned the FCC to require cable to carry HDTV to ensure an adequate
audience to justify investment. It is feared that without fresh competition, existing
broadcasters will cling to the NTSC standard. Public demand for HDTV is likely to
materialize mainly in response to broad program selection. Studios will be hesitant to
produce programs in two standards until broadcasters are able to transmit HDTV.

HDTV & Semiconductors

HDTV represents a major boost to the semiconductor industry. Not only will HDTVs
use large quantities of semiconductors internally but they will stimulate sales of
complimentary semiconductors for applications ranging from multimedia to
photography. (See Exhibits 7 and 8 for related information on the semiconductor
industry.)

In the capital intensive semiconductor industry, large up-front capital expenditures

have encouraged increased consolidation. The investment in R&D and manufacturing
for 16 bit dynamic random access memory (DRAM), for example, exceeds $ 1 billion. It
is estimated that companies have to produce at least 5 million DRAM chips per month
to recoup their initial investment. As a response to high investment and short life
cycles, companies specialize in one stage of the R&D process or in a particular
product. Toshiba, for example, supplies memory chips to Motorola and Motorola
reciprocates with microprocessors. Further, Toshiba transfers production technology
to Siemens.

HDTV looks like it will transform to digital the last high volume analog consumer
electronics segment, TV. Analog refers to information represented in wave form and
digital refers to information represented in numeric form. Sound and image naturally
occur in wave form, thus digital systems must first translate waves into numbers and
later recreate the waves based upon the numeric descriptors. Digital HDTV systems
have many advantages over analog including less distortion and more flexibility. The
major disadvantage of a digital system is the incredible volume of numbers that must
be processed to relay HDTV images.

One second of HDTV data requires one billion binary (0s and 1s) numbers of code. To
put the volume of numbers to be processed into perspective, it would require
appproximately 360 personal computers with standard 40 megabyte hard drives to
store a two hour HDTV program uncompressed. Secondly, in terms of broadcasting
bandwidth, uncompressed digital HDTV would require 100 times the signal capacity
available on current 6 MHz band width channels. The solution lies in compressing the
signals before transmission. This solves the bandwidth problem as well as reduces the

12
volume of numbers that must be processed, but increases the number of operations
that must be performed on each signal, thereby developing the need for parallel
processing and digital speed processing (DSP) chips. It should be noted that the
increased resolution and aspect ratio of HDTV would still surpass the current channel
capacity by a factor of four or five times even if we use conventional analog signals.

Digital HDTV was long thought unfeasible because it would require the processing
power of a super computer. Recent semiconductor advances in video compression
(VC), digital speed processing (DSP), digital to analog converters (DAC) and very large
scale integration (VLSI) make it highly likely, however, that a digital standard for HDTV
will be implemented in the U.S. in the next few years.

Video Compression

General Instruments announced that it had found a way to compress HDTV signals to
a manageable size in June 1990, two days prior to the deadline set by the FTC for
standards proposals. Three other consortiums, Zenith-AT&T, M.I.T. and Philips-
Sarnoff (the Grand Alliance) soon announced competing digital standards. The digital
video compression strategies that have been devised involve several components ,
including coding options, quadrature modulation, motion compensation and error
correction (see Exhibit 1 for details). Together, these compression techniques allow an
HDTV signal to be compressed by a ratio of approximately 100:1.

Digital Signal Processing

Compression reduces the HDTV signal size to a manageable 1.2 MB/second but it
vastly increases the number of operations that must be performed on each signal. It
must be encoded, compressed, decompressed and debugged. During the encoding
process, a series of compressions must take place sequentially. Each compression, in
turn incorporates the results of multiple calculations for such compensatory measures
as motion correction. These calculations may take place in parallel. The same
process occurs in decoding followed by an elaborate debugging process. Thus,
broadcast HDTV is constrained not only by bandwidth , but also by affordable
processing power. Digital speed processing (DSP) chips promise to deliver the most
appropriate computing power for the least price. This is achieved by their multi -tasking
capability that allows them to perform several applications simultaneously , such as
playing music and receiving faxes.

Several semiconductor manufacturers have already introduced high performance

DSPs for HDTV image processing. National Semiconductor has introduced a 50 MHz
DSP capable of 100 million instructions per second (MIPS). AT&T Microelectronics
has already produced a DSP for HDTV and is currently working on a DSP capable of
10,000 MIPS. Due to its ties with Bell Labs, AT&T has unique strength in algorithm

13
design. In 1990, AT&T achieved a 10 % market share in the $300 million DSP market,
which is expected to grow to $4 billion by the end of 1996.

Digital Analog Converters

DACs are required to ultimately translate the digital signal back to an analog signal to
drive the speakers and the display. Fully integrated and temperature tolerant 12 bit
DACs have only been available a few years at low cost, further increasing the price
performance ratio of HDTV.

Very Large Scale Integration

Considering the vast increase in the number of chips required for processing HDTV
data, VLSI along with faster DSPs , will be important catalysts for reducing HDTV costs.
Initial systems required about 2000 chips, arranged on what has been likened to
shelves in a refrigerator. Thus, semiconductor components currently comprise 33% of
HDTV costs. Miniaturization advancements in both manufacturing and design will
drastically lower the number of chips required for HDTV. Faster processors will be
able to perform more tasks per frame , further reducing the number of chips required.
Fewer and smaller chips translate to a greater HDTV price-performance ratio.

Trade Lobbies
Various trade associations , directly or indirectly effected by the emerging HDTV
industry, independently lobby to safeguard and promote their interests.

Semiconductor Equipment and Materials Internationalrepresents firms that build

the machine tools for primary HRDs. Their main goal is thus to develop a U.S .
manufacturing base for HRD. Their lobby efforts focus on the Defense Advanced
Research Project Administration (DARPA) funding for HRD , and only indirectly on
HDTV.

The American Electronics Association(AEA) concluded in 1989 that the Japanese

would use HDTV technology to overtake the U.S . in semiconductors. 13 Further, they
felt that losing in HDTV could jeopardize the U.S . electronics industry. To ease the
transition, AEA recommended moving to EDTV (enhanced) as an intermediate step
before going to HDTV. This concept is supported by the Advanced TV Research
consortia, however the FCC has made it clear that they will not accept a piecemeal
standard.

A study commissioned by the AEA in 1990 recommended a $500 million government

loan program and another $500 million in loan guarantees to support U .S. HDTV
research. AEA spokeswoman Sue Wirth notes that this study has never been formally
adapted by the AEA. The AEA’s lobbying activity supports the component technologies

14
that produce HDTV. In fiscal year 1993, the AEA lobbied for $75 million from DARPA
and an additional $5 million from other organizations. Further, the AEA has
established an Industry -Government Advisory Board to encourage domestic electronic
manufacturing.

The National Academy of Sciencesrecommended in March 1992 that a new self-

funding Civilian Technology Corporation (CTC) be created. The CTC would promote
HRD technologies, notably HRDs and microelectronics. Funding would be provided by
a onetime $5 billion appropriation , with the rest of the financing coming from licensing
fees and patents. Senator Hollings, Democrat from South Carolina and chairman of the
Senate Commerce Committee endorses the CTC. This is considerably more than the
$100 million effort from which Sematech was founded. 14
The National Association of Broadcasters(NAB) made the mistake of inaction with
aid stereo and they do not want to repeat this mistake with either digital audio (DAB) or
HDTV. This group has moved to protect industry interests by successfully lobbying the
FCC to reserve unused spectrum for HDTV. The NAB questions if the FCC proposed
15 year conversion period from NTSC to HDTV is realistic.

Government Lobbies
The U. S. does not have a comprehensive national policy addressing the basic
research, commercialization or manufacture of the electronics industry. By default,
defense concerns and a myriad of special interest constructs serve as public policy.
Throughout the cold war the federal government supported basic research with
defense applications. DARPA coordinated the mainstream of this effort. 15

HRD in particular has been targeted by DARPA. The agency has financed R&D
projects for such companies as Texas Instruments, Projectivision, Photonics, Ovonic,
Norden Systems, MRS Technology, Microelectronics and Computer Technology Corp.,
Tektronix, Sarnoff Research Center and Zenith.

Legislative Branch

Trade Barriers: The 1988 Trade Act allowed the U.S. to target unfair traders and
impose retaliatory measures, the retaliatory provision is commonly know n as Super
301. In 1992, the Bush Administration threatened to use it against Japan , and it is
credited with opening Japanese lumber , semiconductor and super computer markets.
In 1990, the Super 301 clause was removed (v ís-a-vís Japan) and replaced with the
Structural Impediments Initiative (SII). 16 This move was considered a “serious tactical
mistake” by Senator John Danforth (R -MO), the ranking Republican on the Senate
Commerce, Science and Technology Committee and a key author of the bill.

In August 1991, the FTC levied a 63% duty on LCD displays from Japan which
comprised 97% of the U .S. supply. A group of small U .S. producers filed a petition

15
under the Tariff Act of 1930 asking for tariff protection , alleging that the Japanese
manufacturers were selling screens at below fair market value .

Since this tariff does not apply to finished products , such as laptop computers,
manufacturers have been forced offshore. In 1991, IBM and Apple petitioned the
Commerce Department to set up a foreign trade subzone for imported Japanese
AMLCDs, to avoid paying the 63% tariffs. An approved foreign trade zone would allow
firms that manufacture in the zone to import parts duty -free for assembly.

Antitrust Policy: One option is to relax antitrust enforcement on domestic competitors,

relevant market is defined globally and antitrust enforcement is based on world share.
This assumes that domestic firms will become stronger, however it does not assure
reciprocal access to foreign markets. Another path is to export U.S. antitrust policy to
ensure that foreign markets encourage new entrants. Policies are tempered to local
economies, attacking vertical monopolies ( e.g., the Japanese Kierstu), as well as to
traditional horizontal monopolies.

Committee Work: Many measures have gained limited support within Congress. For
example, the American Trade Preeminence Act contained provisions for suspending
antitrust, a $400 million research provision to create a commission to study HDTV, the
hi-tech industry capital costs and to evaluate a new cabinet post for technology policy ,
passed the House Science, Space and Technology Comrnittee by a vote of 49 -0 in
March 1990. The primary author of the bill was Congressman Don Edwards (D -CA),
the antitrust provisions were written by Congressman Tom Campbell (R -CA). House
leader Richard Gephardt (D -MO) favored a “managerial industrial policy ” to restore
American competitiveness. Toward this goal he, together with Senator John Glenn (D -
OH), supported the formation of a civilian DARPA. Congressman Edward Markey (D -
MA) chairman of the House Subcommittee on Telecommunications and Finance
(which has jurisdiction over the FCC) proposed federal funding of HDTV research in
February 1990. In 1992, none of these initiatives had received the necessary support
and funding, so HDS is funded primarily through defense associated grants.

Information Gathering:Within Washington, various agencies have been established

to filter information for an informed legislative decision. The Congress Office of
Technology Assessment was created to assist legislators in determining the potential
of new technologies. The office is administered through the Commerce Department
and congressional direction comes from the House Committee on Science, Space and
Technology. In June 1990, James Curlin, program manager for Telecommunication
and Computing Technologies, issued a report concluding that development of a HDTV
industry could reverse the erosion of leadership in many electronic technologies .

Research Costs: Various proposals have been introduced to lower the cost of
research by a reduction in the capital gains tax, by encouraging tax free savings plans
and by formally changing the mission of DARPA. Federal Labs would be allowed to
commercialize their research through licensing agreements. Currently Federal labs

16
employs 18% of the scientists in the U.S. Thus, they enjoy a large portion of the
government’s $65 billion annual research budget.

Tax Considerations:Many observers have asked for a reconsideration of section 861

of the IRS code. This section requires that companies allocate a certain portion of
their R&D to foreign income, thus creating an incentive to move R&D operations
offshore.

Executive Branch

The Bush Administration talked about “moving more toward an investm ent on applied
R&D at the margin” and emphasizing support of “high performance computing...battery
technology...[and] ...magnetic levitation .”17 The American Technology Preeminence
Act avoided a veto only after a $10 million loan program to help companies' research
of commercial applications was deleted. Further, the two year old Advanced
Technology program (ATP) , which funds small and medium sized companies engaged
in fundamental research , is expected to spend $45.8 million in grants in the early
1990s. A 38% increase is sought for the ATP in fiscal 1993.

The Bush Administration considered HDTV to be the seed of industrial policy and
opposed support for a technology with such a direct product outcome. Administration
officials often risk their careers when they take too bold a position on industrial policy.
For example, Craig Fields, a former DARPA director, lost his job over HDTV. This
dismissal drew a strong reaction , particularly from Senator Al Gore (D-TN), chairman of
the Senate Commerce, Science and Technology Committee. In response to industrial
policy allegations, the HDTV concept was renamed High Definition Systems (HDS) to
emphasize the much wider applications of the technology. In addition, Congressmen
Mel Levine (D-CA) and Don Ritter (R -PA) co-chairs of the Congressional HDTV
Caucus changed its’ name to the Congressional High Technology Caucus.

Within the executive branch, various agencies exist to monitor technological

developments. In the Commerce Department, the Technology Administration is
responsible for analyzing and removing barriers to technology commercialization. This
department consists of the Office of Technological Assessment and the National
Institutes of Standards. The President’s Council of advisors on Science and
Technology helps inform the Office of Science and Technology on policy, which in turn
reviews the research and development budgets of the Department of Energy,
Commerce, Interior and the National Science Foundation. These reviews are
forwarded to the Office of Management and Budget. The National Science Board sets
policy for the National Science Foundation. In the Defense Department most of the
activity takes place in DARPA , although there is a civilian run agency, the Office of
Research and Advanced Technology, that is responsible for the guidance, policy and
oversight of the Science and Technology Program.

17
Regulatory Environment

The Federal Communications Commission ’s (FCC) has among other charters , the
goal of protecting consumer investment. This surfaced over forty years ago when the
FCC mandated that color TV ’s be backward integrated with black and white sets. The
FCC currently stipulates that the HDTV standard be compatible with current TV
transmission.

Zenith wants to set a fixed time after adoption of the HDTV standard to terminate
NTSC. Such a date should be at least seven years after adoption of the standard. To
protect consumer investments, Zenith argues that HDTV must be scalable (through
converters) to accommodate resolution on the 13 -inch to 20-inch sets. Zenith forecast s
a 1% penetration one year after the adoption of the HDTV standard. Additional
lobbying by Zenith includes a proposed foreign excise tax. The company recommends
that those sets with a domestic content of 50% or more , enjoy reduced licensing fees.

The competition for a transmission standard will be judged by the Advanced TV

Advisory Committee composed of colliding interests including: chief executives from
TV manufacturers, broadcasters, cable TV companies and suppliers. The Committee
will finish testing and recommend a system to the FCC in early 1993. Digital system
proposals are now being tested at the Advanced Television Test Center (ATTC).
These tests and those of analog proposals will be presented to the FCC. A standard
should be chosen by mid -1993.

Industry Players
Sony lost about $160 million in 1991. Thus, it cut its capital expenditures by $500
million in 1992. Together with Fujitsu, Hitachi and TI, Sony has been co -developing a
chips set for the MUSE decoder. The chips set, which reduced the number of devices
in the decoder from 150 to 30 , and the cost to less than $1500, has been available in
commercial volumes since April 1991.

Sony is the leading developer of professional HDTV equipment. In July, 1992, Sony
introduced a 32-inch HDTV in Japan incorporating a full-specification MUSE decoder.
In April 1993, Sony also introduced in Japan a low-priced, basic feature 32-inch model.
Both of these units are capable of receiving HD broadcasts and are equipped for
linkage to HD laserdisc players and other HD equipment that will be sold in the future.
In 1994, Sony introduced in Japan a 28-inch model equipped with a newly developed
full-specification MUSE decoder, at a price lower than that of any of Sony’s existing
models.

In digital video editing systems, Sony ’s D-2 standard has been adopted by 5000
broadcasters worldwide. Sony also works on HDTV optical videodisk systems with a
two hour playing time. In 1992, Apple and Sony set up General Magic, a venture
which will develop multimedia players. Additionally, Hitachi, Sony and Matsushita co -

18
developed an analog, uncompressed base -band VCR format for recording HDTV
signals and for playing back prerecorded tapes. They plan to make this format
compatible with other HDTV products. Since Sony and Matsushita had been rivals in
the VCR format, this announcement surprised industry analysts. 18 Sony also
developed HDTV equipment for use in car production at Ford ’s plants in England.

Hitachi introduced a HDTV with a 46 -inch screen, the largest for HDTV sets targeting
consumers. In 1991, the company had an output of 1000 AMLCDs per month, only
10% of the quantity promised to OEMs.

Toshiba and Applied Materialswill jointly develop LCD technology based on chemical
vapor deposition. Also, Toshiba produces the TFS -800 system which can store and
retrieve 240 HDTV pictures. In 1991, Toshiba introduced a $26 ,000 HDTV system and
a professional HDTV camera with 2 million pixels. Furthermore, the company
committed itself to reducing the price of an 11 -inch AMLCD to $385 by the end of
1995. Display technologies, a 50 -50 joint venture between IBM and Toshiba, began
full scale production of TFT -LCDs in November 1991. Investment by both companies
in the joint venture totaled $1.2 billion. As an alliance partner with Motorola, Toshiba is
involved in the development of chips for the MUSE decoder.

In the field of industrial HDTV equipment, Toshiba developed the world’s first 3/4 inch
digital, high-definition VCR, which is based on a universal digital high-definition
recording format jointly developed with Broadcast Television Systems GmbH (BTS).

Toshiba is currently cooperating with Scientific Atlanta to develop a digital set-top

converter for Time Warner Cable’s experimental full-service, interactive home video
network in Orland, Florida. In 1994, Toshiba also supplied HDTV systems to the
Warner Brothers Studio Store in New York City.

Sharp has marketed a receiver since March 1992 for $8,000, 25% of the price of
existing HDTV sets. The set has a 36-inch picture tube with 1,125 scanning lines, a
screen with 16:9 aspect ratio and uses a Muse NTSC converter. Sharp also introduced
a 16.5-inch color LCD which handles 1.2 million pixels, allowing the use of computer
graphics and multimedia. With a 1991 production capacity of 200,000 passive
monochrome LCDs per month , and 10,000 color LCDs a year, Sharp is the market
leader in HRD technology. Sharp hopes to decrease the cost of a 10 -inch AMLCD
down to $400 by the year 1995. In February 1992, Apple and Sharp set up an
alliance. Both companies will develop a notebook with video and sound capability with
Sharp supplying color AMLCDs.

Matsushita, in 1991, demonstrated a 15 -inch amorphous silicon, thin film transistor

AMLCD which displays 16.7 million colors. Together with NHK, the company
developed a VCR for professional broadcast studios. With Dai Nippon Printing and
Oki, Matsushita will develop a 55 -inch gas plasma panel TV screen. Further, the
company entered into an agreement with Gain Technology to develop object oriented
multimedia software.

19
Sanyo developed an HDTV system with a 400 -inch screen and 4.5 million pixels based
on the MUSE transmission system. Together with LSI Logic, Sanyo is developing a
chip set for the Japanese HDTV system that should reduce the number of chips from
the current 46 to 10. Ownership of the chip design will be held jointly by both firms.
Under the agreement, the chips would be manufactured in Japan by LSI Logic ’s
affiliate, Nihon Semiconductor.

Philips, in 1992, was awarded $41.7 million in R&D subsidies for liquid crystal displays
(LCD) research under the European EUREKA and JESSI programs. The company will
convert a factory to flat panel production by early 1993. Philips is seeking other
European partners for its LCD project. Thompson, however, had already decided to
develop and manufacture LCDs in its own Grenoble facility. Philips announced its first
HDTV sets in the D2 -MAC standard for 1994. Despite $2.5 billion provisions for
restructuring expenses, Philips has committed more than $2 billion to R&D. Much of
these research efforts will go into digital compact cassettes, CD -I and HDTV. Together
with Thompson and AEG, Philips is establishing a research consortium to develop
LCDs based on ferroelectric technology. This new technology is expected to have
higher manufacturing yields than AMLCDs.

Apple, in response to a decrease in net income of 40% in FY 1991, plans to diversify

into the consumer electronics industry. Mr. Sculley, the CEO, envisions designing the
“Paradigm 3 TV scalable, interactive and personalized .” In addition to accessing the
hardware skills from Sony and Sha rp, Apple set up a joint venture with IBM (Taligent)
to develop software standards and file formats for multimedia applications. Sony and
Philips support this venture. The future of the IBM -Apple relationship is uncertain.
Many expect an Apple -Sony relationship to be better suited to Apple ’s diversification
plans.

Coloray received financing for the development by Micron Technology, a company

that produces memory chips. Micron, with $450 million sales in 1991, will also build
the pilot plant. Coloray expects to commercialize 10 inch diagonal displays for
computers by 1994.

Microelectronics and Technology Corporation,a member of the International

Electronics Devices Association, established a consortium of U.S . companies involved
in field-emitter CRT technology. The consortium includes Optical Imaging Systems
(OIS), Cherry Display Products, Electro Plasma Inc., Magnascreen Planar Systems,
Plasmaco Inc. and Tektronix. In 1991, the consortium received $15 million; $7.5
million from its own members, and $7.5 million from the Advanced Technology
Program. The research program will cover automated inspection and repair
technologies in flat panel manufacturing . Under a DARPA contract, MCC also
develops displays based on field emission technology. The first commercial screens
from MCC is expected around 1995.

Photonics Technologyhas developed 19-inch displays for the U.S . military. The
firm’s proprietary technology handles 262,000 colors and achieves flicker-free imaging

20
with wide-angle viewing. The company was part of a group that lobbied for 4.6%
antidumping duties levied by the Commerce Department on Sharp and Toshiba.
Photonics has been supplying 60 -inch monochrome screens to the military for
$100,000 each. In 1992, only approximately fifteen screens were produced per year.
Photonics estimates that the cost of production could fall to as low as $ 1,000 each if
mass produced.

Planar Systems received a $2.5 million contract from DARPA for research and
manufacturing in its thin film electroluminescent (EL)technology. Since its merger with
Finnish Finlux Display Electronics , Planar has become the largest maker of EL
technology in the world. The company expects to begin pilot production of 8 -inch VGA
panels in late 1993. Further, Planar will develop EL displays for DEC workstations.
Like Photonics, the company successfully lobbied for antidumping duties.

In-Focus had 1991 revenues of $37 million. Additionally, Compaq paid In -Focus
$650.000 for the rights to use its Stacked PMLCD technology. In-Focus is working on
reducing, by threefold, the response time. Since In -Focus imports passive LCD glass
screens from Japan, in 1991 it joined Compaq in lobbying against the 62% duties
imposed on imported LCDs. The company announced it would pursue licensing
options in military, instrumentation and medical computers.

Tektronix has been selected to carry out research for military applications for its PALC
technology under a DARPA contract.

21
Footnotes
1
Interactive Video: Industry Report, Morgan Stanley & Co., Inc. January , 1992.
2
Variations on a Theme . The Economist, April 11, 1991, p. 54 .
3
Electronic Business, August 20, 1990, p. 30 .
4
The New York Times, June 9, 1990, p. 31. “Report Warns of Decline of U.S.
Electronics Industry” by Clyde H. Farnsworth.
5
Burrows, Peter, Robert Haavind and Garrett DeYoung. Zenith ’s HDTV strategy:
“Made in the USA.” December 15, 1991.
6.
Durr, Barbara. Financial Times. “Zenith Heads South of the Border .” December 6,
1991.
7
From Zenith Proxy sent by Nycor, Inc. March 25, 1991 .
8
Quote printed in BC Cycle Financial Report. “Zenith Heats Up HDTV race with AT&T
Venture” by Joanne Kelly. December 17, 1990.
9
From Zenith’s statement to shareholders in response to the Nycor proxy written by
company Chairman Jerry Pearlman. Other partners in HDTV besides AT&T include
GoldStar and Scientific Atlanta.
10
Harbert, Tammi. HDTV holds promise and peril for EEs; Development may produce
enhanced displays, but could cost EE jobs. EDN Copyright 1991 Information Access
Company; Cahners Publishing Co. 1991. March 7. 1991. Vol. 36: No. 5; Pg. 23.
11
From Backgrounder Report for Winter/Spring 1992 provided by Zenith Electronics
Corporation.
12
“FCC to Grant O vner of Every TV Station Another License Free .” Bob Davis. Wall
Street Journal. March 18, 1992.
13
“America’s Billion Dollar Boob Tube Battle .” Economist (UK). Vol. 311, Is.: 7604, pp.
67-68. May 27, 1989.
14
Sematech is a Government -Industry corporation dedicated to advancing chip
technology.
15
DARPA’s fiscal 1993 budget is approximately $40 billion, total government research
outlays for fiscals 1993 are approximately $65 billion. 1980 government research
outlays approximately $31 billion, $15 billion in defense, $16 billion civilian. Source:
Office of Management and Budget Historical Tables, HJ2052.A2 U58 pg 178 .
16
The SII is a dialogue between Japan and the United States to open Japanese
markets to foreign goods. The dialogue focuses on closed supply relationships noted
in the Japanese economy.
17
Budget Director Richard Dannan, Hearing of the Senate Governrnent Affairs
Committee, Fiscal 1993 Budget Management Issues, in response to a question from
Senator Kohl.

22
18
“Japanese Electronic Firms agree to Consumer VTR Format for
HDTV.” Video Technology News. July 1991, p. 8 .
19
“Flat out in Japan.” The Economist. February 1, 1992, p. 79.
20
“Sharp’s Long Range Gamble on its Innovation Machine .” Business Week. April 29,
1991, pp. 84-85.

23
 EXHIBIT 1
Technology Details

HDTV & Compression

One second of HDTV signal requires approximately one billion binary (0s and 1s)
numbers of code or a gigabit. Bits are arranged in groups of eight called bytes. Thus,
a gigabit equals 120 megabytes. Microprocessors perform operations on one or more
bytes at a time (a word) depending upon the width of the data path measured in bits.
Within the Intel chip family, the 8088 processes 8 bit words, the 80286:16 bit words,
the 80386: 32 bit words and the i860:64 bit words. One or more instructions are
performed on these words per clock cycles measured in thousandths of a second or
megahertz (MHz). Overall chip performance is measured in millions of instructions per
second (MIPS).

The digital video compression strategies that have been devised involve several
components, including coding options, quadrature modulation , motion compensation
and error correction. Together, these compression techniques allow an HDTV signal
to be compressed by a ratio of 100:1.

Coding refers to the numeric description of pixels. At the most basic level, coding
transforms continuous waves into discrete numbers (quantization). Quantization is
achieved by dividing waves into nonoverlapping subranges and assigning discrete
numbers to each subrange. Coding can also reduce the number of signals that must
be processed and transmitted by taking advantage of pixel redundancies.
Redundancy occurs both within a frame and across time.

At any one time, large blocks of pixels, such as the sky, have little variance. Thus,
Ioterpolative Coding can send a subset of pixel infonnation upon which can be
extrapolated during decoding to recreate a close approximation of the original pixels.
Transform Codinginvolves transforming pixel intensity into frequency coefficients for
blocks of pixels. Adaptive TransformCoding changes the transformation process as
a function of either picture statistics or as a function of subjective quality requirements.

Across moderate - to low-action frames , most pixels change in a predictable manner.

Differential Pulse Code Modulation(DPCM) takes advantage of evolutionary
changes by using past trends to predict future changes. A decoder is able to make the
exact same predictions. Thus, only the common prediction error must be trans mitted.

Quadrature Modulationallows two distinct signals to be broadcast over the same

frequency by insuring that the two signals are 90 degrees out of phase. Quadrature is
currently used in the NTSC standard to transmit chrominance (color) information.

Motion Compensationcan correct for the distortions introduced by compression tools

such as interlace scanning. As discussed under HRD, scouting provides a 2:1
compression ratio , but it distorts moving objects. Motion estimation algorithms extract

24
three-dimensional motion parameters from a sequence of two -dimensional images.
These motion parameters, in turn, can be used to compensate for the distortions that
motion introduces to compression.

Error Correction involves detecting faulty bits in a word of information and forming
new bits. It is essential that transmission errors be corrected due to the magnifying
effect of decompression and the lingering effect of differential transmission. The
corrected bits are interpolated from the preceding and/or following words. Forward
Error Correction (FEC) can correct for as much as 33% error in a word by storing a
sequence of words upon which to make predictions.

Proposed Compression Standards

General Instrumentproposed fitting a digital HDTV signal into a 6 MHz channel by
first using a Transform Coding algorithm. The signal is further compressed by only
sending the difference between the predicted signal and the actual signal using DPCM.
To increase the accuracy of predicted signals, Motion Compensation is used to
forecast movements. Lastly, the chrominance is averaged in groups of 4 pixels by 2
pixels while the luminance (brightness) is broadcast for each individual pixel.
Chrominance is broadcast at a relatively lower resolution due to the eye ’s relatively
greater sensitivity to luminance.

Zenith-AT&T (DSC-HDTV) have also developed a compression algorithm that

squeezes an HDTV signal into a bandwidth of 6 MHz. Again, DPCM is used to
broadcast only the discrepancy between the new image and the predicted image. The
difference between the two algorithms lies largely in their prediction accuracy. The
DSC-HDTV algorithm forecasts movements in the form of vectors by tracking
luminance. Luminance moving in blocks across frames is translated into vectors using
a hierarchical block -matching motion estimator. Before transmission, the signal is
compressed a second time using Transformation Coding. Since luminance and
chrominance are encoded separately, the signals must be synchronized , as well as
error corrected by the decoder.

Philips-Sarnoff’s Advanced Digital Television (ADTV) adopts the collection of

compression methods outlined by the Moving Pictures Expert Group (MPEG) , a
committee of the International Standards Organization. The methods include motion
estimation, motion -compensated predictive coding, adaptive Transform Coding,
quantization and variable -length coding-decoding. A prioritization layer determines
how the various compression methods interact so that the most important video data is
transmitted with the greatest reliability. MPEG promises the least distortion, but it also
broadcasts the lowest resolution of the four proposed digital standards (1050 lines
interlaced).

MIT’s American Television Alliance System (ATVA) also adapts the compression
strategy to the circumstance. When there is little to moderate motion, the difference

25
between predictions and actual images are compressed (DPCM). To increase the
accuracy of predictions, motion estimation and compensation techniques are used.
When there is significant motion or scene changes, DPCM compression is disabled
and the image frame is encoded in bands of 8 pixels by 8 pixels. A weighted average
based on luminance and chrominance determines which bands are most important
and thus first compressed. The process continues until the band width is saturated
with compressed data.

Screen Measurements
Refreshing may occur every other line (interlaced) or every single line (non-interlaced).
Keeping the scanning frequency constant, interlacing doubles the number of lines and
thus doubles the resolution. Though resolution increases, image quality decreases
since the screen is displaying simultaneously two consecutive frames out of
synchronization by 1/30th of a second. Motion is thus blurred and jagged edges result.
The traditional standard (NTSC) calls for interlacing, while the Zenith/AT&T HDTV
standard proposes non-interlacing.

The scanning frequency is measured in megahertz (MHz). NTSC is broadcast at

59.94 MHz, which translate to thirty interlaced frames per second. The Zenith/AT&T
HDTV standard also proposes broadcasting at 59.94 MHz, but in a non-interlaced
format that corresponds to sixty frames per second.

A line consists of a string of colored dots known as pixels. Each individual pixel is
uniform in color and shade. When arranged as a tightly packed mosaic, however,
these monotone pixels form pictures of all colors and shades. How seamless the
pixels blend together is directly proportional to the resolution and inversely proportional
to the screen size. NTSC consists of 525 inter-laced lines per frame. HDTV proposals
standards that range from 700 non-interlaced lines to 1575 interlaced lines per frame.

Lastly, the NTSC aspect ratio calls for the screen width to be 4/3rds as long as the
screen height. This near square proportion was adopted largely to add stability to the
cathode ray tubes (CRT) first used as screens. A CRT’s contains a vacuum in a large
glass tube. The more cylindrical the tube, the lower the stress introduced by the
vacuum. The Zenith/AT&T HDTV standard is modeled after the 35mm film or cinema
format, which has a width 16/9ths as long as the height. Though HDTV screens will
initially be made from CRTs, improved technology will allow adequate stability in the
rectangular format.

Attaining HDTV resolution is a trivial task for today’s CRT technology. The challlenge in
HRD lies in improving a screen’s production cost, color fidelity, image contrast, viewing
angle and physical size. The 90-year old CRT technology is likely to be eclipsed in the
medium run with alternate HRD technologies currently under development. By the end
of the decade, several flat screen technologies are expected to out perform CRTs in
every respect, except perhaps price.

26
Cathode Ray Tube

CRTs have been the standard display technology from the birth of television to the
birth of the HDTV. Modern advances in CRT technology can compensate for most of
the inherent drawbacks of small CRT displays, however, large CRT displays are likely
to remain awkward due to their depth and weight.

CRTs consist of a large glass cone (tube) with an electron gun (cathode) on the narrow
end and a coating of phosphor dots on the inside of the broad flat end (screen). The
electron gun emits electrons (rays) which are attracted to the positively charged
screen. The phospors on the screen emit colored light when they are excited by the
electrons. The sides of the cone contain electron coils (yoke) which channel the flow
of electrons into vertical and horizontal lines by virtue of the magnetic field which they
create.

Color CRTs require three electron guns. Each excites a distinct phosphor dot in a
cluster. The cluster of phosphor dots, representing the three primary colors, form a
pixel (the intersection of a vertical and horizontal line). To insure that an electron ray
hits only the intended primary color within a cluster, a sheet of metal in front of the
screen full of minute holes (shadow mask)absorb errant rays.

Traditionally, CRT color saturation and contrast have been limited by the amount of
electron energy the shadow mask could absorb. To improve saturation and contrast, a
polarizing filter can be applied to the screen. This filter, however, reduces the light
intensity producing a dimming effect. Increasing the intensity of the electron beam
compensates for the dimming effect, but the increased errant energy expands the
metal show mask causing image distortion. Zenith has solved this problem in
moderate size screens by placing the shadow mask under such high tension that the
heat fails to distort the holes. Zenith continues to expand this technolo gy to ever larger
screen sizes.

Another CRT weakness that Zenith has been able to overcome in smaller screens is
the traditional curvature of CRT screens. Hemispherical screens restrict the angle of
view and increase the problem of glare. Screens are curved along the circumference
of the electron beam to insure that the cross section of the rays remain circular and in
focus from the center to the edge of the screen. Zenith has overcome these difficulties
in smaller screens bv adjusting the ray focal length as it scans across the screen and
altering the distance between dot clusters. Other manufacturers have been able to
flatten their screens using similar technology, but Zenith remains in the lead in both
size and degree of fla tness.

Despite these advances, CRTs remain prohibitively heavy and bulky. The larger the
screen, the further back the electron gun must be placed and the thicker the glass tube
must become for strength. If the gun is not recessed, the beam must be moved
through larger angles exacerbating ray distortions. As the glass tube becomes larger
and less cylindrical, it must be made thicker to avoid breakage. Thus, a 3 x 5 foot

27
screen, a likely format for HDTV, would weigh approximately 800 lbs. The neck of its
tube would be too long to fit though the door of a home.

CRTs are also toxic. The radiation emitted by CRTs are suspected of adversely
affecting health. This is of growing concern , especially to people who work around
computer displays all day. The flicker caused by the sweeping beam of electrons is
also suspected of aggravating the sight of computer operators over extended periods
of time. Lastly, the radiated tube and phosphor are too toxic for landfills.

To date, Zenith has been unable to apply its flat tension mask (FTM) technology to
screens above 34-inches in diameter , and then only at high cost. Thus, initial HDTV
screens will be limited in size and quality by CRT flaws. Zenith’s CEO Jerry Pearlman
may well be correct in his prediction that “Over the next 10 years, the CRT is going to
be the most cost-effective display, and by far the most cost -effective high definition
display.”

Projection System

A current alternative to CRTs is a projection system which basically folds a projected

image via a mirror. The image is first created by any of a number of technologies ,
including CRT-Liquid Crystal Display (LCD) or a lightvalve. The image is then bounced
off a mirror and projected onto the back of the viewing screen. These systems have
the advantage of a large flat screen , but the disadvantages of poor image contrast and
a lack of brightness. Hughes Aircraft and Hughes Electronics have traditionally
produced projection systems with the highest contrast and brightness , but at very high
cost. A lower cost system is expected for HDTV.

Field Emission Display

Several companies are developing a radical variation on the CRT theme called Field
Emission Display (FED). Instead of the rays from one electron gun exciting millions of
pixel dots, ten to one hundred microscopic electron guns (emitter tips) illuminate each
individual pixel dot. Thus, several emitter tips per pixel can be defective without
compromising the quality of the screen.

The emitter tips are mounted on the intersections of row and column electrodes which
drive the cluster of electron guns. The electrodes in turn are mounted on a thin base
plate. Parallel to the base plate, is the face plate which is coated on the inside with
dots of phosphor in cluster formation to form pixels. The entire sandwich is only a few
millimeters in depth .

The advantages of FED over CRT are numerous. FED screens are perfectly flat and
very thin. They also require much less energy , reducing unwanted radiation, lowering
power consumption and reducing heat buildup. The fault tolerance built in through

28
emitter tip redundancy increases yields , decreasing production costs. The
disadvantage is that the largest FED produced to date is only six inches in diameter.

Microscopic cathodes were developed by Capp Spindt at SRI International in the late
1960s. LETI Labs in France advanced the technology in 1983 by producing the first
video screen with the cathodes. Spindt left SRI in 1989 to develop FED screens in his
own firm, Coloray.

Active Matrix Liquid Crystal Display

LCD technology was developed in the U.S. by RCA in 1963. Westinghouse Electric
Corporation built the first active matrix liquid crystal displays ( AMLCDs), in the early
1970s. Up until the late 1980s, several major U.S. corporations including IBM, Apple,
AT&T and General Electric , had R&D projects aimed at commercializing AMLCDs . A
few U.S. corporations , such as Ovonic, Kodak and Xerox , continue to research
AMLCD, however, Japanese giants such as Sharp, Toshiba , Hitachi, Fujitsu and
Matsushita, dominate the application of the technology. In fact, U.S. companies have
found it difficult to attract financing not only to AMLCD , but also to alternate HRDs due
to Japan’s perceived lead.

Every cluster or pixel is controlled by four thin -film transistors ( TFT). One TFT for each
primary color and white. Current VGA screens (642 x 480) for color portable
computers have 308,160 pixels times 4 TFTs per pixel or 1,232,640 transistors. HDTV
resolution will require approximately 2 million TFTs. TFTs control the flow of light
through liquid crystals by applying an electric current to the crystal which untwists the
nematic material making it translucent. To color one pixel, a cluster of four TFTs vary
the amount of current passing through their crystals to produce the intensity of each
primary color needed to form a specific color intensity.

Many believe that the future of HDS lies mainly in AMLCD s. It is estimated that the
market for AMLCD s will reach $15 billion by 2000. 19 In addition, it is estimated that
50% of all computers will use AMLCD technology by 1995. 20 Many Japanese firms are
betting on AMLCD screens dominating HDS markets. It is estimated that Japanese
firms will have invested over five billion dollars in AMLCD research and development
by 1993. Though Japanese firms have been unable so far to commercialize screens
larger than 15 inches in diameter, these small screens have been in high demand.
Given the history of the underlying semiconductor technology, it is likely that AMLCDs
will rapidly increase in size and decrease in price as a function of production volume.

AMLCD technology is often characterized as a memory chip for a screen. Indeed. a

AMLCD has millions of transistors that are individually addressed like a memory chip.
AMLCDs do not emit light , rather they selectively allow pinpoints of light to pass
through both the liquid crystals and a color filter.

29
The advantages of AMLCDs are numerous. Image quality is superior to CRTs
because there is no need for a curved screen, there is no concern for focus and there
is no problem applying a polarizing filter. AMLCDs are so thin and light that they can
be hung on the wall like a picture. AMLCDs are also nontoxic. Analysts believe that
within the next decade, AMLCDs will become more cost effective than CRTs in formats
larger than 40 inches.

Problems with AMLCDs include a relatively high power consumption and low
manufacturing yields. Power consumption is a major issue only for battery operated
screens used for such applications as note book computers. Manufacturing yields,
currently at only 30% for 10-inch screens. are expected to rise significantly. Sharp,
which in 1990 held a worldwide market share of 40%, hop es to increase yields of 10 -
inch screens to 80% by 1995, thereby reducing costs by 66 %, to approximately $400.

The problem with yields stems partly from the fact that only one of the over two million
thin film transistors (TFTs) need be defective to render the entire screen defective.
Additionally, the glass substrate upon which the TFTs are mounted is much more
susceptible to damage than the silicon used as a platform for most semiconductors.
Preliminary indications are that the manufacturing learning curve is not as steep as
with other semiconductors , such as memory chips. In 1991, for example, AMLCD
manufacturers produced only 25% of their yearly volume forecast , due largely to
slower than anticipated yield improvements.

Canon may emerge to lead the Japanese pack , based upon a new technology it
disclosed in October 1991. Canon claims its new feroelectric AMLCD is larger,
sharper, easier to produce and thus less expensive than conventional AMLCDs. Many
U.S. corporations hope to overtake the Japanese firms by developing alternative
technologies.

Plasma Addressed LCD

Tektronix has modified AMLCD by eliminating TFTs in its plasma-addressed liquid

crystal (PALC). PALC varies current to LCDs via ionized and deionized gas. The gas
is ionized with plasna switches. Theoretically, PALC will deliver the perfo rmance
required by HDTV, but in 1990, Tektronix had only been able to produce a 7 -inch
screen with 300 lines.

Passive Matrix Liquid Crystal Displays

Passive matrix liquid crystal displays (PMLCD s) or supertwist LCDs differ from an
active matrix in that the color dots within each pixel cluster are not addressed
individually, but rather through strips of electrodes along the x and y axis. This less
efficient process reduces the screen response rate. It also reduces the contrast and
the viewing angle. These screens have been widely used in portable computers.

30
In-Focus Systems has addressed these inherent flaws by designing a system whereby
three PMLCDs, one for each primary color, are stacked upon one another. When
current flows through the three dot clusters aligned vertically, the pixel takes on the
white color of the backligh t. By selectively reducing the current, primary colors can be
blocked to produce a pixel with whatever color is desired.

While the stacking innovation does improve image quality, it also adds weight and bulk.
More importantly, stacked PMLCDs retain the disadvantage of their slow refresh rate.
Still, PMLCD will continue to thrive at least in the portable computer market until
AMLCDs production yields improve.

Gas Plasma Display

Gas plasma display (GPD) is perhaps the contemporary system that comes closest to
meeting HDTV needs. The basis of the technology is a gas that illuminates when
charged with an electric current. To produce color, clusters of phosphor coatings of
each primary color are placed on the inside of the screen. The gas illuminates the dots
necessary to produce the color required of each pixel. One of the technological
problems that must be overcome is how to compensate for the red -orange light emitted
by the gas. It may be difficult to attain a full range of colors on large screens.

Fujitsu already produces a 16 -inch GPD for Sun workstations. NHK has demonstrated
a 33-inch color GPD, but it only has l/3rd of the pixels necessary for HDTV. A model
compatible with HDTV is expected soon. Other companies developing GPD
technology include NHK, Matsushita , Sharp, Thompson and Hitachi.

Electroluminescence

Electroluminescence (EL) is similar to the preceding technologies except for the fact
that there is no intermediary between the electric diodes and the color phosphors.
When current is supplied, the phosphor illuminates directly. The problem with this
technology so far has been f inding a phosphor that illuminates with the proper blue
color.

Planer Systems currently produces an EL with a 19 -inch diameter for computers.

Planer’s manufacturing system, vacuum deposition, allows high -quality and high-
volume and hence low prices. Planer Systems was spun off from Tektronix who still
holds equity in the venture. Other EL competitors include Sharp and Hitachi.

Deformable Mirrors

Texas Instruments ( TI) has developed a radically new approach to illuminating

phosphor dots on the screen. A chip with hundreds of thousands of independent

31
mirrors, called a deformable mirror device (DMD), directs simple light rays to strike
individual phosphor dots , as needed, to build whatever pixel colors are required. By
varying the electrical charge around a mirror, the orientation of the mirror can be
changed to one of three positions. In 1990, TI had only been able to build a display
with 16,000 mirrors, well short of the million mirrors that are required to fit HDTV
parameters. Other problems include manufacturing complexity and image contrast.
The first product likely to use DMD technology will be a laser printer employing 840
mirrors in a linear array.

Omnivision 3D

TI is already developing the technology that might render all flat panel displays
obsolete: 3 dimensional (3D) screens. TI first demonstrated a prototype in 1990. The
screen can be viewed at great angles and doesn ’t require any additional peripheral
equipment such as glasses. The prototype is capable of 750 scanning lines and could
be upgraded to HDTV standards.

The viewing surface is a translucent double helical disc that rotates at 600 rpm,
presenting an area continually varying in depth , like threads of a screw. Three laser
beams scan the disc as it turns, thereby projecting onto it the color TV picture. The
first applications are likely to be for the military and air traffic control .

32
 EXHIBIT 2
Zenith Electronics Corporation
Consolidated Annual Balance Sheet

Dec. 1991* Dec. 1990+ Dec. 1989+ Dec. 1988+ Dec. 1987+
ASSETS
Cash & Equivalents 36.30 56.30 175.70 26.30 19.50
Net Receivables 203.80 198.00 240.00 488.40 417.70
Inventories 236.50 249.60 275.00 579.20 583.60
Other Current Assets 6.30 6.60 5.30 73.70 68.70

Total Current Assets 482.90 510.50 696.00 1,167.60 1,089.50

Gross Plant, Property & Equipment 684.60 663.20 633.70 660.90 633.30
Accumulated Depreciation (484.10) (454.20) (416.70) (406.60) (366.50)

Net Plant, Property & Equipment 200.50 209.00 217.00 254.30 266.80
Other Assets 3.50 4.20 5.30 5.60 16.70

TOTAL ASSETS 686.90 723.70 918.30 1,427.50 1,373.00

LIABILITIES
Long Term Debt Due in One Year 0.00 0.00 38.90 6.90 6.90
Notes Payable 0.00 0.00 0.00 100.00 113.00
Accounts Payable 84.60 75.20 147.20 273.20 220.50
Taxes Payable 13.30 20.80 19.40 7.80 2.30
Accrued Expenses 130.70 135.10 163.70 197.00 205.40

Total Current Liabilities 228.60 231.10 369.20 584.90 548.10

Long Term Debt 149.50 151.10 150.90 308.60 315.40

Deferred Taxes 0.00 0.00 0.00 30.80 31.30
EQUITY
Common Stock 29.20 27.70 26.70 26.70 25.90
Capital Surplus 165.30 152.50 146.80 145.30 132.80
Retained Earnings 114.80 162.00 225.30 331.20 319.50
Less: Treasury Stock (0.50) (0.70) (0.60) 0.00 0.00

TOTAL EQUITY 308.80 341.50 398.20 503.20 478.20

TOTAL LIABILITIES & EQUITY 686.90 723.70 918.30 1,427.50 1,373.00

Note: Monetary values are in $ Millions. * Adapted from Zenith Electronic Corporation's 1991 Annual Report.
+ From Standard and Poor's PC Compustat.

33
 EXHIBIT 3
Zenith Electronics Corporation
Annual Statement of Cash Flows

Dec. 1991* Dec. 1990+ Dec. 1989+ Dec. 1988+ Dec. 1987+
INDIRECT OPERATING ACTIVITIES
Income Before Extraordinary Items (51.60) (52.30) (17.00) 5.30 (19.10)
Depreciation and Amortization 37.90 38.80 40.50 43.10 41.50
Extraordinary Items and Disc. Operations 0.00 (11.00) (105.00) 6.40 0.00
Deferred Taxes 0.00 0.00 0.00 (0.50) (8.70)
Sale of Property, Plant and Equipment
and Sale of Investments - Loss (Gain) (8.90) 0.00 (1.10) (6.50) 0.00
Funds from Operations - Other 0.00 6.50 0.00 11.20 0.00
Receivables - Decrease (Increase) (5.80) 24.40 (30.40) 0.00 0.00
Inventory - Decrease (Increase) 12.10 25.40 (25.70) 4.40 (80.80)
Accounts Payable and Accrued Liabilities 10.40 (100.60) 49.70 44.30 44.20
Income Taxes-Accrued-Increase (Decrease) (4.10) 4.00 (2.00) 3.30 31.40
Other Assets and Liabilities - Net Change 1.00 (0.20) 1.70 (62.40) (66.20)

Operating Activities - Net Cash Flow (9.00) (65.00) (89.30) 48.60 (57.70)

INVESTING ACTIVITIES
Capital Expenditures (36.70) (32.40) (34.10) (32.90) (55.40)
Sale of Property, Plant and Equipment 0.00 0.00 0.00 8.80 3.00
Acquisitions 0.00 0.00 0.00 0.00 0.00
Investing Activities - Other 12.80 16.60 497.60 0.00 0.00

Investing Activities - Net Cash Flow (23.90) (15.80) 463.50 (24.10) (52.40)

FINANCING ACTIVITIES
Sale of Common and Preferred Stock 14.50 0.10 0.90 2.10 65.70
Cash Dividends 0.00 0.00 0.00 0.00 0.00
Long-Term Debt - Issuance 0.00 0.20 0.00 0.00 50.00
Long-Term Debt - Reduction (1.60) (38.90) (125.70) (6.80) (7.00)
Current Debt - Changes 0.00 0.00 (100.00) (13.00) 18.00

Financing Activities - Net Cash Flow = 12.90 (38.60) (224.80) (17.70) 126.70

Exchange Rate Effect 0.00 0.00 0.00 0.00 0.00

Cash and Equivalents - Change (20.00) (119.40) 149.40 6.80 16.60

Note: Monetary values are in $ Millions.

* Adapted from Zenith Electronic Corporation's 1991 Annual Report.
+ From Standard and Poor's PC Compustat.

34
 EXHIBIT 4
Zenith Electronics Corporation
Annual Income Statement

Dec. 1991* Dec. 1990+ Dec. 1989+ Dec. 1988+ Dec. 1987+

Sales 1,321.60 1,409.90 1,548.90 2,685.70 2,362.70

Cost of Goods Sold 1,170.50 1,255.20 1,368.50 2,209.70 1,976.40

Gross Profit 151.10 154.70 180.40 476.00 386.30

Selling, General, & Administrative 101.20 106.50 103.90 278.60 239.30
Expense
Engineering and Research 54.10 55.90 51.40 100.10 103.40

Operating Income Before Depreciation (4.20) (7.70) 25.10 97.30 43.60

Depreciation, Depletion, & Amortization 37.90 38.80 40.50 43.10 41.50

Operating Profit (42.10) (46.50) (15.40) 54.20 2.10

Interest Expense (12.40) (12.60) (6.00) (51.20) (45.70)

Non-Operating Income/(Expense) 3.10 7.70 4.60 12.10 14.30

Pretax Income (51.40) (51.40) (16.80) 15.10 (28.90)

Total Income Taxes 0.20 0.90 0.20 9.80 (9.80)

Income Before Extraordinary

Items & Discontinued Operations (51.60) (52.30) (17.00) 5.30 (19.10)
Extraordinary Items 0.00 0.00 0.00 6.40 0.00
Discontinued Operations 0.00 (11.00) (51.40) 0.00 0.00

Net Income (51.60) (63.30) (68.40) 11.70 (19.10)

Earnings Per Share (Primary) -

Excluding Extra Items & Disc Op (1.79) (1.95) (0.64) 0.20 (0.78)

Earnings Per Share (Primary) -

Including Extra Items & Disc Op (1.79) (2.36) (2.56) 0.45 (0.78)

Dividends Per Share 0.00 0.00 0.00 0.00 0.00

Note: Monetary values are in $ Millions, except per share values.

* Adapted from Zenith Electronic Corporation's 1991 Annual Report.
+ From Standard and Poor's PC Compustat.

35
 EXHIBIT 5
Zenith Electronics Corporation
The Household Audio & Video Equipment Industry

Dec. 1990 Change (%) Dec. 1989 Change (%) Dec. 1988 Change (%) Dec. 1987 Change (%) Dec. 1986 Change (%) Growth
Rate
BALANCE SHEET
Current Assets 510.50 (26.65) 696.00 (40.39) 1,167.60 7.17 1,089.50 12.74 966.40 40.61 -6.6
Current Liabilities 231.10 (37.41) 369.20 (36.88) 584.90 6.71 548.10 11.63 491.00 68.61 -5.4
Other Assets 213.20 (4.09) 222.30 (14.47) 259.90 (8.32) 283.50 5.55 268.60 11.92 -3.5
Total Liabilities 382.20 (26.51) 520.10 (43.73) 924.30 3.30 894.80 11.38 803.40 63.93 -6.9
Shareholders Equity 341.50 (14.24) 398.20 (20.87) 503.20 5.23 478.20 10.80 431.60 (1.28) -4.0
INCOME STATEMENT
Sales 1,409.90 (8.97) 1,548.90 ( 42.33) 2,685.70 13.67 2,362.70 24.87 1,892.10 16.53 -3.3
Cost of Goods/Operations 1,255.20 (8.28) 1,368.50 (38.07) 2,209.70 11.80 1,976.40 27.73 1,547.30 16.64 -1.5
Net Income (63.30) (7.46) (68.40) (684.62) 11.70 (161.26) (19.10) 91.00 (10.00) 29.87 n.a.
ZENITH VS. INDUSTRY RATIO
(Ratio except as noted) 5-Year Industry
Zenith Industry Zenith Industry Zenith Industry Zenith Industry Zenith Industry Average
LEVERAGE
Debt to Total Equity 0.44 0.89 0.48 0.91 0.83 0.53 0.91 0.73 0.87 0.55 0.70
Times Interest Earned (3.15) 2.20 (1.83) 2.61 1.10 3.04 0.58 2.17 0.66 2.45 -0.53
LIQUIDITY
Current Ratio 2.21 1.15 1.89 1.21 2.00 1.39 1.99 1.27 1.97 1.64 2.01
Cash Flow Per Share ($) (0.49) 3.99 0.88 3.09 1.81 2.99 0.86 2.15 1.29 1.85 0.87
ACTIVITY
Operating Cycle 132.97 164.51 199.74 189.35 157.61 164.80 161.79 168.56 162.27 166.59 162.88
Fixed Asset Turnover 6.62 4.43 6.57 4.43 10.31 5.24 9.03 5.16 7.65 5.63 8.04
PROFITABILITY
Return on Avg Total Assets (%) (6.37) 2.82 (1.45) 3.07 0.38 3.40 (1.46) 2.17 (0.92) 2.89 -2.18
Return on Avg Total Equity (%) (14.14) 7.94 (3.77) 8.18 1.08 8.76 (4.20) 5.49 (2.30) 6.65 -4.97
Profit Margin (%) (3.71) 2.97 (1.10) 3.35 0.20 2.95 (0.81) 1.92 (0.53) 2.30 -1.19
MARKET INFORMATION ($)
Price Close * 6.63 33.86 12.75 37.19 19.00 33.42 14.75 27.05 21.88 n.a. 15.00
Dividends Per Share ( Exdate) * 0.00 0.23 0.00 0.22 0.00 0.20 0.00 0.19 0.00 0.15 0.00
Earnings Per Share * (1.95) 1.21 (0.64) 1.25 0.20 1.10 (0.78) 0.61 (0.43) 0.62 -0.72
Price-Earnings Ratio (3.40) 27.92 (19.92) 29.68 95.00 30.33 (18.91) 44.07 (50.87) n.a. 0.38
Market Value ($ millions) ** 183.62 0.80 340.73 1.37 507.45 2.63 382.32 2.71 510.67 6.57 384.96
Market to Book Value 0.54 1.77 0.86 2.17 1.01 2.25 0.80 2.09 1.18 n.a. 0.88

* Industry figure represents average industry item. n.a. Calculation not possible with given numbers.
** Industry figure represents Zenith's percentage of total industry. Source: Standard and Poor's PC Compustat.
36
 EXHIBIT 6
Financial Information FY 1991

Net Income/ ROE (%) Sales per 5-year Average 5-year Average
Sales (%) Employee Sales Growth (%) Employment (%)
3.3 7.9 264.0 22.8 18.2
2.6 11.2 232.0 10.4 14.8
3.0 8.2 220.0 9.0 13.5
3.9 8.0 252.0 7.8 9.1
1.5 6.7 252.0 9.8 4.3
3.1 6.9 228.0 4.8 4.8
0.1 2.5 129.0 3.0 -5.4
-7.1 -25.1 125.0 -1.5 4.5
2.5 8.6 120.0 3.0 2.3
7.0 19.0 136.0 1.3 4.1
9.0 33.0 165.0 27.0 20.8
-4.0 8.0 171.0 10.0 -2.5

37
 EXHIBIT 7
U.S. Semiconductor Alliances With Japan

U.S. Firms Development Partners

Texas Toshiba Mitsubishi Hitachi Fujitsu Sharp Kobe Steel NEC Sony Acer
Instruments (x-license) (x-license) (audio) (DSP) (x-license) (production) (x-license) (analog) (JV)
(DRAM)
Motorola Toshiba
(Chip Set)

LSI Logic Sanyo

(Chip Set)

AT&T - NCR Zenith Mitsubishi Intel Xerox Xilinix Paradigm

(HDTV) (SRAM) (LAN) (CMOS) (gate array) (SRAM)

Intel NMB
(DRAM)

38
 EXHIBIT 8
The World's Ten Largest Semiconductor Firms

Firm Sales in $ Billions Market Share (%)

NEC 5.0 8.5
Toshiba 4.9 8.4
Hitachi 3.9 6.7
Motorola 3.7 6.3
Intel 3.1 5.4
Fujitsu 3.0 5.2
Texas Instruments 2.6 4.4
Mitsubishi 2.4 4.2
Motsushita 1.9 3.3
Philips 1.9 3.3

39
 EXHIBIT 9
Zenith’s Important Events

First Quarter 1992

Industry color TV sales down 9% coupled with the production start-up of new big
screen flat tension mask (FTM) screen color display tubes that will contribute to an
expected first half loss for 1992.
In February, began shipping new 15 inch and 17 inch FTM color computer monitors
with multi-scanning capabilities.
In March, reduced employment by 75% at Springfield , MO plant to consolidate color
TV final assembly and plastic cabinet operations with plant in Mexico.
In March, received $5 million defense contract to develop FTM screens.
In March, the FCC began testing of DSC-HDTV.

1991
Lost $51.6 million on $1.32 billion in sales.
Industry color TV sales sown 4%.
Gain in market share for color TVs due to revamped line of products.
Cut operating expenses by $58 million for year.
Sold Taiwan monochrome montior plant to consolidate operations with Mexican
plant.
Sold magnetics plant in Keils, Ireland to consolidate operations with the magnetics
plant in Chihuahua, Mexico.
Announced plan to phase out automotive electronics by mid-1992.
Announced plan to phase out low-end color and monochrome monitors due to
extreme market competition from Far East suppliers.
Re-entered the audio business to capitalize on demand for home theater systems.
Zenitt/ATT develop digital filtering technology to eliminate interference from standard
TV signals.
In March, Nycor (who owns 8% of Zenith’s stock) and its owner Sal Giordano, Jr.,
send proxies to shareholders in an attempt to win control of the board of directors.
In April, issued $15 million in common stock to Korea’s GoldStar as a white knight in
proxy fight.
In other dealings with GoldStar during April, the Korean TV maker signed licensing
agreements to market FTM technology in TVs in Korea and agreed to promote the
DSC-HDTV system as the Korean standard.
At April’s stockholders meeting, current management wins 2 to 1 support,
successfully fighting off the Giordano proxy fight.
In September, introduced first TVs in the world with built-in closed caption decoder.
(Taking this action two years ahead of U.S. regulations requiring all manufacturers
to have models with this capability by June 1993.)

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 In December, Scientific Atlanta endorsed DSC-HDTV for the U.S. standard and is
developing equipment for satellite delivery and testing.

1990
Lost $65.2 million on $1.41 billion in sales.
Cut $38 milion in operating expenses for fiscal year.
U.S. defense advanced research project agency provided $1.25 million for research
on high-definition displays.
State of Illinois gave $1 million grant for the development of new productiion
processes.
Power supply plant in ireland phased out.
Components operations downsized worldwide.
Development breakthrough allowing FTM shadow masking to be stretched to larger
size screens with greater precision at costs lower than standard tube production.
In April, received $15 million last payment from Groupe Bull for comuter products
business.
In October, joint Zenith/ GoldStar task forces began working to expand the vender
customer relationships between the two.
In December, Zenith and ATT announced the development of an all digital version
of Zenith’s Spectrum Compatible HDTV called Digital Sectrum Compatible HDTV
(DSC-HDTV).

1989
Lost $66.4 million on $1.55 billion in sales.
TV unit shipments increase 9%.
Applied for ten U.S. patents on HDTV bradcast related inventions, and more than
thirty related to FTM display technologies.
In February, entered into a partnership with AT&T to develop an all digital HDTV
system based on Zenith’s Spectrum Compatible HDTV system
In December, sold computer products division to Groupe Bull.

1988
Return to profitability making $11.7 million on $2.69 billion in sales.
Twenty-three percent increase in computer sales; consumer electronics sales were
flat.
Added 600 employees at the Chicago-area picture tube plant which operated seven
days a week.
In September, announced proposal for HDTV system called Spectrum Compatible
HDTV.

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