Further text from the 1994 Annual Report.
The Group's principal operating division, Acorn Computers Ltd, continues to focus on the development of low cost personal computers utilising RISC technology. In April 1994, Acorn Computers Ltd successfully launched the Risc PC, for which it was recently awarded first place in the secondary category of the Educational Computing & Technology 1994/1995 Awards. The Risc PC will shortly become IBM-compatible with the introduction of Acorn Computers Ltd's PC 486 card, a low cost second processor card scheduled for general release in April 1995. Acorn Computers Ltd has established a reputation as an innovative provider of high performance but low cost computers, in particular for the education market in the UK and, increasingly, overseas.
In 1990 Acorn recognised that it's RISC microprocessor design activities could be developed on a much broader front. Acorn therefore transferred its microprocessor design activities into a new joint venture company, Advanced RISC Machines Limited ('ARM'), which was established as a collaborative venture with Apple Computers and VLSI Technology. Acorn retains a 42.8 per cent. interest in the share capital of ARM, which has developed one of the world's leading ranges of RISC microprocessors and is now contributing strongly to Group results. ARM has exciting growth prospects as evidenced, inter alia, by its recent announcement of a licensing and joint development agreement with Digital Equipment Corporation to develop a new family of high performance, lower power consumption 'StrongARM microprocessors.
Further opportunities to exploit Acorn's technology and design skills were identified in 1994 and led to the establishment in July of a new operating division, Online Media, to create products and services for the emerging worldwide market of interactive online multimedia as described below.
The activities of the Group are therefore now divided into three distinct operating areas: Acorn Computers Ltd, the investment in ARM and Online Media.
Online Media has the skills and technology base to exploit this new market. Initially, Online Media has used Acorn's existing skills and technology base to develop the essential control device or 'set-top box' which will be used in the home, office, school or college to receive, decode, manage and distribute the services to which the customer will have access. Online Media is currently enhancing the intelligence and functionality of such devices whilst reducing their cost, a prerequisite for mass market acceptance of these products.
Acorn and Online Media recognise the importance of ensuring that Online Media's products and services will be capable of operating in the standard environments which are expected to emerge for communications, infrastructure and networking software. Online Media has already entered into licensing agreements with Macromedia Inc. and Oracle Corporation, allowing access to and compatibility with the key proprietary technologies that these companies have developed. Additionally, in November 1994 Online Media and Digital Equipment Corporation signed a co-operative technology development agreement, under which the two organisations will work in partnership to develop and exchange technologies for interactive television. The first collaboration will permit Online Media set-top boxes to operate with Digital's servers.
In due course, Online Media intends to sub-contract the mass production of set-top boxes and to license set- top box designs and part designs to third parties. The first design is now in small volume production and units have been supplied to demonstration sites and development laboratories in the United Kingdom, the United States, Canada, France, Germany, Sweden, the Netherlands and New Zealand. In addition to the development and sale of set-top boxes, Online Media will offer consultancy services to help network operators run interactive multimedia trials and to assist the owners of data such as films, sales catalogues and computer games in creating services to make their data available to interactive multimedia users.
The interactive multimedia market is still in its formative stages and large scale commercial exploitation of the market is not likely to begin until 1997 at the earliest. In the intervening period the market will be characterised by intensive competition between cable, satellite and telephone companies, investing heavily in order to develop the necessary technologies and infrastructure to establish leadership in this market. Online Media's strategy is to participate in the early development of the market by working closely with telecommunications and cable network operators and with other key participants in the industry. Trials are now running or being established in a number of locations across North America and in Western Europe to evaluate a number of technical approaches, most notably access to homes via telephone and cable television networks. These trials typically involve a number of phases in which the trial population is gradually increased from a low base to a population of several thousand over a period of one to two years. Full commercial launch of an interactive service on the successful completion of each trial could potentially generate orders for many tens of thousands of set-top boxes and produce significant revenues for
One of the most significant results of this activity to date is Online Media's collaboration with Northern Telecom Limited ('Northern Telecom') of Canada, one of the world's leading telecommunications equipment suppliers. Northern Telecom has conducted a global review of existing multimedia products and prototypes as part of its internal appraisal of potential partners. On the strength of this review and detailed technical discussions with Online Media, Northern Telecom has selected Online Media as its preferred supplier of set-top boxes for participation in the proposal process for forthcoming trials in the UK and Europe. It has also invited Online Media to take part with it in a significant trial in North America.
Online Media is also a major participant in a trial of online interactive services currently running in Cambridge. This is the only trial of a public, fully digital online service currently running in the UK, and the only such trial in the world using ATM data transmission technology, which they regard as a key technology in this new market, from server to set-top box. The other founding partners in the Cambridge trial are:
Online Media's revenues in 1995 and 1996 are expected to derive principally from the sale of set-top boxes to a number of trials in the UK, Europe and North America.
Online Media is not expected to generate positive cash flows before 1998, by which time the cumulative cash outflow for the division is projected to be in excess of 13 million. If the interactive multimedia market develops more slowly than the Directors currently anticipate, this rate of cash utilisation will be reduced. The balance of the Rights Issue proceeds will be used for the purposes of the core business, Acorn Computers Ltd.
Sam Wauchope continues as managing director both of the Group and of ACL. Having been finance director of Acorn Computers Ltd from 1985 to 1988, he is also currently responsible for the financial management and reporting role for the Acorn Group at Board level. As the Group develops, the Board's intention is that a full time Group finance director will be appointed.
The Board therefore now comprises two full time executive directors (Messrs Wauchope and Bird), three non-executive representatives of Olivetti (Messrs Piol, Musumeci and De Benedetti) and three independent non-executive directors (Dr Hauser, Mr Ward and Mr Owen).
ARM licensing revenue continues to grow strongly, and royalty income is expected to rise as early design wins begin to generate volume sales. Growth in royalty income is expected to continue in the longer term, driven by important new design wins including IBM (serial storage architecture) and AT&T (data encryption), both with VLSI Technology. In the current year, this growth in ARM's revenues will be offset to some extent by strategic investment to establish an international sales and marketing network, and by increased development expenditure on a range of new products including the StrongARM microprocessor family (with Digital Equipment Corporation), the ARM8 and ARM810, and further new product developments. These developments are expected to generate further significant licensing and royalty opportunities for ARM in the future, and give the Board confidence that ARM's prospects remain highly encouraging.
Online Media is well-positioned to establish itself at the forefront of a new and potentially very large worldwide market in online interactive multimedia, and in 1995 will seek to build on its achievements to date by winning involvement in trials in Europe and North America, by the strengthening of key alliances, and by continued investment in reducing the production cost and further improving the performance of its set-top box.
In view of all these developments, the Board is confident that 1995 will be a year of substantial progress for the Group's businesses.
The Directors also believe that a full listing will increase the marketability of the Ordinary Shares to a wider range of institutional investors. Accordingly, application has been made to the London Stock Exchange for the Company's enlarged issued share capital to be admitted to the Official List. It is expected that Admission will become effective and that dealings on the Official List in the existing issued Ordinary Shares and in the New Ordinary Shares, nil paid, will commence on 21st March, 1995.
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