Warrants as Industry Coordination Currency

“An order that large would be unprecedented and would require enormous amounts of arm-twisting with each one of the big cable operators, and in a hurry. It would be easier to train monkeys to play chess. “I have an idea,” I said. “We can give you a bigger order than that. We just need to sweeten the pot.” “I’m listening,” Ed said. “Why don’t we do a deal where General Instrument gives warrants for GI stock for every box that a cable operator buys?” I explained that if GI got a big order, for say, millions of boxes, it was safe to assume the stock price of General Instrument would go up significantly, and that way, Wall Street would essentially pay for the upgrade. We figured this would motivate people to participate. And boy did it.”

“On December 17, 1997, GI announced $4.5 billion in orders from nine cable operators including TCI, Time Warner, Comcast, Cox, and others. In addition to the 15 million set-top boxes, the cable operators would also receive warrants for a 16 percent stake in GI. This single order—three times GI’s $1.8 billion in revenue—would guarantee the company’s profitable future, especially since the same operators would look to GI for maintenance parts and upgrades.”