Features

SAN JOSE — Two startups that were in need of cash, but had ambitious goals to revolutionize the delivery of home entertainment, have decided to merge. 

Moxi Digital, based in Palo Alto, and digeo, based in Kirkland, Wash., both of which were developing platforms for multimedia set-top boxes, will announce their marriage Friday. 

Paul Allen’s Vulcan Ventures, which provided first-round funding for both companies, has invested more now to help carry the merged company through 2004, the companies said. Some additional funding also will come from cable company Charter Communications, which was an investor in digeo and also is controlled by Allen, co-founder of Microsoft Corp. 

Financial terms of the deal were not disclosed. 

The new company will be named digeo with dual headquarters in Kirkland and Palo Alto. Allen, who is currently the chairman of digeo, will be the chairman and major shareholder of the combined company. 

The companies said merger discussions arose in recent months as both startups sought additional funding. 

The companies saw that their missions were nearly identical: to give television viewers easy access to a new world of entertainment, information, communications and commerce. Their products — a set-top box platform that would act as a gateway for TV programming, video, music and the Internet and be distributed to multiple televisions in a house — even had some of the same components. 

“It seemed an ideal situation to join forces and be bigger, better, faster, with more money — all in one fell swoop,” said Jim Billmaier, who will remain as chief executive officer of the new digeo. 

No layoffs of the 217 employees at digeo and the 111 at Moxi are planned. The combined development teams will unveil their new, joint products in May at the National Cable and Telecommunications Association trade show. 

News of the merger did not surprise analysts, since the financial troubles of both startups were the subject of widespread speculation recently. Abrupt management changes in February at Moxi Digital, which was the larger headline grabber of the two, triggered rumors that the company did not have much left of their whopping $67 million in first-round funding. 

“We still had cash, but we were looking for money to remain as an independent company or join forces with someone else,” said Moxi’s chief executive, Rita Brogley, who took over Moxi after founder Steve Perlman abruptly stepped down Feb. 20. 

“The product we wanted to bring to market was a big idea, and it requires a large amount of money to do that,” Brogley said. 

Perlman, who also founded WebTV and made millions from its sale to Microsoft, had guided Moxi from its stealth two-year development under the name of Rearden Steel through its glitzy unveiling in January at the Consumer Electronics Show. Perlman remains an investor in the combined company, but “we’re still working out what advisory capacity he’ll have,” Billmaier said. 

Analysts say the companies bring complementary strengths to the table: Moxi, with its powerful new set-top box design, and digeo, with its relationships and deals with Charter and the two leading set-top box makers, Motorola and Scientific Atlanta. 

Neither company probably would have succeeded if it had stayed on its own, said Josh Bernoff, industry analyst with Forrester Research. 

“They needed each other here,” Bernoff said. Now, “if you sprinkle the Moxi magic dust and you blend in digeo, then you get something really powerful.” 

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On the Net: 

http://www.moxi.com 

http://www.digeo.com