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Slow sales hit modems

Modem makers and suppliers aren't expected to see relief soon, as prices on 56-kbps modems continue to fall amid unexpectedly tepid demand.

    Modem makers and component suppliers aren't expected to see financial relief anytime soon, as prices on the newest 56-kbps modems continue to plummet amid unexpectedly tepid demand.

    Modem manufacturers such as 3Com, Diamond Multimedia, and Hayes had hoped that the February adoption of an international modem standard, called V.90, would spur users to buy higher-priced, higher-margin 56-kbps products based on the new standard, thus remedying their bottom lines.

    But analysts say the migration to new products isn't occurring as fast as expected because the majority of Internet service providers have not completed their system upgrades or have relatively few high-speed lines available, causing many users to hold off on purchases. A 56-kbps modem offers roughly twice the connection speed of the older 28-kbps modems, found on the bulk of PCs now in use.

    An outbreak of fierce price competition could also put a squeeze on revenues at these large modem makers. Prices are already dropping fast on pre-standard (non-V.90) modems. Now, even the newer V.90 modems have seen price drops of $20 or more in the last month, reports Eric Kitchens, communications analyst with Associated Research Services.

    For example, some vendors are offering an external V.90 fax/modem from 3Com's U.S. Robotics for $129, down from around $159 last month. An external modem from Boca Research is available for as little as $90. Internal modems, which don't have a plastic case, are available for even less.

    As a result, modem component makers are suffering too. Chipmaker Rockwell Semiconductor has been hardest hit by the ongoing troubles. The company is the largest supplier of chipsets to modem makers, with fully 50 percent of revenues coming from this market, according to estimates from Forward Concepts.

    In part due to continued weakness in the market, Rockwell International said yesterday that the unit will be spun off as a separate company in hopes of gaining tax benefits and other efficiencies.

    "There has been a huge price erosion in V.90 chips. They started at about $55 each in late '96, were priced at $35 by the end of 1997, and are now in the low $20s. That's a tremendous drop, and it clearly means profit is down" for modem chip makers, said Will Strauss, president of Forward Concepts. Texas Instruments and Lucent are the two other large modem chip vendors, but haven't been as affected by price drops because of their more diversified product lines.

    The downturn for dial-up modems may last until after September, since there is a small chance of an update to the V.90 standard by then. This means customers would have to update their modems to the current V.90 standard and again to any revised standard, something ISPs are loathe to force people to do.

    "It's a difficult situation, but we've been in the business long enough to know that remaining conservative in adopting new consumer technologies is always a wise move. We still have people dialing in at 14.4 [kbps] in some instances, so not everyone's eager," said Drew Saur, vice president of technology at Spectra.Net Communications, a New York-based ISP and Web design firm that hosts corporate sites.

    In light of these developments, chip and modem makers alike are looking to newer technologies such as cable modems and digital subscriber line modems to boost profits.

    Rockwell, for instance, is developing chips for DSL "Lite" modems, which would be easier to connect than current DSL modems and offer connection speeds many times that of even the fastest dial-up modems on the market today. Companies such as 3Com and Hayes have said they intend to offer DSL modems, while PC makers such as Dell Computer intend to offer the modems in a select number of systems by the end of the year.

    "The real salvation is when the DSL Lite chips ship late this year or early next year. The only problem is that there won't be offsetting revenues [from dial-up modem sales] from these markets for almost a year," Strauss thinks. The market for DSL chipsets will initially be small, due to the fact that DSL Lite service will be available in limited geographic areas.