Commentary: U.S. Robotics faces thin modem profits

3Com's move to spin off its analog modem business--which will revert to the old name, U.S. Robotics--follows its spinoff earlier this year of Palm.

With both moves, 3Com is shedding itself of non-core businesses so that it can concentrate on key networking markets in the small and mid-size enterprise sector.

	See news story: 3Com modem spinoff will regain old name

But what about the prospects for U.S. Robotics? Could its analog modem business melt away under the vigorous assault of cable modem and digital subscriber line (DSL) services?

Gartner forecasts that by 2005, 50 percent of the U.S. residential market with telecommunications capability will use broadband technologies rather than analog modems to access the Internet.

The broadband revolution will have an enormous impact on e-commerce and telecommuting. On the other hand, analog modems in 2005 will still account for 50 percent of the U.S. residential market's Web access, which is a huge market share. In short, analog is not going away anytime soon.

A number of factors will contribute to the viability of analog modems. For one, analog will continue to have significantly lower prices than those of broadband technologies. Low price makes analog attractive for use in free or near-free Internet access offerings supported by, for example, advertising revenue.

In addition, the inexpensive Internet access devices that are starting to emerge will likely rely on analog modems. Many of those devices, such as $99 machines that deliver email and low-end Web surfing, will support low-bandwidth Internet uses only.

Workers on the road will continue to need analog modems until hotels and other facilities install broadband connections.

The federal government will likely subsidize Internet access in poor areas, and those services will use analog.

The low price of analog will also find a large audience in less-developed countries, where people want Internet access but cannot afford broadband.

But the low prices that guarantee analog's survival also mean low profit margins for firms such as U.S. Robotics.

Analog modems have become commodities. Stand-alone models cost around $70, but today most are included with PCs.

Given volume production and the variety of form factors, the profit margin of analog modem manufacturers will continue to fall.

To succeed as a separate company, U.S. Robotics must look to new markets, including broadband modems and home networking.

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