IBM to spin off home networking unit

The unit, to be based in Morrisville, N.C., sells a new type of home appliance, called "residential gateways," that allows consumers to connect their electronic devices--PCs, appliances and security systems--with their phone service, cable and Internet access connections.

Spencer Trask Intellectual Capital Company, a New York-base venture firm, is backing the new company financially, but IBM is retaining a small equity investment, according to company executives.

About 55 employees, including sales, marketing and engineers from IBM's home networking unit, have joined the new entity. Mary Walker, which headed IBM's home networking business unit, will serve as president and chief executive.

The spin-off allows IBM to concentrate on its core thrust in e-business, as well as PCs and consulting work, while giving its former business unit the autonomy and resources it needs to tackle the growing home networking market, Walker said.

"This makes us much more powerful, to let us loose and try to run fast, then to try to keep it in the confines of IBM," said Walker, who will announce the spin-off at the Consumer Electronic Show in Las Vegas tomorrow. "It opens up opportunities to partner with different companies we didn't have the opportunity to partner with before."

A recent study by Cahners In-Stat Group estimates that the sale of home networking devices reached $137 million by the end of 1999 and will explode to more than 1.4 billion in sales by 2003. Dozens of established and nascent firms are fighting for a share of the market, including Intel, Cisco Systems, Motorola, S3's Diamond Multimedia, and an alliance between 3Com and Microsoft.

IBM's move to spin-off its home networking unit comes at a time when PC makers, such as rivals Compaq Computer and Dell Computer, have made home networking a bigger part of their consumer strategy. Dell, for example, has bundled home networking kits into their consumer PCs and plans to eventually build a residential gateway.

Analysts, however, say the spin-off is a smart move for IBM.

"IBM may have figured there wasn't enough synergy between its existing business of servers and PCs and the [home networking] piece," Cahners In-Stat analyst Mike Wolf said.

But Wolf warns that Home Director may lose much of the marketing muscle it gained by having IBM's name attached to it. "When you get a business card with Intel, Cisco or IBM on it, you pay attention," he said. But, he added, spinning off Home Director will give the home networking unit more worth, like 3Com's plan to spin off its popular Palm Computing division.

Home Director executives said it will continue to market its products under IBM's name. The company hopes to eventually offer shares publicly, but has not set a date, according to Bill Buchanan, executive vice president of Spencer Trask.

Some home networking firms, such as Tut Systems and wireless device maker Proxim Technologies, have thrived on the stock market. Proxim has a market value of $1.2 billion as it's stock has quadrupled in value, from $20 to $101, in the last nine months. Tut, which went public in 1999, has reached a high of $86 before falling to its current price of $49.

As part of IBM, Home Director targeted its products at the new home market, striking deals with land developers and enlisting the help of service providers, such as Bell Atlantic, SBC Communications and Cox Cable. These service providers are wiring new homes with networking technology, as well as providing service and support when needed.