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Tech Industry

Modem standard victory isn't

In the battle over a 56-kbps standards, modem makers may have lost the war by slashing prices and profit margins in the struggle for market share.

In the mortal combat of the high-tech industry, fighting for a standard can be the equivalent of the quest for the Holy Grail.

But in their long-running battle over a standard for modems running at speeds as high as 56 kbps--twice the rate of most online home connections--modem makers may have lost the war. In the struggle for critical market share, they slashed prices, shrinking profit margins.

The struggle over which competing modem technology would prevail stalled sales, created excess channel inventories, and delayed product rollouts, confusing customers. At the same time, several high-speed technologies such as DSL (digital subscriber lines), cable modems, and ISDN connections continue to gain ground on the 56-kbps industry.

Companies like 3Com (COMS) and Boca Research (BOCI) cited the 56-kbps standard fight as slowing sales and crunching profit margins when both reported weak quarterly results.

"The standards fight eroded the margins," said Abner Germanow, an industry analyst at International Data Corporation. "The cycle has been new modem standards with the fastest and greatest technology sold at a premium to whatever existed before, but the 56-kbps modems are selling at the same price that the 33-kbps modems sold for last year."

As self-destructive as this course may seem, it easy to understand how such a strategy evolved in the chaotic environment of Silicon Valley. If a particular technology is granted the status of being the de facto standard, its owner can acquire exclusive rights to all contracts for the products it yields. As a result, the major players are going to do whatever it takes to win that designation.

In the process, however, modem makers may have done more harm to themselves than good. The 20 or so vendors in this industry sector will find that their profits will continue to be hampered by tiny margins, negating much of the immediate benefit that companies like 3Com had hoped to get out of the acceptance of a new standard. In addition, products with the new standard are not expected to hit the stores until the second or third quarter at the earliest, delaying any benefits from those revenues.

Last year, when 56-kbps modems were introduced, their prices started at around $185 for a version that customers would purchase and then install inside their PCs. But by the time the holidays rolled around, the cost had lowered to as little as $79.

Computer Discount Warehouse was selling a Diamond SupraExpress 56-kbps modem for $89.30 with a rebate. A U.S. Robotics Sportster Winmodem model carried a price tag of $100 with rebate at CompUSA.

The competing standards also fed the confusion that was dragging down sales. Customers that wanted to upgrade to a faster modem had different options--3Com's x2 technology or K56flex modem technology from Rockwell Semiconductor Systems (ROK) or Lucent (LU). Muddying the matter even further, consumers could buy 56-kbps modems, but in order for them to be standards-compatible, the user had to download the compatibility code from the vendor's site.

"It's not simple," Germanow said. "Which is why [the market] stalled in the first place."

Meanwhile, customers will continue to have to wait for standards-based modems. Rockwell, for example, announced just yesterday that it is shipping client-side and central-site modem chipsets incorporating new v.90 specifications to modem makers. Those new modems aren't expected to reach consumers until March or April.

Consumers also may be postponing any modem purchases until their Internet service providers have upgraded to 56-kbps technology. After all, the faster modems can be used only if their ISPs support the technology. It could still be 8 to 12 weeks before all ISPs have upgraded, according to Moiz Beguwala, vice president and general manager of Rockwell's personal computing division.

If ISPs take the full 12 weeks to upgrade their systems, modems sales will be pushed into the middle of the second quarter. The third quarter, therefore, will be the first full quarter before all of the confusion is taken out of buying a modem.

Reporter Jim Davis contributed to this report.