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Standards delay troubles 3Com

Dell is one of the latest modem-makers to acknowledge that the modem industry's delay in deciding on a 56 kpbs standard will hurt sales.

Following a meeting of modem-makers in which it was concluded that they could not decide on a preliminary standard for 56 kpbs, 3Com (COMS) is one of the latest to acknowledge this delay will hurt sales.

3Com, in an earnings conference 3Com first-quarter revenues up call to analysts yesterday, said the delay in establishing a technology standard will hurt modem sales in the coming quarters.

Analysts also agree this will have an effect on the industry's sales, but agreement on the scope of the effect is more elusive.

Modem-makers and chip companies met earlier this month to adopt standards that would allow the faster 56 kpbs modems to operate with one another. But fights over intellectual property rights and royalties complicated the talks, and a preliminary standard is now not expected until January.

"3Com receives about a third of its revenues from its modem sales," said Erik Suppiger, with Deutsche Morgan Grenfell. "And we can assume that the growth they would have experienced if they had ratified this preliminary draft in September would have added about 3 to 5 percentage points to sales in the November and February quarters, with most of the growth in February."

Suppiger added that the delay will push back that timeline so that the benefits will come in 3Com's May quarterly results.

Roger Threlfall, an analyst with JP Morgan Securities, said although the standards delay will have an "impact" on modem-makers and chip companies' sales, there are several other factors that also are slowing sales.

Threfall noted that confusion exists among customers as to whether devices such as cable modems and ISDN are a better buy than a 56 kpbs modem; and that modem sales also are dependent on the rate of computer sales.

"If they settle the standard tomorrow, I'm not sure these companies will see the revenue boost they got when we transitioned to the 28.8 kbps from the 14.4," Threlfall said. "When we went to the 28.8, they saw a growth rate of 90 percent quarter-to-quarter."

Nonetheless, Threfall agrees that modem-makers and chip companies are losing sales because of the standards delay.

"I agree this delay hurts them all," Threlfall said. "I think it hurts Rockwell (ROK) and Lucent (LU) more because they control chip sets to someone else, whereas 3Com has a higher degree of control on the end user during this time of a state of flux [over standards]."

3Com, with its recent acquisition of modem-maker U.S. Robotics, is selling modems directly to end users, while Lucent and Rockwell sell their chips and technology to modem- and computer-makers that in turn sell to the end user.

"Once there are standards in place, however, I see Lucent and Rockwell getting a greater revenue boost because they have a broader distribution channel," Threlfall said.