3Com's Residential Bugout Could Spark Consolidation

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In a move that could spark the consolidation of dozens of equipment manufacturers, 3Com Corp. announced plans to scrap its line of consumer broadband modems.

The chief reasons for the decision were plummeting margins and a glut of vendors in the sector, 3Com said. According to a vendor source, margins are now razor-thin, ranging anywhere from the high teens to 5 percent in some cases.

3Com wasn't the only manufacturer to announce plans to shelve its modems this month. Alcatel Alsthom agreed to unload its DSL-modem business to Thomson Multimedia for roughly $387.9 million. Thomson also carried a line of cable modems.

Alcatel has about a 6-percent ownership position in Thomson, and that stake will rise when the deal closes.

Shopping 3Com's residential broadband business to other manufacturers is "not an option," company spokesman Brian Johnson said, noting that the company will continue to market cable and DSL modem products to the commercial sector. CommWorks Corp., a 3Com unit that makes DSL network-routing equipment and cable-modem termination systems, will continue to operate, Johnson said.

"All we did was shut down a couple of product lines and apply [those resources] into an area that has a better rate of return," Johnson said.

At the end of last year, 3Com held the No. 2 Data Over Cable Service Interface Specification cable-modem market position, behind Motorola Broadband communications Sector, according to Gartner Dataquest figures.

Still, 3Com simply wasn't "making any money" with its broadband consumer products, Johnson said. It also had a dismal first quarter, shipping just 290,000 DOCSIS units, down from about 416,000 in the fourth quarter.

That's due to the margin free-fall, but also because most of 3Com's cable-modem competitors have dropped their prices below $100 per unit. Last year's component shortage also affected the numbers, as it prompted some cable operators to overstock equipment.

3Com's departure "is simply a rationalization of the market," Kinetic Strategies president Michael Harris said. "Given the incredibly aggressive price reductions some vendors are using to buy their way in, it definitely puts pressure on [market-leading] vendors."

If the cable industry wants to see a vibrant cable-modem community, MSOs must base their loyalty to vendors on factors other than price, Harris said. Of the sector's 50 or so vendors, five or six companies control about 90 percent of the market, he noted.

Still, 3Com's decision to wave good-bye to the residential broadband cable sector comes as no big surprise.

3Com CEO Bruce Claflin told analysts this year that shrinking margins had prompted the company to have second thoughts about staying in the broadband-modem business. Multichannel News
reported that development May 14, citing Gartner Dataquest broadband communications senior analyst Patti Reali.

WHO BENEFITS?

It's still too early to say which vendors will be the next to call it quits. But companies such as Com21 Inc., Toshiba Corp., Motorola Broadband Communications Sector and Thomson Multimedia are among the best positioned to benefit from 3Com's fallback, Harris said.

Despite 3Com's bailout, Com21 "fully intends to be one of the remaining players," said company president and CEO Craig Soderquist. Consolidation is a natural phenomenon, he added, noting what happened to personal computer and television manufacturers in the 1980s.

"All along, we have recognized that there will be two or three players doing 90 percent or more of the available business," Soderquist said. He called 3Com's departure a positive signal for Com21. That's because the subsequent consolidation phase will filter out vendors that don't have proper cost structures in place or competitive products, he said.

As more companies exit the sector, margins will also improve, Soderquist predicted. He said prices could begin to stabilize sometime in the second half of this year.

Com21 has yet to submit a cable modem for DOCSIS 1.1 certification, though the company intends to enter one in Cable Television Laboratories Inc.'s next certification wave, which is expected to start July 23, Soderquist said.

Since there's a veritable phalanx of vendors in the sector, MSO officials said they don't believe 3Com's pullout will have much of an impact of their short- or long-term high-speed plans.

3Com's MSO customers include AT&T Broadband, Charter Communications Inc. and Classic Communications Inc., among others. 3Com said it will honor past agreements to ensure its operator customers "have a soft landing," Johnson said.

"We don't foresee an impact because we buy modems from a diverse set of suppliers," including Motorola, Toshiba, Com21 and Thomson, said AT&T Broadband spokeswoman Sarah Duisik. She wouldn't say which vendor is the MSO's majority supplier, but AT&T Broadband did ink a deal last August to buy 700,000 Motorola Broadband "SURFboard SB 3100" and "SB4100" modems through the end of 2001.

AT&T Broadband also buys modems from Toshiba, Com21 and Thomson.

In addition to selling cable modems directly to operators, 3Com also distributed the gear via retail channels, including Cablevision System Corp.'s chain of The Wiz stores.

Cablevision and The Wiz said 3Com's decision would not affect their plans.

"We expect that 3Com Corp. will continue to honor all end-user warranties in accordance with their terms, and it has ensured a commitment to providing support through the transition," said Gemma Toner, Cablevision's senior vice president of high-speed data products, in a statement. "All Optimum Online customers with 3Com modems will continue to receive a high level of customer service support."

A spokeswoman for The Wiz said stores also sell cable-modems from Motorola Broadband and Terayon Communication Systems Inc., and still offer 3Com models.

"Retail, by and large, hasn't happened in a meaningful way," Harris said. "At the end of the day, volume still goes through MSO channels."

Although cable-modems through retail have yet to set the world on fire, that area represents between 10 percent and 15 percent of all Toshiba shipments, said company marketing communications manager Christopher Boring.

"We're pushing retail hard," he said.

3COM: MAYBE NOT OUT

Although 3Com is discontinuing its line of consumer broadband modems, that doesn't necessarily mean it's completely out of the cable-modem picture.

That's because 3Com has a 20-percent stake in U.S. Robotics Corp., which rejoined the cable-modem market at January's Consumer Electronics Show, where it unveiled its first unit since 1997.

At the time, U.S. Robotics — a well-known name among dial-up modem users and retailers — said it plans to differentiate itself from its legions of competitors with value-added features such as "plug-and-play" universal serial bus ports. To date, U.S. Robotics has not announced any MSO deals, aside from trials.

U.S. Robotics is currently focused on getting its new cable-modem stamped for DOCSIS certification, which would clear the way for retail distribution.

Cable Television Laboratories Inc. already has certified U.S. Robotics' "Ethernet Cable Modem" for DOCSIS 1.0. That product is software upgradable to DOCSIS 1.1 when and if the vendor gets certified for the more advanced spec.

U.S. Robotics officials also confirmed in January that the company is working on a model that adheres to EuroDOCSIS specifications.

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