I'll venture a model. AWRE's maximum royalty would be $1/unit. I derive this from the modem industry's refusal to pay 3com/US Robotics price of $1/unit for access to X2 technology. Motorola, Lucent and Rockwell, Ascend and others chose to fight for an open standard, losing six to twelve months of product revenue, rather than go with a proprietary, but cheap, 3com product. So let's assume $1.
In the next three years, I think 40% market penetration for DSL is the best possible. I choose this figure based on the slow adoption of ISDN and other broadband solutions, adapting this for the supposed ease of G.lite. I also discount the strict line requirements and allow for the slowness of RBOC's as they have so many irons in the fire besides consumer level broadband access.
Given PC sales of 20 million eligible units per annum worldwide, a DSL penetration rate of 40%, and a per unit royalty of $1, I see $8 million in revenue from consumer level DSL adapter market. Now back out some marketing and administration expenses, which could be shared by co-marketing with other vendors, and I see maximum profit of $6 million per annum, based on 20 million PC's with 40% DSL penetration.
I believe the 20 million units for PC's and 40% penetration figures are optimistic.
Still, one should also add in DSL-related sales for remote access concentrators. I see build-out there as follows: I assume there will be 600 million eligible Internet users worldwide by 2000, 20% serviced by DSL, which equals 120 million total DSL users. (This is probably 100x times as many as real life at this moment.) Here's where the analysis gets tricky, because unlike analog modems, DSL is always on! How the heck are ISP's going to place 120 million DSL "ports?" It's impossible! With modems, you could get by with 20:1 ratios, but not with DSL. Somebody explain how ASND and CSCO are going to concentrate DSL services at such a scale. Is there really that much space in the central offices? But I digress...
Anyway, while the royalty revenue from consumers may be small, the buildout of DSL at the carrier level implies a big spike in sales. This is the sweet spot. When this happens, AWRE revenue will skyrocket. That's the time to sell!
But to answer the question on the carrier side, you might get 40 million users per annum on the first three years of DSL ISP buildout. At a generous $2/port, that's $80 million in revenue, or, say, $60 million in net profit.
At max, then AWRE might make approximately $70 million in profit. That's about $4/share, which ain't bad. For reference, AWRE now has annualized revenues of about $8 million with nil earnings.
Now, how will the Street value AWRE as a company. I think it will be viewed as a one trick pony. Earnings will be deeply cyclical, just like Micron, TDFX, SEG and GM. You will never see DELL or CSCO type valuations, as the business model is just not there. It's fine to buy the company and plan to sell it at the top (whenever will be that be), but this is not a buy and hold type company. The best thing to hope for is that AWRE gets bought at the top, like USRX, by a world-class company. That'd be great. What are the odds? 50-50, I'd say.
Now, I'll be the first to admit that I made everything up. Obviously, if AWRE can extract $5/unit, then the possibilities explode. Does anyone think that such royalties are really possible? Also, are you all assuming that DSL is going to be a long-lasting technology? Or, do you assume, as I do, that 1MBit DSL is going to be passe very soon in favor of something newer, just like v.32, v.32bis, v.34 and v.90 will be obsoleted by DSL with a life of about three years?
Good luck,
Matt |
