Final installment, Bear Sterns Report
(Part 2 of 2)
3. Service Providers Likely to Have to Support USRX's X2
Technology (Broadening x2 Market Further}. While USRX is has
been shipping z2 modems for three weeks now, Rockwell appears to
be shipping sample chipsets only. As it takes a few months to
test and ship modems based on new chipsets, we expect Rockwell-
based modems to reach consumers in volume at the earliest in the
summer of l997. Ascend.announced availability of Rockwell's
56KBPlus equipment for January. 1997. We don't believe the
company met its delivery schedule. (No shit!) But even if it ships now,
with no modems on the market to talk to its equipment, service
providers that use it will not be able to market 56KB access.
which we believe would put them at a competitive disadvantage vis
a vis those ISPs that `talk' to X2 modems already available on
store shelves. Given the commodity-like characteristics of
access service, an inability by an ISP to match a differentiated
service from a competitor (based on a higher access-speed) could
result in a rapid loss of subscribers to competition - an ominous
developeent for cash-poor providers. According to a recently
published survey 62% of subscrlbers would switch an Internet
Service Provider to receive a 56KB access service. Consequently,
we stronnly believe that service providers (including those
currently using central site equipment based on Rockwell
technology. e.g.. that from Ascend) will have no choice but
support X2. (In fact. it appears that there will be as many as
50 ISPs offering 56KB access services based on X2 as early as the
end of this week.) Obviously that would only broaden the X2
market, lending it increased momentum (and boosting USRX's
revenue; and, profits from incremental Total Control Enterprise
Hub central site equipment business).
4. A modem maker would put its business in jeopardy if it does
not offer the latest technology as even customers who are
inclined to purchase modems based on older technology (because of
lower price) are likely to purchase it from a leader. It is then
even beneficial to in effect subsidize a chief competitor to stay
in the game. (Sacrificing a long-standing relationship with a
supplier which is late with its own technology becomes less of an
issue.
Will Other Modei Makers Switch Too? We thought they would as
soon as the market dictated so but were likely to resist doing so
for as long as possible. In the meantime, while they wait for
Rockwell to deliver (and get ready to switch to X2 if Rockwell
takes too long to do so), they were likely to attempt to stall
the adoption of X2. In our view, this was the most prudent
strategy for them to adopt. (Mean spirited though it was!)
Ordinarily, it is not the best of strategies to rely on
technology from the chief competitor, especially if the
competitor commands a very large market share and the nature of
the finished product lends itself to little differentiation. It
would then seem imprudent for USRX competitor to adopt USRX's X2
when USRX holds 50% share of the PC Card modem market and 42% of
the desktop modem market. However, for those that make their own
silicon and write their own software (like Cardinal Technologies
which is to ship ) x2 modems in March), the adoption of x2
protocols still allow for development of value-added features or
cost benefits derived from c\ever designs, thereby creating
opportunities for product differentiation and profitable
operation within market niches. On the other hand, those modem
makers which source Rockwell silicon and software would have to
buy from Texas lnstruments the DSP (Digital Signal Processor)
chips and X2 software, (which TI licenses from USRX) affording
thm little opportunity to differentiate final product from that
by USRX. And also, and very importantly, they would subsidize
the chief competitor in the form of royalty payments.
Consequently. we thought that USRX's Rockwell-based modem
competitors, Zoom, Hayes, Boca Research and others, would resist
the switch for as long as possible. However, if Rockwell's
technology became perceived to arrive later than these players
originally anticinated. the market stalling tactics failed to
achieve the desired effect and USRX's X2 momentum increased to
the point that a potential for significant market share erosion
became apparent, they would have no choice but to pull the trigger.
With a leading player, Hayes, having just done that, we think it
is reasonable to infer that we have entered that stage and the
endorsesent of x2 (which will inevitably result in additional
royalty revenues to USRX) by other makers just a matter
of time
What about central site systems players? Arre they next?
We have no precedent here yet, but we think this is likely to
change, because a similar logic holds for the central site
remote access system vendors, such as Ascend, Shiva and others.
(Their situation differs from that of modem manufacturers in that
their products include digital interfaces and many software-rich.
advanced features which constitute sources of differentiation.
Nevertheless, analog dial-up continues to be the cost prevalent
dial-up access method.) Rockwell is a supplier and not a
competitor and USRX is their chief competitor. Consequently,
they are likely to resist endorsing the technology unless they
have to in light or potentially deteriorating demand for their
products and the resulting market share erosion. Also, by the
virtue of acquiring USRX, 3Com, with an estimated 7% share of the
remote access concentrator market (according to IDC) becomes the
first remote access system vendor to switch from
Rockwmll/Lucent to USRX, allowing the X2 remote access system
camp to command 45% of the market. In essence, we believe that
pressure is mounting.
That's all, folks! |
