Here is an excerpt from the 3COM article :
Monday, December 1, 1997
The Future is 3Com
This beleaguered firm has an ace up its sleeve: mind-blowing Internet capabilities
By Bill Alpert
When I bought my house, I
installed a cable TV jack near my personal computer. I was ready for one of
the new cable modems that would allow me to surf the Internet hundreds of
times faster than the clunker modem that's attached to my phone line. I
couldn't wait for waves of full-motion video to come crashing over me. What
a relief it would be after years of watching Internet images appear
piecemeal on my computer screen, like photos from some deep-space
probe.
"What's a cable modem?" asked my cable-service rep, irritably. That was
almost two years ago. I'm still waiting. So are lots of other folks,
including investors in
3Com Corp., the Santa Clara, California-based networking company that became a
leader in the modem business in February by agreeing to acquire US
Robotics.
Sales of modems that permit 'Net surfing via cable TV lines may surge
before long, but for now, 3Com and its rivals are dependent mainly on sales
of traditional modems, meaning the ones that get computer users onto the
'Net via phone lines. And sales of phone modems are sagging. Recent
disclosures show, for example, that sales at 3Com's US Robotics operation
dropped to an anemic $15 million in April and May of this year, down from
$690 million in the previous three months.
With unsold phone modems stacking up in retail stores, Wall Street has
started to worry that 3Com's earnings will suffer. For the quarter ended
November 30, analysts have reduced their earnings expectations to $160
million, or 44 cents a share, down from $190 million, or 53 cents. The
lowered expectations are quite a comedown from the quarter ended August 30,
when 3Com earned $172 million, or 48 cents a share, excluding merger
charges, on revenues of $1.6 billion.
The earnings shortfall certainly seems to indicate that 3Com overpaid
when it bought US Robotics for $8 billion. Indeed, for the current fiscal
year, ending next May, 3Com will be lucky to earn $750 million, or $2 a
share, on revenues of perhaps $7 billion. Little wonder that 3Com's shares
in the past six weeks have been pounded down from the mid-50s to a recent
36.
But what's been obscured in all the hand-wringing is the tremendous
potential of the modems that 3Com will soon sell to allow folks to get on
the Internet through their cable-TV lines. By the year 2003, cable-TV
modems alone could make 3Com more than $2 billion in annual revenues.
Such optimistic predictions are based in part on the phenomenal
performance of these modems. They will allow personal computers to take in
data from the Internet 100 times faster than do today's
28.8-kilobit-per-second modems. This is the breakthrough I've been waiting
for, the one that will allow personal computers to take in video and audio
feeds that are clear, crisp and lifelike.
Right now only about 50,000 people are tapping into the Internet via
their cable-TV lines. But the rollout of such service should accelerate in
the next year or so, particularly after cable modems start appearing on the
shelves of computer retailers in the second half of 1998. The new modems
will be made by 3Com as well as by rivals such as Motorola, Samsung, Sony and Matsushita 's
Panasonic unit. The spread of cable modems will also prod cable-TV operators to buy more networking gear, and those purchases should benefit 3Com, Bay Networks and
Cisco Systems, among others.
What should make the market for cable-TV modems explosive is the fact
that manufacturers have already agreed to a common standard. By contrast,
sales of phone modems have been lame because there is no common standard
for high-speed modems, making it difficult for PCs to rapidly communicate
with one another and with online services.
To understand 3Com's potential in this area, you first have to
understand the current situation in the Internet access field. Most homes
in North America nowadays have two wires running into them: a phone line
and a cable TV line. Until this year, many folks predicted that the first
high-speed Internet service available to homeowners would be a technology
called Digital Subscriber Line, from the telephone companies. Although
"DSL" service is available in a few locales from such telephone companies
asUS West Communications and SBC Communications,
squabbles on standards and tariffs have delayed
industry plans for widespread deployment into 1999 and beyond. Even where
it is available today, DSL service ain't cheap, with U S West charging $145
per month for 704 kilobit-per-second Internet service, which is about 25
times faster than today's typical modem links.
<Paragraphs about cable companies - cut....>
As noted, only about 50,000 North American homes had actually signed up
with the major cable modem services through September: 26,000 with At Home;
20,000 with Road Runner; and 10,000 with MediaOne. That's a small start,
but most systems have only recently turned on. In the four markets that
Road Runner has had in operation for at least six months, penetration
averages 2.5%, with Portland, Maine, already at 4.2%.
Roger Keating, who runs Comcast's online operation, says that the
Comcast-At Home venture will become a financial success when it signs up
roughly 5% of Comcast's cable TV homes. At Home Network should start
showing net profits in 1999, at somewhere between 5% and 10% penetration of
its cable affiliates.
Cable modems will sell through computer and electronics stores, and
eventually cost less than $200. Mail-order personal computers will come
with the modems pre-installed. 3Com and other manufacturers aim to provide
modems to both retailers and computer makers. Although the cable guy will
continue to show up at homes to install the gear, eventually there will be
plug-and-play modems that subscribers can install themselves.
"Retail distribution for modems is going to be a huge boost," says Henry
T. Nicholas, chief executive of Broadcom Corp., an Irvine, California, firm
that makes microchips for cable modems.
With its dominant share of telephone modem sales to retail outlets, 3Com
predicts that its US Robotics brand will also become the No. 1-selling
cable modem in 1998. "This is our home turf," declares 3Com Senior Vice
President Rick Edson.
Edson hopes that by 2003, 3Com will be selling cable modems at the same
rate it sells phone modems today, that is, a million units a month, making
for potential annual revenue of more than $2 billion. It's true that the
other two-thirds of 3Com's business, meaning network cards and
local-area-network systems, are encountering some price competition. But
the company is gaining market share in these areas, and its customers must
continually upgrade their networks, says UBS Securities analyst Scott
Heritage.
Let's face it, the coming surge in cable-modem sales at 3Com may not
come quickly enough to gracefully pick up where phone-modem sales are
leaving off. But the cable-modem market will surely be a huge one. And that
fact isn't fully reflected in 3Com's current stock price.
<-- article end -->
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