Arcticle helping explain xDSL potential :
<<Encyclopaedia Britannica to his computer in 16.6 minutes, compared to 3.2 days using a standard modem.>>
Just another reason why all those $1000 computers purchased at the competitors house last year will be given away this year and upgraded to systems like Dells which have xDSL capabilities/connection partners. Although the article is about one particular xDSL modem player, it does help explain the xDSL market in general.
globes.co.il
Wednesday, Jan 13, 1999 Sun-Thu at 18:00 (GMT+2)
Communications Features
On Standby
By Eliav Allalouf
Wall Street's handful of "fat-cat", prosperous shares continue to wax even fatter and more prosperous, while the "poor" shares still lie neglected. This theory can easily be made to fit the Orckit share. Capital market esteem for the company and its technology, of course, runs wall to wall, but the share simply isn't getting off the ground.
Orckit made its IPO in September 1996, raising $53 million at $16 per share. Six months ago, the company was back in the issue market, raising $47 million at $18 per share. Yesterday, the share closed at $19. Perhaps the company was not ripe for issuance at this early stage, but such explanations cannot hide the bottom line which shows, by any criterion, a pretty miserable return, both absolutely and relative to Wall Street's high tech indices, which have gone through the roof.
On the face of it, Orckit seems well positioned for take-off. Recent developments in telecommunications and Internet are encouraging, from its point of view, positioning it favourably for a commercial breakthrough. The Internet has seventy million surfers, and is expected to have a hundred and sixty million by year 2000, all of them eager for rapid communications. The problem, right now, is one of communication between computers, and between people in different places. To call a spade a spade, the problem is bandwidth.
Most of the world's major telecom equipment providers, other than France's Alcatel, for a long time viewed with indifference the niche in which Orckit is active, starting to bestir themselves only recently. In the past, Nortel began investing in the field, but then thought better of it and retreated. This opened a window of opportunity for a number of small and medium size companies (in global terms) to grab a market share. Utilising this window of opportunity, apart from Orckit, was ECI Telecom. These and others are currently competing with titans such as Alcatel, Canada's Nortel, Cisco and 3Com of the US. It's no simple matter.
Technological primacy does not necessarily translate into market share primacy. One key problem encountered by no few Israeli companies, including VocalTec, is that their technological creativity operates also to their disadvantage. Huge conglomerates spot the potential and go in for it for all they are worth. Since markets for the new products mature relatively slowly, big players catch up with the technology, using their financial and marketing power to beat out the competition. Well, this could prove a problem for Orckit.
Where telecommunications equipment companies are concerned, such problems become all the more acute. Telephony companies, the principal customers, are conservative by nature and not inclined to outfit themselves with new technologies. On the other hand, the deregulation process taking place in the United States works in Orckit's favour. Some three thousand new telephony operators have sprung up in the United States, and are breathing down the necks of their well entrenched rivals, accelerating the process of adoption and acquisition of new technologies.
ADSL technology is designed to facilitate higher information capacity transfer on telephone lines. ADSL works on the existing copper wire (telephone line) infrastructure, enabling fast paced multimedia applications such as Internet communications, distance learning and video conference calls.
ADSL is distinctive in that it operates at record speed but at reasonable cost (the service is expected to cost less than $50 per month). The user of this modem can download the entire Encyclopaedia Britannica to his computer in 16.6 minutes, compared to 3.2 days using a standard modem.
If the technology is so good, why hasn't it become a hit? The problem could be one of (a provisional) lack of suitable technological infrastructure; or it could be one of how to reach the customer. ADSL modems must be installed by telephony technicians, and this creates a bottleneck, putting a damper on marketing capability and raising the price of the modems.
Another problem is that the public, while keen on a service that provide rapid communication, is not so keen on paying more for it than it pays, for example, to the cable companies.
Customer billing is another problem. Fixed price billing, in use today with most Internet companies, will evidently be uneconomic for telephony companies. A fixed price, after all, does not reflect bandwidth consumption, which varies from one customer to another.
Then there are the alternatives. Competing technologies for communications via cable, satellite and cellular phones may affect the future ADSL market. If cable network data transmission technologies become widely available and cheap (as forecast by AT&T, an international calls company whose proposed merger with major US cable company TCI is in final stages of approval), telephony companies may well find this an incentive to invest in ADSL.
What next? Orckit itself expects 140,000 ADSL modem installations this year, compared to more than 500,000 next year.
Telecommunication equipment producers that have a global focus and presence in their own right (such as Alcatel), or through partnerships (such as Orckit), will gain a market edge. In other words, market competition is between leading global equipment manufacturers with a far flung marketing spread (to whose product portfolio ADSL will be added), and small, specialist companies, with a strong business focus on the market.
In marketing terms, and this is nothing new; manufacturers must build a good relationship with telephony companies or develop partnerships with equipment producers that have such relationships. Orckit, a dwarf in the communications equipment field, has built up an exclusive marketing framework with Japan's Fujitsu (the world's seventh largest communications equipment firm) in the United States, and also has marketing agreements with Siemens, Lucent and Sagem (a French communications equipment firm competing with Alcatel).
Orckit's competitors, on the other hand, are still stymied by limited marketing capability. Cisco has no ADSL customers in Europe, nor has ECI any in the United States.
All these technical explanations are well and good, but investors, ultimately, want a positive return. Orckit, meantime, is losing not inconsiderable amounts of money: $10 million in the first nine months of 1998 on $31 million revenue.
The company explains that this is an integral part of the dynamics of competition in the field. These dynamics, known as forward pricing, convey a simple message: telephony company tenders are for the long term, and the way to determine how much to bid in them is by naming prices that will be in effect in another six to eighteen months, which, currently, are loss making prices. The goal, of course, is to bite off as large as possible a market share at the expense of short term profit.
Orckit's working premise: current prices are in fact loss making prices, but they embody a huge future profit. ADSL production costs are being scaled down. Thus, with the passage of time, as you cut down on costs, you start to make a profit. That is what Orckit hopes will happen; the only question is, will it really?
Published by Israel's Business Arena January 13, 1999
|
