Is Dial-Up a Dinosaur?

SAN FRANCISCO (03/22/2000) - Could the squeal of your analog modem be the cry of a dying beast?

This week, leading modem maker 3Com Corp. yanked the cord on its dial-up modem division and is selling the business to two overseas firms. 3Com has already gobbled U.S. Robotics Inc., one of its last competitors, and PC modem pioneer Hayes folded a year ago. Some analysts say it's only a matter of time before dial-up modems take up permanent residence in the Computer Museum.

"All modem manufacturers know the end game isn't analog modems," says Tere Bracco, with market researcher Current Analysis. She divides modem makers into two camps: those developing broadband products and those going out of business.

The accelerating adoption of broadband is largely responsible for dial-up's decline. Internet service providers are pairing with DSL or cable services to offer fast access at low cost, or even free of charge. The growth of the Web and electronic commerce continues to drive demand for faster connections than dial-up can deliver.

Some manufacturers may be able to make a living from dial-up modems, but it's not profitable for 3Com anymore, company representatives say. Instead, 3Com has set its sights on the high-speed world of cable and DSL modems. Now, that's a lively market: Residential high-speed Internet subscribers will number 3.3 million this year, and reach 16.6 million by 2004, according to a Yankee Group report.

Security for 3Com Customers

The millions of 3Com modem customers won't be left in the lurch, however. 3Com is selling its modem business to Accton Technology of Taiwan and NatSteel Electronics of Singapore. 3Com will retain a minority stake in a joint venture with the two. The yet-to-be-named company will also market U.S. Robotics modems.

"Customers will be taken care of," says 3Com spokesperson Dave DeVries. He is unsure whether 3Com or the joint venture will handle existing service contracts and warranties, which may be little consolation to 3Com modem owners who paid a premium for lifetime warranties.

The good news for modem buyers is that prices will continue to dip even with fewer competitors in the market. This will be true because older analog technology must compete aggressively against broadband, according to Tom Valovic, an IDC analyst. In the future you'll still be able to pick up a modem at your corner computer store, but you'll have a smaller selection to choose from.

3Com's exit from the analog modem market signals an end to the heyday of modem sales, when manufacturers such as 3Com, Hayes, and Cardinal enjoyed big profit margins, Valovic says. Today, unit sales are up but profit margins are razor thin.

The fact that most PCs come preloaded with a modem while dust settles on modems sitting on store shelves is squeezing manufacturers.

Fewer Players, Smaller Market

The remaining modem manufacturers are buoyant, however.

"Dial-up is far from dead," says Frank Manning, president and chief executive officer of Zoom Telephonics, which sells analog modems and other network products. Nothing can replace the low cost, ease of use, and widespread availability of analog modems, he says.

3Com's departure from the cutthroat modem market is good news for midsize manufacturers such as Zoom.

"There is no question there is a shakeout taking place among modem manufacturers," Manning says.

Manning predicts Zoom will be one of a handful of trusted names among analog modem makers. Zoom, like most modem manufacturers, is moving into cable and DSL modem manufacturing. But unlike 3Com, Zoom sees analog modems as a way to maintain incremental sales and foster brand awareness.

Too Costly for 3Com

A growing number of modem makers are being pummeled in competition that has brought modem prices below $10 and severely curtailed profits. Analysts say 3Com's action is not surprising.

"3Com has suffered along with the entire modem industry," says Gartner Group vice president Rob Hafner, an expert on the modem industry.

Profit margins for modem makers have been abysmal. Some of the price pressure comes from dirt-cheap, software-based modems, according to Hafner.

Software-based modems rely on a PC's main microprocessor for performance, which can keep down a PC's cost.

Taiwanese firms like Askey International and GVC Corporation are among the companies supplying software modems for cheap, Net-ready PCs. But even those firms are seeing their profits pinched.

Dial-Up Die-Hards

Despite the expected growth of broadband services in the next four years, the Gartner Group estimates that 55 percent of U.S. homes will still dial up to connect to the Net in 2004.

"The modem business will continue as a viable business, just not a major growth area," says IDC analyst Valovic. 3Com's exit illustrates how constrained the market is and what a low margin business it has become, he says.

Sales of 3Com network interface cards and analog modems combined have declined 15 percent over the past year, DeVries says.

"We hit a brick wall when it come to performance gains and sales, and felt it was time focus on the future," DeVries says.

Smaller manufacturers are apparently picking up 3Com's slack, because unit sales of analog modems continue to grow worldwide, analysts say. Still, the increase in sales is smaller each year. IDC predicts worldwide sales of analog modems will be 86.3 million units in 2001, a growth rate of 13.5 percent over 2000 projections, Valovic says. In 2002 that growth will slow to 10.6 percent; in 2003, to 9.9 percent, according to IDC figures.

Those figures are for modems in PCs and notebooks but not Net appliances, Valovic says. Most of them will be shipped inside PCs, not sold at retail.

"Modems are a commodity," Valovic says. Like the disk drive, modems may become just a part of the PC.

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