Equipment Makers Hang Up on Modem Divisions

Officials at two of the largest Internet equipment makers announced their
decision to jettison consumer broadband modem divisions, the result of a
market environment turned sour.

In a deal valued at roughly $387 million, Alcatel sold off its digital
subscriber line (DSL) modem division to fellow Parisian company Thomson
Multimedia Thursday.

At the same time, 3Com announced its plans to discontinue its line of
consumer DSL and cable modems.

Manufacturers 18 months ago were riding a wave of astounding success, with
orders pouring in from around the world to support infrastructure roll outs.

Companies like Cisco, Lucent and Nortel, in addition to Alcatel and 3Com,
branched out into different areas to capture market share. At the time,
with venture funds and sales revenues skyrocketing, it seemed like a good idea.

But as high and fast as their successes reached, the fall from grace was
just as quick. Inevitably, the Internet bubble burst, drying up venture
funds, which in turn forced carriers to slow down their deployment.

The competitive local exchange carriers (CLECs), once responsible for the
boom in broadband and the attendant riches, were now responsible for the
broadband bust.

Providers like NorthPoint Communications were suddenly out of business and
no longer buying the routers, switches, DSL Access Multiplexers that
bankrolled the equipment makers. Equipment makers soon discovered they
were running in the red and had to get out.

So it was decision time for equipment executives: earmarking its least
profitable divisions and getting rid of them.

Bruce Claflin, 3Com president and chief executive officer, saw his company
miss target sales expectations for the fourth quarter of 2001 by nearly
$100 million and decided to cut back.

“Business conditions worsened in 3Com’s fourth quarter,” Claflin
said. “However, 3Com is taking the steps necessary to achieve future
profitability in this unfavorable climate. Today’s announcement to
discontinue consumer DSL and cable modem products is an important part of
our plans.”

3Com officials also pointed to a glut in the consumer broadband modem
market, which was responsible for driving down prices.

According to Alcatel officials, their DSL modem division wasn’t in line
with company goals to focus on networking infrastructure equipment, which
prompted the fire sale.

Thomson Media, on the other hand, was in the market for a DSL modem to
round out its equipment line that spans the gamut of broadband Internet
access. In addition to its newfound DSL modem, the company manufactures
digital cable modems and satellite set top boxes.

“Our expertise in video technologies and our focus on high-growth digital
consumer markets are ideally complemented by this reinforced partnership
with Alcatel,” said Thierry Breton, Thomson Multimedia chairman and chief
executive officer. “With satellite, cable and today DSL, Thomson intends
to be a strong leader to enable the consumer to access digital content and
interactive services.”

The deal, which is expected to close by the end of 2001, involves the
transfer of 9.5 million shares of Thomson Multimedia to Alcatel and signals
a stronger partnership between the two companies. The stock currently
trades at $40 on the Paris exchange. European regulators, as well as
shareholders and board members, have not given their approval yet.

Serge Tchuruk, Alcatel chairman and chief executive officer, said
Thursday’s announcement brings each company’s core activities a little
closer for the rollout of future products.

“I have no doubt that the agreement will help accelerate the development of
the modems activity as well as bring end-to-end solutions expected by the
market in order to move toward interactive video,” Tchuruk said.

Alcatel plans to roll its research and development team of engineers into
Thomson’ Multimedia’s consumer products division when the transition is
complete.

Officials on both sides expressed their satisfaction with the
arrangement. Thomson Multimedia gains an instant international DSL modem
presence with a 28 percent market share in the first quarter of 2001, while
Alcatel receives some much-needed funding.

Alcatel, like its North American counterparts, has had a rough year. A
significant drop in the demand for networking equipment, attributable to
the many DSL companies that went out of business, created a surplus.

Reduced sales cut into the company’s profit margin, forcing officials to
lay off 900 employees and shut down plants in California, Massachusetts and
Oregon. Officials also decided it was time to streamline its operations
and focus on infrastructure equipment like DSL Access Multiplexers and routers.

It’s same decision reached by 3Com officials, who see the infrastructure
market and business modem market still profitable.

“Our strategy is to focus on businesses and service providers, delivering
advanced networking solutions that leverage leading edge technologies,”
Claflin said. “These are areas that play to 3Com’s strengths.”

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