DSL

DSL Prime News Weekly: The Inside Source

Stock market fails to distinguish between good companies and bad, modems replaced by gateways, bad lawsuits against ramp and paradyne, and more.

by Dave Burstein
DSL Prime
[October 12, 2000]

"No man can tell the gods what to do" —Old blind Tiresias . Nor can rational men explain the stock market, battering our industry despite solid growth.

 

90% down	DSL.Net, NAS, Orckit, Paradyne, Ramp
80% down	Accelerated, Akamai, Copper Mountain, Covad, Efficient, Metalink, NorthPoint, PSI, Rhythms, Telocity
70% down	Comdisco, Hanaro, Next Level, Westell
60% down	Deutsche Telekom, Hanaro, Lucent, Sprint
50% down	AT&T, British Telecom, France Telekom, Worldcom

"Good companies will thrive; the weaker will be weeded out" is a lie being spread by analysts. Most of the companies above are good, even great companies, with darn sharp leaders working their tails off. We have no concern for Bernie Ebbers of Worldcom who had to sell 3M shares for a margin call, but remains wealthy — but we don't underestimate the pain of thousands at DSL companies who knocked themselves out to reach lifelong dreams, and are seeing them fade away. Everyone will be affected (we'll lose some ads as folks cut back), and hope that few of our friends lose jobs in the inevitable restructuring.

Reality is that the industry continues to go flat out to keep up with demand, and the underlying business remains in good shape. So we're presenting regular news first, before the financial stories

Gateways will replace modems — one day
2Wire shipping home gateways to Dell, Flashcom, Office Depot
No, modems aren't dead, especially at the $600 price point 2Wire is introducing. But 2Wire is the first unit to clearly target the mass home market, incorporate direct ecommerce features and consumer-style packaging and ease of use, and be backed by a massive consumer-oriented marketing effort. Brian Hinman was the visionary who convinced us the wired home could be delivered at a great price, and now a dozen others are working on similar, including every CPE manufacturer seeking volume. Manufacturing efficiencies (especially integrated chips from folks like Virata, Centillium, and ishoni) will bring the price down, and volume pricing will be well below the retail quote. Cayman is already shipping a Home RF unit with similar features, if not the pizzazz, in the thousands. The market is moving to 802.11b wireless, and Cayman will ship that in volume in a month. They intend to bring the price low enough to go beyond the early adapters and telecommuters buying them today. So do Sharegate, Broadband Gateways, Ericsson, Alcatel, Thompson and more to come.

Broadcom buys E-14 to get back into DSL
Gets Alcatel design team, top DSP engineers
Henry Nicholas and Henry Samueli were DSL pioneers, and nearly everyone thought their CAP-based designs would dominate the market. DMT won out, but Broadcom has made billions making cable modem and ethernet parts, while leaving DSL on the backburner. They now bought Stan Boland's company for $600M in stock. E-14 emerged from Acorn/ARM, as Stan Boland preserved the DSP engineering team to form the nucleus of a new company dedicated to DSPs. That market was moving too fast, so they targeted DSL, and hired Jean-Philippe Cornil, from Alcatel in February. Broadcom is shipping highly integrated parts for cable modems and gateways, incorporating 4 telephone lines and home networking, which they will presumably offer for DSL as well. $2M per engineer was a remarkable price when Globespan bought Pairgain's team, but seems a pittance compared to $600M for 68 engineers and work-in-progress. Boland, a Cambridge physicist, will now take over all DSL and local loop (including VDSL) for Broadcom's new division. Next Level's 19 new customers
VDSL's better service is the way to keep a customer
The big telcos are betting that folks don't want speed to the internet, or choice in their video selection, and even US West has backed away from VDSL. It's hard to believe that Verizon, BellSouth, and SBC intend to deliver a service clearly inferior to NLC's new customers, small telcos Ace Link, Ace Telephone, Blue Earth Telephone, Eckles Telephone, En-Tel Communications, Halstad Telephone and Pine Island all of Minnesota, Chester Telephone Company and West Carolina Rural Telephone Cooperative of South Carolina, Kerrville Telephone Company and XIT Communications of Texas, Mitchell Technical Institute of South Dakota, Topsham Telephone Company of Vermont, OutReach Communications of Missouri, Home Telephone Company of Illinois, Northeastern Telephone Company of Pennsylvania, Ontario Telephone of New York, TCT West of Wyoming and All West of Utah. Must we move from Manhattan to upstate Ontario to get high-speed service?

SBC: 2,000/day, climbing, with 55% customer installs
Credit Suisse looks at the numbers
Few cover telecommunications as thoroughly as CSFB, and top analysts Dan Reingold and Julia Belladonna allowed us to share the DSL section of their report on SBC. They've moved to 55% customer self-installs as they scramble to get back to June's 4,000 per day rate. He believes DSL is very profitable for SBC, will speed growth, and will soon be upgraded with voice and video. Q3 will be 550K at best, probably lower, so 1M yearend will be tough, but 2.5M end of 2001 Reingold finds likely. Detailed analysis of SBC, definitively sourced, at http://www.dslprime.com/News_Articles/SBC_Oct.html .

When the chip shortage is over
DRAM price drop suggests time may be near; TSMC and analyst disagree
DSL equipment prices will take a major fall when chip prices return to normal with the end of the worldwide shortage of manufacturing capacity. DSL chipsets dropped about 30% last spring as Alcatel dropped prices to prevent a move to G.lite, but have been flat to up since then. The last two quarters have been remarkably good to chip vendors, as they could sell everything they could produce at a high price. The resulting "good numbers" have spared them from the market carnage facing the rest of the industry, and another good quarter is likely. But wireless growth has slowed, Dell is having problems selling PCs, and the market price of DRAM is drifting down. On the other hand, Taiwan Semiconductor, the world's largest foundry, insists their production is sold out through the end of 2001, and four leading chip vendors told us last month they were still on allocation.

We're looking hard at the price of home gateways, as five of seven North American telcos have told us they'd buy them by the million if the price comes down enough. We initially projected a manufacturing cost of $110-150 second half of next year, unless the chip prices break, which means any company that meets the telco target price of $200 is looking at massive losses to buy market share. But chip vendors are starting to listen to requests for a dramatic volume price to create that market, looking at a market with multi-million unit potential. Comdisco/Prism/Red dies
Even massive marketing failed amidst the stock crash
Before April, Prism was set to become the fourth national DLEC, replicating Covad/Rhythms/NorthPoint with a 33 city network. Comdisco, an oldline computer leasing and services company, bought it for a few hundred million, and would invest as much again for the national presence. They told Wall Street that would make them a peer of Rhythms, then valued in the billions, and drove up the stock price. They were an "internet company" - spending tens of millions in a single market to build a brand and recognition, with actual services and revenue to follow. Red was ubiquitous in New York - Times Square billboards, Bell Atlantic phone booths, and local commercials right after the Superbowl. Nortel provided much of the financing, and Comdisco took over for the national run. But they closed with only 2,000 customers and failed dreams, as the stock market refuses to go along.

Interspeed/Brooktrout cut in half; CEO and others out
Restated earnings dire
Rajeev Agarwal is the new CEO, and Stephan Ide, Arthur Goodwin, and Christopher Whalen are out. Parent Brooktrout is putting in funds as their stock is battered as well. Losses will be higher, and sales worse, for the quarter, and previous period sales are being restated. Interspeed had few actual customers, announcing instead sales to distributors; when details come out, look for those sales to be the ones that didn't stick. They're in a hot market - basement DSLAMs - but this fiasco reaffirms our bias against reporting "deals" as opposed to actual sales. Companies issues prominent press releases about unlikely sales projections from "emerging" customers be warned - we'll consider that a red flag that you have few solid customers to discuss.

How fragile we are: Paradyne drops 40% in a day
We'd rather tell you about the first SDSL for England, but ...
Paradyne scored a breakthrough for CLECs in the UK, who have been blocked from offering symmetric service by regulations. Oftel, which clearly favors BT in a series of rulings, has approved Paradyne's DSLAM. Paradyne's a respected company, $200M in sales, broad customer base, even turned a profit. Well-funded Texas Pacific maintains control. They've sold as many DSLAMs as companies the market values 4 or 5 times as high. But the gods of the stock market hit them hard. Unfortunately, Dreamline, in intensely competitive Korea, is the largest customer (29% of sales) and they and some others are cutting back so fast that Paradyne had to announce a write-off and reduced sales.

Paradyne's dependence on Dreamline was in SEC filings, so we could have found this story if we had researched more carefully the reason for Paradyne's price drop; some folks on the street knew, because Paradyne stock had been dropping. Paradyne's customers are struggling since April's stock drop and financing difficulties, and facing brutal competition among providers worldwide.

Bad lawsuits against Ramp & Paradyne
Paradyne, Ramp didn't deceive investors; poor research did
Ramp, a reputable company facing hard times in the highly competitive CPE business, was inappropriately sued because their stock plummeted on a bad quarter. Paradyne faces two suits as well. All are unsound. Both companies have been clear in their financial filings: the market is intensely competitive and risky. They've been careful in their claims to the press, providing us with much less puffery and hype than the average company. We strongly support consumer fraud enforcement against false claims, but any investor who didn't understand this was a very risky business should be in index funds, not picking stocks; any investment adviser who doesn't explain the inherent danger in high tech investing should sell used cars instead; and the journalists who don't research the field enough to report accurately do our profession a disservice. 200 investment analysts and 400 journalists get DSL Prime, which has often reported that competition will be fierce and all companies in this field risky - the warning is clearly part of the public record.

Copyright 2000 Dave Burstein.
The DSL Prime Newsletter is reprinted with permission.

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—A.J. Leibling

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—End