My Modem Can Lick Your Modem

In the battle of the speed demons, consumers are likely to win

The modem wars are here in earnest. The first big salvo came on Feb. 26 when a consortium of companies that sell 70% of the modems worldwide banded together to back a standard for the next-generation modem--one that will let computers talk to each other at a zippy 56,000 bits per second, about twice today's speed. In grandstanding fashion, the consortium, dubbed Open 56K Forum, timed its announcement to preempt the launch of U.S. Robotics Corp.'s speedy new modem.

Well, not for long. Later that day, 3Com Corp. made a $6.6 billion stock bid to buy U.S. Robotics. That gives the modem maker a potent backer and hands 3Com a strong brand name in the consumer market. The Open 56K group had hoped to steal the thunder from U.S. Robotics' deal with America Online Inc. (AOL), which was scheduled to start turning on telephone access numbers on Feb. 27 to give subscribers log-on access at the faster speed. The deal alarmed consortium members because AOL customers can only use modems from U.S. Robotics, which controls a quarter of the market. Modems from the Open 56K Forum group--available in March--can't talk to those of U.S. Robotics.

On the surface, it looks like a classic battle over standards, reminiscent of the Beta-VHS fight for the VCR market in the '70s. But maybe not. All the companies are promising buyers free upgrades to the eventual standard, expected next year. When a compromise is reached, they will alter their modems for free to work with all the others. For most of the new modems, customers will be able to download a piece of software to complete the upgrade. The result: For once, the big winners are likely to be consumers--if they can get over their initial confusion about which modem to buy.

Sales of the new modems are expected to be huge, driven by the Internet boom and Net surfers' frustration with the long wait to download Web pages. "There's such a strong pent-up demand for 56-kilobit technology," says Dwight W. Decker, president of Rockwell Semiconductor Systems in Newport Beach, Calif. "It's not clear that there will a big winner or loser."

PRICE WAR. It was beginning to look as if U.S. Robotics had the market sewn up by snagging the endorsement of such companies as AOL, Prodigy, and CompuServe. As late as last fall, U.S. Robotics was promising to have its new, so-called x2 modems on the market by January. Rockwell was thought to be six to nine months behind. But U.S. Robotics blew much of its head start, and Rockwell hit every milestone on its calendar. U.S. Robotics postponed its launch to early February--and missed that date as well, plunging its stock 7%, to 56 3/8. U.S. Robotics' shares have since recovered to 61 1/2--but are still well below the 52-week high of 105 1/2.

The competition will be good for the consumer. Instead of charging the usual premium for the jump to next-generation technology, modem makers are going straight to a price war--even before they have their modems on the market. Most of the Open 56K group will have modems out in March. The No.2 modem maker, Hayes Microcomputer Products Inc. in Norcross, Ga., registered more than 40,000 people for a deal it offered on the company's Web page: When its high-speed modems are introduced next month, customers can get one for $99 by sending in any brand modem, even a decade-old 1,200-bps model that has been collecting dust on the shelf. U.S. Robotics, with the only modem on the market, hasn't joined the price war yet. It's selling the superfast models for 70% more than current modems--$199 for a version that slides into a computer, or $239 for the external model.

If the two sides don't strike a compromise soon, online companies could become casualties in the modem war. "Once customers start asking for both kinds of connections, they'll have to offer both," says Robert A. Rango, general manager of Lucent Technologies Inc.'s modem chip business in Huntington Beach, Calif. "What else can they do? Watch half of their subscribers defect to another provider?"

It's already hard to make money on selling unlimited online access for $19.95 a month. Now, the service providers have to upgrade their equipment to handle the higher modem speeds and install separate equipment and phone lines for the rival technologies. And there's virtually no chance that they will be able to recoup their investment by charging more. In the war over modem standards, consumers may be the only winners.

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