They’re two icons of American business, a pair of world famous high-technology companies sharing deep Chicago roots that suddenly find themselves locked in bitter battle on a global scale.
Schaumburg-based Motorola Inc. and Skokie-based U.S. Robotics Corp. are going mano a modem for the right to change your life.
The two technology firms are fighting over the riches of the information revolution everywhere from the federal courts to the shelves of WalMart and Best Buy.
For nearly two weeks now, their competing high-speed 56 kilobit per second modems– “Sportsters” by U.S. Robotics and “ModemSURFRs” by Motorola–have been duking it out with the startling promise of instantly making access to the Internet roughly twice as fast as ever has been possible via telephones.
On Friday, Motorola suffered a setback when the company said it was forced to withdraw its first batch of ModemSURFRs because they were not working as fast and efficiently as had been promised to consumers.
U.S. Robotics, which had delays shipping its own product, issued a statement chiding its competitor and boasting, “Fortunately, consumers have a choice and they can go with the market leader, U.S. Robotics, because our high-speed modem, X2, is already broadly available.”
The increasingly acrimonious Robotics vs. Motorola battle to sell the ultrafast new 56 kbps devices provides a window on a major new business struggle centered on the enormously lucrative technologies that will link American homes, farms, factories, schools, stores and offices to the Internet.
It’s a complex and sometimes confusing landscape of shifting corporate alliances, headline-grabbing mergers, competing technologies and stock market turbulence that comes to life with particular clarity in the modem battle.
“People don’t really understand just how incredibly dynamic high-technology business has become,” noted Thomas Thornton, president of the Illinois Coalition, a not-for-profit alliance of high-technology companies, academics and government leaders.
“Companies rise and fall very quickly, and often the only way to keep from getting gobbled up is to join together in mergers or some form of alliance,” Thornton said.
True to that picture, participants in the modem competition are forging a skein of alliances, mergers and strategies that each believes will bring it victory first in the battle over modems and later in fights over the technologies that are certain to follow.
In late February, U.S. Robotics announced a stunning decision to merge with a Silicon Valley giant named 3Com Corp. Experts said the new company will be a far larger threat to Motorola and other competitors than U.S. Robotics alone ever could have been.
Casey Cowell, chief executive of U.S. Robotics, has spent much of his time since the announcement explaining how the two companies will combine to create a huge $5 billion enterprise that will become the largest business in the lucrative computer networking industry.
A 1996 report by Mary Meeker and Chris DuPuy of Morgan Stanley & Co. Inc. estimated the market value of the networking industry at $36 billion. Modem sales alone are expected to top $5 billion this year.
Little known to most Americans but key to virtually all plans to expand the Internet into more American homes and businesses, the networking industry focuses on the equipment that hooks computers together everywhere–from home hobbyists dialing into America Online with modems to multinational corporations linking tens of thousands of desktop computers together into company networks over high-speed fiber-optic cables.
The joint U.S. Robotics/3Com enterprise will square off most visibly against Cisco Systems Inc. of San Jose, Calif., which before the merger had enjoyed a largely unchallenged spot as the major player in products that link what are called local area networks and wide area networks.
At his March 5 meeting of stockholders in Chicago, Cowell used on-line services to explain the difference between LANs and WANs. Services like CompuServe, America Online or Prodigy are LANs, and the huge numbers of individual people, schools, corporate networks and others on the outside who call in to the LAN to access its services make up the WAN.
The combined company, which will be called 3Com and be based in Santa Clara, Calif., will be able to provide everything from the individual modems that some participants use to the huge racks of telecommunications equipment and other machinery and software that make up the network’s innards.
Cowell emphasized that he intends to keep the newly formed company’s huge Chicago manufacturing complex, with U.S. Robotics’ three factories and 4,000 local workers, in place. “We’re going to stay here, and we’re going to get bigger here,” he said.
But, he added, merging with 3Com positions U.S. Robotics to take advantage of new strengths as the playing field moves from today’s modem-dominated situation to a quickly approaching future when much faster delivery methods, such as fiber-optic networks, start hitting the huge American home/office Internet marketplace.
Motorola, too, has moved in recent weeks to find allies in the complex quest to tap the looming information networking market. In addition to signing a deal with Newport Beach, Calif.-based Rockwell International Corp. to jointly build ultrafast modems, Motorola has enlisted the aid of Bell Labs’ Lucent Technologies and more than 30 other companies to create modem technology in competition with U.S. Robotics.
The modem competition carries special significance because it marks a milestone in the push to find ever-faster ways to connect the homes and businesses of America to the Internet, with all of its informational treasures and powers.
Vedat Eyuboglu, chief of development for Motorola’s modem business unit, noted that the 56 kbps devices go as fast as traditional telephone lines will allow.
Thus, he said, the 56 kbps modems almost certainly will be the final technology before the world eventually moves on to far faster fiber-optic and coaxial cable connections.
But Eyuboglu acknowledged that the “faster than 56 kbps programs” at Motorola and similar projects under way at U.S. Robotics and elsewhere in the industry mostly are things being promised for the future.
“Modems,” he noted, “are here and now.”
The 56 kbps modems will dominate the way the bulk of Americans get onto the Internet “from now until past the turn of the century, certainly three to five years,” Eyuboglu said.
Skokie modem mogul Cowell is still more bullish about the future of traditional telephone modems, even as his company rushes to deliver far faster speeds via other technologies.
Cowell said that he expects that the new 56 kbps modems will be heavily used “for the next 10 to 15 years,” even as other technologies gradually replace modems.
Furthermore, Cowell predicted, as people move on to connect their homes to the Internet via cable television lines, there will continue to be uses for voice line telephone modems for such tasks as e-mail, faxing and sending things back to the home office while on the road.
Lisa Pelgrim, chief modem industry analyst for the Gartner Group’s Dataquest market research organization in San Jose, Calif., backs up Cowell’s and Eyuboglu’s predictions for the short term with forecasts that modem sales will soar by 220 percent this year, to 80 million, and continue to grow to 210 million in 1998 and 540 million by the year 1999.
By 1999, the vast bulk of modems in use likely will be the fast new 56 kbps breed, which leads Pelgrim to say, “The stakes in this modem competition are just huge for the next several years, and so this is very, very serious competition for both Robotics and Motorola.”
The 56 kbps modems sell in the $150 to $220 range; the potential customers are the estimated 16 million (and growing) American consumers now using various Internet service providers from their homes, according to a recent study by James Parmelee of the Deutsche Morgan Grenfell Technology Group’s New York office.
The competition to sell $150-plus products to those 16 million people and to millions of other potential customers as well is particularly heated because neither company’s new 56 kbps modems work with modems from the other company at the high speeds.
Underscoring just how bitter this compatibility issue is, Motorola last month sued U.S. Robotics in U.S. District Court in Boston, charging that U.S. Robotics is making illegal use of Motorola patents.
Motorola claims that U.S. Robotics improperly uses its so-called “V.32” technology in the part of its new 56 kbps modem that sends data “upstream” from the modems on people’s computers into the equipment at various on-line service providers that lets each computer user access the Internet.
U.S. Robotics’ general counsel, George Vinyard, said in an interview that the Motorola allegation represents “tactics designed to confuse the issue, which is that none of the matters involved in their lawsuit deals with the X2 (56 kbps) technology.”
Vinyard noted that Motorola filed its suit against U.S. Robotics only hours after it had dropped a nearly identical suit against Rockwell International and announced that instead of suing Rockwell, Motorola will become its partner in building the modems to compete with U.S. Robotics.
The Rockwell-Motorola alliance underscores a further complication in today’s turbulent modem business, because the large Internet service providers like America Online, CompuServe, Prodigy and others must buy special equipment for each company’s product.
U.S. Robotics, for example, scored a major coup when Steve Case, the chief executive of Dulles, Va.-based America Online, agreed to open high-speed access for AOL’s 8 million customers to modems using the U.S. Robotics technology, but not the competing modems from Motorola.
AOL agreed to vastly expand its use of U.S. Robotics products called Total Control remote access servers.
U.S. Robotics’ vice president in charge of broadband access unit marketing, Ron Westernik, explained that this Total Control system amounts to banks of modems that AOL and other on-line service providers use to connect to the individual modems of people who phone in to use the services.
Individuals who buy the new U.S. Robotics modems only can make them work at their peak speeds when they phone in to services that offer these Total Control modem banks.
Likewise, people using Motorola modems need to dial in to equipment that will serve Motorola’s differing requirements.
Motorola’s chief of modem manufacturing, Iain Morris, said that although U.S. Robotics has scored first with America Online, Motorola has important alliances with companies such as Ascend Communications Inc. of Alameda, Calif., which makes equipment that competes with the U.S. Robotics versions and is used by many more Internet providers.
Ascend, Morris noted, makes the Motorola version of the new 56 kbps modems compatible with roughly 70 percent of all Internet service providers, including such huge ones as AT&T Corp, MCI Communications Corp., UUNet Technologies Inc. and BBN Corp.
Thus, the modem market “has degenerated to a situation of the rest of us vs. U.S. Robotics,” noted Doug Barney, a leading network industry analyst at Framingham, Mass.-based International Data Group’s trade publication Network World.
In essence, he explained, the visible part of the fight is between modems people see on their desks with names like Sportster or ModemSURFR, while behind the scenes are Internet service providers using equipment that is compatible either with Ascend’s technology or with U.S. Robotics’ Total Control version.
Another major player in the modem game, Atlanta-based Hayes Microcomputer Products, seized on the Motorola vs. U.S. Robotics standards dispute to announce last week its plans to build modems that will use both of those standards, something that neither Motorola nor U.S. Robotics can do. Executives at privately held Hayes said this gives their company a competitive advantage over both of the feuding Chicago area firms.
Clearly, a joint modem standard is badly needed, and the Geneva-based International Telecommunications Union is expected to draft one sometime in 1998. When that standard is set, Motorola, U.S. Robotics and all the other players in today’s modem war chaos will have to comply.
Meanwhile, the feuding continues over standards, just as it does over modem sales.
Two days after Motorola and Rockwell announced their partnership in the 56 kbps modem project, another huge modem industry player, Lucent, announced the formation of a coalition of 35 networking companies, including Motorola and Rockwell, that will combine to produce a U.S. standard for 56 kbps modems.
That group, which pointedly excluded U.S. Robotics, will use its resources to press for its standard over Robotics’ methods.
When analyst Barney was asked how an ordinary observer will be able to tell who is winning or losing in this bitter contest, he said, “About all you can do is look at the bottom line of companies on both sides, watch their stock prices and count their modem sales.
“This isn’t going to be resolved for at least two years,” he said.
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Monday: Chicago companies lead the way to the post-modem age.
