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Modem Maker Widens Focus

U.S. Robotics now offers ISDN adapters and enterprise hubs
By Edward Cone
Issue date: Feb. 5, 1996

Casey Cowell has a simple expansion strategy for U.S. Robotics, the thriving modem maker in Skokie, Ill. "When it comes to dial-up communications, we have both ends of the call," says Cowell, the company's chairman and CEO.

U.S. Robotics already sells millions of modems. To ensure growth, the company has extended its product line, via development and acquisition, by adding other communications products. U.S. Rob otics also sells ISDN terminal adapters and enterprise network hubs. "We want to offer everything in access, to be at the periphery of any system," says Ross Manire, senior VP."

This end-to-end strategy is paying off. U.S. Robotics' sales hit $890 million last year, doubling the previous year's sales. First-quarter 1996 sales, released on Jan. 22, were $365 million, up 125% from the same period last year. Much of this growth comes from customers that extend U.S. Robotics' reach beyond traditional modem markets. While the company doesn't break out revenue by product line, analysts estimate that non-modem products account for more than 25% of U.S. Robotics' sales-and that proportion should continue to increase.

America Online's ANS network-service subsidiary, which deploys 1,100 U.S. Robotics' Total Control hubs, is a typical large enterprise customer. The subsidiary will buy more U.S. Robotics modems this year, says Carl Showalter, a product manager at ANS in Elmsford, N.Y.

Another big customer is MCI's data services division in Reston, Va., which offers local-call access to the Internet in 60 cities. MCI expects that number will grow to 100 cities by the summer and eventually top out at 300 localities. "U.S. Robotics has the organization and resources to meet our demand quickly," says Robert Hagens, the MCI division's director of Internet engineering.

Bob Tomasi, VP of operations at Netcom, an Internet service provider in San Jose, Calif., uses some 15,000 U.S. Robotics modems. "There are cheaper alternatives, but we need our access to be trouble-free," he says.

The move to end-to-end communications builds on U.S. Robotics' experience with traditional modems. Says MCI's Hagens, "These hubs are a rack of modems at their heart. But they are totally integrated and can handle all protocols we need."

Eager to secure strong distribution channels for its enterprise technologies, U.S. Robotics inked a marketing deal last ye ar with networking giant Cisco Systems Inc., for which U.S. Robotics builds network hub chassis. "This could lead to future ventures," says Kevin Kennedy, director of access products for Cisco in San Jose, Calif.

The Cisco alliance should help U.S. Robotics become an enterprise/networking player. "U.S. Robotics gets to look at Cisco's routing software, be Cisco's partner, and sell into that huge market," says Maribel Lopez Howard, an analyst at International Data Corp., a technology consultancy in Framingham, Mass.

In traditional modems, U.S. Robotics continues to compete by sticking to the basics. "Modems are almost a commodity," says Amar Senan, an analyst with Volpe Welty & Co., an investment bank in San Francisco. "The pricing pressure at the low end is incredible, but they've surmounted that with good distribution deals and good manufacturing."

U.S. Robotics controls about one- quarter of the corporate and consumer modem market, accor ding to Lopez Howard. "People rightly view the modem market as being dominated by several players," she says. They include rivals such as GVC Technologies and Hayes Microcomputer.

But isn't the traditional modem market flattening-especially with the emerging 28.8-Kbps standard pushing the limits of analog phone lines? Not yet. Lopez Howard estimates that more than 14 million modems were shipped in 1995. "Everybody and their mother is getting on the Internet," she says-and they all need modems.

Still, CEO Cowell sees an ongoing need to expand U.S. Robotics' product lines and strategy. Where the company hasn't successfully developed products, it's been willing to buy technology from others. "We look for reinforcing pieces," says Cowell. The result: seven major acquisitions over the past six years.

For instance, Cowell wanted the company to have a stronger presence in the mobile access market. That led to U.S. Robotics' biggest acquisition: last fall's $21 3 million purchase of Megahertz Holding Corp. in Murray, Utah, the leading maker of PC Card modems for portable computers.

U.S. Robotics purchased Palm Computer in Los Altos, Calif., last September in a $44 million stock deal. Palm develops operating systems and applications software for handheld computing and communications devices. U.S. Robotics also is focusing on the growing ISDN market. Last August, it purchased ISDN Systems Corp. in Vienna, Va., for about $40 million. U.S. Robotics introduced its first ISDN terminal adapter (bundled with a standard analog modem) last year, followed in January by an ISDN access system for its Total Control hubs.

Cowell says he's unconcerned over one potential problem for U.S. Robotics: the possible migration from modem technology to communications microchips embedded in PCs. "We design elegant algorithms for complex problems," says Cowell. "We don't care if that goes into our box or somebody else's."

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