When Will PC OEMs Bundle ADSL Modems? - Industry Trend or Event

Computer Technology Review, June, 2001 by Yoram Solomon

As the Internet became more widely used in the late 1980s and early 1990s, modems started to become a commodity, although one not yet bundled with new PCs (Fig 1). During this time, more internal (ISA and then PCI) modems were available through retail channels and even service providers, and the price war began. The transition from 14,400 BPS to 28,800 BPS (and then from 28,800 BPS to 33,600 BPS) introduced another variable--up gradeability. A user could upgrade a modem with a single program memory chip (EPROM) that supported the new standard (V.34 and higher), although the upgrade procedure was highly technical and sensitive.

As the Internet reached the mainstream in the mid-90s, PC manufacturers realized they could generate more revenue by bundling modems with new PCs. They began with high-end computers, equipping them with the top-of-the-line sound cards, hard drives, and modems. Eventually, even low-end, entry-level computers came equipped with dial-up modems. The manufacturing decision was driven by price; modem bundling did not occur while the prices of external modems were around $300, and the prices of internal modems around $150. It was only when the price of a modem dropped below $35 that PC manufacturers decided to bundle modems into all new computers.

With the initiation of the modem "price wars" in the late 1990s, modem and modem chipset manufacturers started looking for ways to lower the component cost. Several chipset manufacturers introduced the "controller-less" modem that had some functionality (mainly protocol-level) implemented by the host CPU, thus lowering the size and complexity of the silicon chips in the modem--and therefore lowering the cost and the price of the modem.

Some modem chipset manufacturers took this idea to the next step by completely implementing all of processing functions through the host CPU, achieving a true "software modem." Although the price of these modems and chipsets were the lowest available, PC manufacturers were still reluctant to use them due to operating system instability and CPU requirements. While a hardware modem would not consume any CPU resources, a software modem would consume around 40 MHz from the host CPU. In 1994, when the top-of-the-line processor was the Pentium 75 MHz, consuming 40 MHz really affected the PC performance; thus, the idea of bundling the software modem was rejected by PC manufacturers. With the appearance of the Pentium 166 MHz, however, this problem was solved.

In 1999, 38 percent of the dial-up modems sold were full-hardware modems, 37 percent were controller-less and only 25 percent were full-software modems. In 2004, analysts project that only 3 percent of all modems will be full-hardware, 37 percent will be controllerless, and as many as 60 percent of all modems will be full-software modems (source: Cahners In-Stat, 2000).

Projected Technology Adoption Cycle for ADSL Modems

Today, the ADSL market is in its early adopter phase. ADSL provisioning is accomplished using external ADSL modems connected to PCs through either the Ethernet or USB cable. Service providers give their customers free or subsidized-cost ADSL modems in return for long-term service contracts. Subscribers see the benefit of ADSL service as being a high data-rate, always on Internet connection, and are willing to pay for it. However, there are many problems that prevent ADSL technology from mass deployment, almost all of which may be described under the title of infrastructure.

Although consumers have demonstrated a willingness to purchase DSL service, telephony infrastructure was never designed to support frequencies higher than the 4 KHz required for vocal transmission; ADSL communications require 1.1 MHz. This means that, due to the telephone line characteristics, the maximum distance between the central office and the subscriber is 18,000 feet. In the United States, only 60 percent of the population lives within this distance restriction. Additionally, 30 percent of U.S. households are connected to the telephone network through a Digital Loop Carrier (DLC), which does not support ADSL communications.

These problems can be identified prior to the installation of an ADSL modem by submitting the telephone number of the prospective subscriber to the Local Exchange Carriers (LEC) database; however, there is yet another problem. Bridge taps and load coils affect ADSL communications dramatically. While the loop lengths are documented by the LECs, bridge taps, load coils, and other impairments are not documented. This means that, even if a prospective subscriber pre-qualifies for ADSL service, there is still a 25-30 percent probability that the user will not be able to get ADSL service due to these loop impairments.

These are the major hurdles facing manufacturers who might be interested in bundling an ADSL modem with a new PC. if a consumer buys an ADSL modem through a retail outlet and cannot get service, he or she will simply return the modem. However, when a user buys a computer bundled with an ADSL modem and cannot get service, he or she will return the computer, which is a riskier proposition for the PC manufacturer.