Polarization in the xDSL Market

The development of xDSL service around the world has tended to become polarized. In the case of the markets where xDSL service rollout began at a relatively early date, such as North America, Europe ?mainly Germany, France, the UK, Italy, and Spain ?Japan, Korea, and Taiwan are now approaching saturation. As a result, broadband service providers in these countries are now aggressively promoting valued-added services and new types of xDSL technology with the aim of reducing subscriber churn and drawing in new subscribers that are attracted by practicality. Since 2002 operators have been rolling out managed home networking service, VoIP, video-over-DSL, VDSL, and ADSL2+ service, while at the same time demand for CPE has shifted away from modems towards wired and wireless ADSL routers. This shift beyond basic modems has transferred the main focus of competition in the xDSL market to on technology and functionality.

Different operators have different service rollout strategies, so demand for equipment varies too. Supplying customized equipment to particular operators in regional markets is one way for manufacturers to boost profit margins; differentiation also helps existing makers to create higher entry barriers. In the European market, which is extremely heterogeneous, Taiwanese branded makers have thrived despite fierce competition from the leading international vendors.

By contrast, in the later-developing xDSL markets such as China, Eastern Europe, and Latin America, demand is still largely confined to basic broadband access service. Equipment for these markets are highly standardized, and the importance of the operator bid market ensures that price is the key factor determining whether a manufacturer is able to secure orders. When developing this kind of market, improving production efficiency and strengthening one's bargaining power with respect to component purchasing are the most urgent tasks. A good example here is the merger between Ambit and Honhai in 2003, which will create a superior global logistics capability and greater economies of scale, while the adoption of the EMS (Electronic Manufacturing Service) model will make it easier to secure business opportunities in the bid market through collaboration with leading international equipment vendors.

Value-added Cable Modem Services Inspire Hope for Retail Channel market

With the upgrading of cable TV networks to two-way cable and the enhancement of interoperability and service efficiency, the global cable modem access market is gradually moving into a new era in which the main emphasis is on value-added services. In 2003, MSOs began to implement small-scale pilot programs for home networking, tiered bandwidth services, VOD, PVR and other value-added services, collaborating with retail channel players to provide subscribers with a wider range of products to choose from. In 2004, as VoIP technology and products become more mature, and as consumer awareness of broadband value-added services grows, MSOs and telecommunications operators can be expected to embark on the full-scale commercialization of these services. This trend will lead to a shift in demand for cable modem equipment towards high-end, more highly integrated products such as residential gateway products that integrate IP routing, WLAN, VoIP and security functions.

From the point of view of the equipment makers, although the cable modem value-added service market is expected to take off in 2004 ?2005, the distribution channels are still controlled by the MSOs, who tend to emphasize practicality and risk-avoidance in their purchasing decisions. Until demand for value-added services really starts to take off, there is unlikely to be any rapid shift towards high-end products. The MSOs will therefore be relying on the retail channel players to stimulate the development of the value-added service market.

Looking at the changes in Taiwanese maker business types, in 2003, because the retail channel player market had not grown as quickly as had originally been anticipated, with demand still largely confined to basic modems, share of shipments to channel players declined rapidly, while the share held by ODM/OEM for equipment vendors and MSOs shot up. However, given the high level of standardization in the cable modem market and the enormous bargaining power that the MSOs possess, Taiwanese makers have often found themselves in a situation where shipment volume is rising but shipment value is falling. The growth of value-added services will provide Taiwanese makers with an opportunity to develop the channel player market, focusing particularly on companies such as Linksys, Netopia, D-Link, and 2Wire, whose main customers are operators.

Appendix

Research Scope

For the purposes of this report, WAN refers to a computer network device that spans a large geographic area, such as a state, province or country. A WAN may be composed entirely of proprietary structures, however, only standardized, Internet related computer network devices are included in this report. Furthermore, this analysis focuses mainly on CPE.

While a handful of Taiwanese companies have begun developing central office equipment such as DSLAM and CMTS (Cable Modem Terminal System), most Taiwanese manufacturers have not moved into central office WAN equipment. This is partly due to the higher level of technology required for central office equipment, creating an entry barrier for Taiwanese makers. Taiwanese manufacturers additionally suffer from low brand visibility and lack of long-term experience in collaborating with operators abroad and MSOs. At present, central office equipments are not the main focus of Taiwanese WAN industry development because they account for only a very small percentage of the industry's total shipment value. They have therefore been excluded from this report.

This report covers all Taiwanese WAN manufacturers whose products are sold in Taiwan or overseas.

Definitions

Business Types

OEM

The OEM business model entails carrying out product manufacturing or assembly according to specifications supplied by the customer. The OEM business model emphasizes production efficiency; thus, in order to lower costs, customers outsource manufacturing to OEM providers. This cooperation forms a division of labor among design, manufacturing, and sales.

OEM production for WAN includes shipments in both PCB (Printed Circuit Board) form and bundled with desktop and notebook PCs. Manufacturing undertaken for leading international vendors is also included.

ODM

The ODM business model entails undertaking product design and manufacturing, but not direct retail sales or brand promotion. ODM providers either collaborate with customers on product specifications or independently design products according to customer specifications; the ODM provider then receives manufacturing orders upon customer approval. The ODM model links the sales capabilities of the ODM customer and the design and manufacturing capabilities of the ODM provider, developing a cooperative division of labor throughout the product's value chain.

Retail Channel

Business from retail channels includes orders from brand-name retail channel players, such as Linksys or Netgear, with whom Taiwanese makers cooperate on design. Business from retail channels also includes private label shipments to end-market retailers.

Products

By transmission media, WAN can be separated into three major product categories: analog modem, xDSL, and cable modem. Other WAN product categories, such as ISDN (Integrated Service Digital Network), have been omitted, either because shipment value is very low or because these products are in decline.

Analog Modem

An analog modem is a device used to connect two digital devices through a telephone network. The maximum rate of data transfer is 56Kbps.

xDSL

xDSL is a collection of technologies that provide high bandwidth over existing copper phone lines. xDSL is available in a number of variations, such as ADSL, SDSL (Symmetric Digital Subscriber Line), HDSL (High Bit-rate Digital Subscriber Line), G.shdsl, and VDSL. At present, ADSL is the mainstream xDSL technology, which supports both voice and data services. ADSL provides server approximately 50 times fast than analog or ISDN dial up access.

Cable Modem

Cable modems are devices that operate over CATV RG-58 coaxial cables. By hooking up to PC and CATV systems, cable modems operate with a shared bandwidth, ring-type network architecture. TCable modem performance can vary due to the utilization of the shared cable line in the surrounding neighborhood; however, 500 Kbps is the typical data rate. 

CMTS

A CMTS (Cable Modem Termination System) is a cable modem head end device that communicates through television channels with cable modems located in subscriber homes, creating a virtual LAN (Local Area Network) connection. The modem transfers IP packets from the Internet into MPEG frames and transmits them to subscriber cable modems via an RF (Radio Frequency) signal. The reverse process is then performed for signals issued by the subscriber modem.

DSLAM

A DSLAM (DSL Access Multiplexer) is a central office device for ADSL service that intermixes voice traffic and DSL traffic onto a customer's DSL line. The device also separates incoming phone and data signals and directs them onto the appropriate carrier's network.

IAD

An IAD is a xDSL modem integrated with voice function. Two types of technology are applied.  One is called channellized VoDSL, which utilizes voice over ATM technology.  The other is VoIP based VoDSL, which utilizes voice over IP technology.

MTA

An MTA (Multimedia Terminal Adapter) is a cable modem integrated with voice function.  This device follows CableLabs' PacketCable standard and utilizes VoIP technology.

Shipment Destinations

''Asia Pacific'' does not include Japan or China, but includes Australia and New Zealand. Russia is included in ''Europe.''

Glossary of Terms