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ParkerVision’s Role in the WLAN Market

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ParkerVision’s Role in the WLAN Market

 

ParkerVision is a low-volume, high-cost producer in a WLAN market dominated by high-volume, low-cost producers like Linksys, Netgear, D-Link, and Belkin. With a fifteen-year history of repeated poor product execution, including failure in both its video business and its wireless networking business, ParkerVision will not survive in a market already subject to intense competition, short sales cycles, and rapidly declining prices. Even if ParkerVision were profitable, which it never has been, its survival would depend on its ability to maintain margins through continually (1) negotiating with component suppliers and contract manufacturers to reduce unit costs, (2) introducing new products with technology on par with its competitors, and (3) broadening its geographical and channel distribution, all of which ParkerVision has never achieved in the WLAN market.

 

Overview of: WLAN Products WLAN products are grouped into three major segments: (1) Ethernet Networking, (2) Broadband, and (3) Wireless Networking. Ethernet networking products include (1) switches – multiple port devices linking personal computers and peripherals, (2) network interface cards (NIC), adapters, and bridges – devices connecting personal computers and other equipment to networks, and (3) peripheral servers such as print servers – devices managing printing on networks. Broadband products include (1) routers – devices connecting two networks together, (2) gateways – routers with integrated modems for Internet access, and (3) products including integrated wireless access points such as wireless gateways. Wireless networking products include (1) access points – devices providing wireless links between wired and wireless network devices, and (2) wireless network interface cards, adapters, and bridges – devices wirelessly connecting personal computers and other equipment to networks. (WR Hambrecht)

 

Large Market Opportunity: Jupiter Research predicts the US home broadband user base will be 108M people by 2009, double the 55M it counted in 2004. Demand for consumer and small business wireless networking products depends on the growth of DSL lines and cable subscriptions, since they are the basis of broadband networking. Without a DSL or cable connection, users lack sufficient reason to purchase broadband networking equipment, but users in the US and globally are rapidly upgrading to broadband connections, which in turn drives sales for broadband networking products. The US has approximately 8 million small and medium-sized businesses and 108 million homes/home-offices. At the end of 3Q 2004, DSL subscribers in the US was 12.6M, less than the 12.7M in Japan and 13.7M in China, for a global total of 85.3M DSL subscribers, according to DSL Forum. Comparatively, Jupiter Research reported 42M worldwide cable modem subscribers at the end of 2004.

 

Substantial Competitive Threats: The market for Ethernet LAN, wireless LAN, and broadband routers is highly competitive. We do not believe ParkerVision has any advantage whatsoever against much larger competitors like Netgear or Linksys, where both have significant market share and sell substantially more product variety at much higher volumes. ParkerVision has less than 0.1% market share, and even if they introduced a competitive product, its competition is much better positioned to reduce prices to maintain their dominant share of the market. 

 

 

More Competition from Asian Vendors: Asian vendors are expected to aggressively enter the US WLAN market in 2005. Vendors such as Correga and Melco/Buffalo Technology in Japan and TP-Link in China offer products of reasonable quality at a price point that is significantly lower than the market average.

 

Margin Pressure and Falling Prices Prices: for wireless networking equipment drop substantially every year as vendors continue to cut prices and introduce new products to attract more customers. Linksys, Netgear, and D-Link continue to develop new, functional, easy-to-use devices that are priced below $100. Netgear, for example, introduced a number of products that won best in show at the Consumer Electronic Show in January 2005, including a travel router and a dual-mode 802.11 a/g router. Dell’Oro predicts that prices for home and small business access points, which link wired and wireless LANs, will decrease steadily, with ASPs falling to $64 in 2004 from $84 in 2003 and $176 in 2002. Note that prices dropped more than 50% in 2002. As a result, IRG Research expects margins over the next three years will settle in the 20-25% range, similar to those realized by leading cable/DSL modem manufacturers as their markets matured.

 

Increasing Competition from Substitutes: Intel Centrino packages together a CPU, chip set, and wireless hardware offering 802.11b connectivity. With such a package, many computer laptop users will not need to purchase a wireless Ethernet card, which poses a threat as a substitute for ParkerVision’s SignalMax products. Consumers purchasing a laptop with Centrino technology will no longer need to purchase any ParkerVision wireless Ethernet cards. Companies like 2Wire and Netopia are also integrating Wi-Fi capability into their DSL routers, which decreases the demand for stand-alone products that provide these functionalities. ParkerVision does not currently have relationships with consumer electronics manufacturers, and signing them up would require a major shift in its current operating model. (IRG Research, 2004)

 

WLAN Market is Becoming Commoditized: Standards-based consumer electronics products typically become commoditized over time. To expand or even maintain its gross margins, ParkerVison would have to succeed where most makers of consumer/small business-oriented networking products have failed. Wireless networking equipment providers are facing product commoditization similar to what modem manufacturers experienced in the mid 1990s. For example, Hayes, the pioneer in analog modems, filed for bankruptcy protection in 1999. 3Com spun off its analog modem business into U.S. Robotics in a move that created another struggling modem manufacturer, and Com21 recently filed for bankruptcy protection after selling off some of its assets to ARRIS Group. (IRG Research, 2004)

 

ParkerVision has No Relationships with Carriers: ParkerVision has no relationships with any MSOs, cable operators, or telecom providers, and its competitors are better positioned to win a majority share of the carrier market because they also sell a portfolio of higher-end core networking products to carriers. Cisco, for example, has a large portfolio of core carrier/enterprise networking products and firmly established relationships with many leading MSOs, cable operators, and telecom providers and can leverage these relationships to win home and small business networking contracts for its Linksys business.

 

ParkerVision has a Small Retail Distribution Network: ParkerVision offers its products primarily at CompUSA and Micro Center as well as online at Amazon, TigerDirect, and a few others, which comprises a distribution network that is much smaller than its competitors. By comparison, Netgear, for example, has over 2,800 traditional retailers in North America, including Circuit City, Costco, Fry’s Electronics, CompUSA, Staples, and Best Buy; and over 2,500 international retail locations, including PC World (UK) and MediaMarkt (Germany, Austria) in Europe and Harris (Australia) in Asia Pacific. Netgear also sells through online stores such as Buy.com and Amazon.com and has a DMR presence in direct marketing channels and catalog sales, including relationships with PC Connections and CDW domestically and Misco Global, Insight Direct, and MicroWarehouse both domestically and internationally. Netgear also has relationships with over 5000 domestic and 1500 international VARs worldwide.

 

ParkerVision has a Limited Product Offering: ParkerVision sells 3 products: (1) the SIGNALMAX USB1500 Wireless USB Adapter for $79.99, (2) the SIGNALMAX USB1500 Wireless PC LAN Adapter for $79.99, and (3) the SIGNALMAX WR1500 4-Port Wireless DSL/Cable Router for $99. For the first nine months of 2004, ParkerVision generated sales of $516,000 for its three products, for a market share of less than 0.1%. The WLAN market is so heavily dominated by Linksys, Netgear, D-Link, and Belkin that an analyst from Wachovia Securities who covers Netgear said in February 2005, “I didn't know ParkerVision competed in this market. We visit electronics stores regularly, and have never seen them on the shelves.” To draw the comparison, on the CompUSA web site, for example, ParkerVision offers 3 wireless networking products, compared to 43 from Linksys, 43 from D-Link, 35 from Netgear, and 26 from Belkin. While ParkerVision sells 1 Router and 2 Ethernet Cards on the CompUSA site, Linksys sells 8 Routers and 19 Ethernet cards, in addition to 4 Access Points (Hubs), 4 Antennas, 2 Media Players, 3 Print Servers, 2 Kits, and 1 Wireless Home Security product.

 

ParkerVision has never recorded a profit in both its video and wireless networking businesses. Its limited product offering and lack of new product releases has been detrimental to its business in a market dominated by large, innovative, low cost competitors. To survive in the WLAN market, ParkerVision needs to continually release new products to (1) keep pace with current technology, (2) maintain steady gross margins, and (3) stay ahead or at least on par with the competition. With a market share of less than 0.1% in the WLAN market, ParkerVision’s offering of three high cost, average quality products is hardly a winning strategy.

 

The major criteria determining which technology home networking operators provide are: (1) throughput, (2) range/mobility, (3) power consumption, (4) application suitability (media vs. data), (5) cost, and (6) interference.

 

Ethernet Networking Products: NETGEAR is expanding its network management capabilities for Ethernet networking products. In addition, the company is offering ports with higher port counts and densities for Fast Ethernet and Gigabit products. Broadband Products – NETGEAR intends to enhance its router potential with virtual private network and firewall capabilities and permit voice calls over the Internet. These technologies will be offered in copper cabling and wireless connectivity modes such as 802.11b, dual-mode 802.11a/b, and tri-mode 802.11a/b/g. Wireless Networking Products – NETGEAR plans to add 802.11g, 802.11a/b, and 802.11a/b/g capabilities for access points, and network interface cards to deliver enhanced speeds, security, and backwards compatibility.

 

Ethernet Networking Products: NETGEAR intends to expand product lines to low cost Gigabit Ethernet Network interface cards, in-home power lines to form a network, and engineering redesigns to allow for price and cost reductions in the switch line. Broadband Products – Expand line of wired and wireless gateways with integrated asynchronous cable and DSL modem technologies, with easy to setup and use capabilities. These technologies will likely be offered in traditional cabling and 802.11b and 802.11g connectivity modes. Wireless Networking Products – NETGEAR’s development efforts include routers and gateways, 802.11g access points, and network interface cards and bridges with increased speed, more security, and expanded range.

 

Broad product line: NETGEAR’s products suit a variety of networking environments, including Ethernet cable, wireless connections, and emerging in-home electrical wiring communication. NETGEAR also provides broadband products for many connection types such as cable and DSL modems. The company also provides wireless LAN and security functionality to serve the increasing security and mobility trend demands of users. 2. Affordable, dependable, and simple-to-use – NETGEAR has a high degree of customer satisfaction and a low rate of product defects. NETGEAR products are considered easy to install, use, and require minimal need for hardware or software configuration. 3. History of product innovations – NETGEAR partners with several leading software and semiconductor companies to apply emerging technologies to new products. In addition, the company’s internal research and development team, experience, and global market presence enables NETGEAR to continually recognize trends and changing demands in the small business and home networking markets. The combination of these traits gives NETGEAR a time-to-market advantage. NETGEAR was the first to introduce Cable/DSL routers, unmanaged Gigabit Ethernet switches, wireless routers and gateways with security capabilities, and 802.11a/b/g network interface cards. NETGEAR introduced 40 new products in 2002.

 

High volume, declining gross margin, products and strong competiton, combined with the progression of technology has created a rapid reduction in the average selling prices of wireless networking products. New product introductions from competitors have contributed to rapid price erosion cycles and consistently declining margins.

 

Unprofitable Business Model: Over the last several Years NETGEAR has consistently delivered weak very low revenue and operating income. We expect the same to continue over the next several quarters.

 

Business Model: Built For Efficiency And Low Cost
NETGEAR’s product development and manufacturing model relies heavily on Asian-based original design manufacturers (ODMs). This model essentially allows its U.S.-based engineering team to focus on the highest value-added engineering tasks like product development and prototyping. Downstream engineering tasks like de-bugging, integration, and test are handled by ODMs, generally at much lower cost. Manufacturing itself is entirely outsourced, mostly to Taiwanese companies with large operations in mainland China. One significant partner is Foxcom. Tech support is largely outsourced around a core in-house staff. The company utilizes call centers in three countries, with local language support for many countries. Evidence of the efficiency of NETGEAR’s model is found in the relatively small staff in its major internal departments. R&D has 30 engineers. Sales and marketing has less than 100 employees in total. Core inhouse tech support has eight employees, with the first- and second-level tech support outsourced around the world. This highly efficient model has resulted in revenue per employee of $1.5 million, which is the highest in the industry by a factor of two.

 

Wireless Local Area Networks (WLAN) are generally known today as Wi-Fi networks. These networks use the IEEE 802.11x wireless standard. Initial deployments, based on the 802.11b standard were available only over distances of up to 100 meters with data speeds of approximately 11Mbps. Following on the success of 802.11b, the 802.11a standard was developed and delivered data speeds of up to 54 Mbps at distances of up to 50 meters. To combine the best of the “b” and “a” standards, 802.11g was created to deliver the 54Mbps data speed of “a” and the 100 meter distances of “b.”