How to play high-speed Net access

Ted Rogers’ acquisition of Groupe Vidéotron Ltée for $6-billion or so makes it clear that the race for ownership of the information pipeline is heating up. Mr. Rogers and other cable companies see the coaxial cable snaking into most homes as the premier route for high-speed Internet access, phone service and digital TV. Telephone companies like Bell Canada, meanwhile, see advanced telecom technologies such as digital subscriber line (DSL) as the Holy Grail.

In some cases south of the border, companies are hedging their bets by buying into both sides of the issue: for example, last year telecom behemoth AT&T bought Tele-Communications Inc., one of the country’s biggest cable providers. Ma Bell also owns a stake in Excite@Home, which operates a high-speed cable service — a service that both Rogers Communications and Shaw Communications of Calgary license and offer over their own networks.

In the early days of high-speed Internet access, it was assumed that cable would dominate the market. Phone companies didn’t have a great track record with new technologies, being more focused on selling high-margin business lines. In the past year or so, however, companies in Canada and the United States have stepped up the pace of their high-speed offerings.

Although both sides like to get into heated arguments about whose service is a) faster and b) more reliable, most analysts agree that DSL (Digital Subscriber Line) and cable access will probably continue to co-exist. Some feel DSL will likely be adopted faster by businesses because they already have the phone lines, while cable has been accepted more quickly by consumers because most — especially in Canada — have cable at home.

When it comes to investing in this market, you’re probably better off staying away from the actual cable providers such as Rogers and Shaw and going after the so-called “plumbers” — the companies that make the cable modems and DSL routers and other equipment that Rogers and Shaw and other companies use. This market is rapidly becoming neither cable- nor telecom-centric but rather fusing into a single networking equipment market.

Many of the existing telecom equipment companies are involved, such as Lucent Technologies, Motorola and Nortel Networks. There are also younger players such as Juniper Networks — whose stock is up 460 per cent since last July — Sycamore NetworksEfficient Networks and Copper Mountain. The latter two specialize in DSL equipment, while the others are trying to become suppliers of choice for either fibre-optic or coaxial cable, or both.

When it comes to cable, Motorola and Nortel are two of the leading makers of older-style cable modems, along with General Instrument (now part of Motorola) and 3Com Corp. But they are not as big a factor when it comes to the newer modems, which can be used with any cable service, that are seen as the future of the industry. In that end of the market, the stars include two smaller and lesser-known companies: Com21 Inc. and Terayon Communication Systems.

Terayon has done deals with Rogers and Shaw, and as an incentive has given both an equity stake. Network equipment giant Cisco Systems also owns a stake. The explosive increase in Terayon’s stock price since it went public in 1998 — up more than 850 per cent to $140 (U.S.) — has helped boost Shaw’s results, because it sold shares last fall for a healthy profit.

Another fast-growing network equipment maker is Redback Networks,which went public last summer at $30 and has climbed more than 600 per cent. Redback recently bought a networking technology company called Siara Systems for $4.3-billion, even though Siara had no revenue whatsoever. Redback is building systems that can handle either cable or DSL, and speed up Internet traffic by sorting the bits of data and routing them more effectively.

Next Level Communications,a General Instrument spinoff, is selling technology in partnership with USWest that it says uses a variation of DSL to provide enough bandwidth for full-motion video broadcasts, as well as high-speed Internet access and telephone use, on a single copper phone line — although a user has to be no more than 3,000 feet from a phone company switch. Its shares have climbed to about $120 from about $50 last fall.

A California company called Jetstream Communications,meanwhile — which is expected to go public in the near future — says its equipment will allow users to have up to 16 virtual phone lines as well as high-speed Internet access using a single copper phone line. Its main competitors are a company called Accelerated Networks,also said to be planning an initial public offering (IPO) soon, and another privately-held equipment supplier called Coppercom.

While the big U.S. phone companies focus on selling DSL in large centres, there are a whole series of smaller companies that are focused on smaller areas. These companies — who install their own DSL equipment in the central switches belonging to the phone company and then lease phone lines — include Covad Communications (whose stock has climbed to $80 from less than $30 last year) and Northpoint Communications,as well as privately-held New Edge Networks,which is expected to do an IPO soon.

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