In the rush to bring fast Internet access to the masses, the Baby Bells will need big help if they are ever going to beat back the cable companies.
Their best weapon might just be
, a 77-person company in Bedford, Mass., that designs and licenses software that permits high-speed access over copper telephone lines.
When used in modems or at a phone company's central office, Aware's technology enables copper-wire networks to deliver data at rates that are more than 25 times faster than 56-kilobit modems. The key is that you can still use your boring old phone lines without disrupting phone service on the wire. Aware's technology, which is simpler and faster than earlier incarnations of digital subscriber line technology, adheres to a standard called G.Lite, approved initially by the
International Telecommunications Union
in October. The ITU is expected to ratify the standard in June.
Among the well-heeled partners to which Aware licenses its software is
, which uses the software in chipsets that are built into
new Presario 5100c Series Internet PCs and 5600 Series PCs for home use. Compaq began shipping those computers in November.
The challenge for companies that derive their revenue from royalties -- and there aren't many in the tech sector -- is that they sometimes have trouble collecting. Consider Mountain View, Calif.-based
, whose memory-chip technology sparked a skirmish between
, putting Rambus' royalty stream in doubt. There are still rumblings of dissent among memory-chip makers, even though Intel has given its blessing to Rambus.
License companies are also several steps removed from their end customers, and their growth depends on how quickly their customers expand sales efforts.
"It means that your operating model is volatile," says Philip Coburn, senior vice president with New York money manager
Lynch & Mayer
. He declined to state his firm's holdings, but in the most recent quarter,
doesn't list Lynch & Mayer as a holder of Aware. The good news for Aware is that it has minimal sales costs, and thus license revenue goes straight to the bottom line.
Aware has spread its technology among numerous customers, including
. It typically collects payments 45 days after the close of the customer's quarter. "We know what our royalty revenue will be long before
our own quarter ends," says CFO Richard Moberg. Analysts estimate that royalties will swell from one-quarter of revenue this year to one-half in 2000. The other revenue stream is generated by tailoring its software for individual customers.
Aware turned a profit of $575,000, or 3 cents a share, on revenue of $4 million in the fourth quarter, reversing a year-earlier loss of $1.8 million on revenue of $1.8 million. Analyst Charles Pluckhahn with
, an investment bank based in Little Rock, Ark., predicts gross margins will jump to 84% this year from 55% last quarter, and operating margins will increase to 22% from 6%. Stephens has no underwriting relationship with Aware.
Aware might just achieve the success that has so far eluded
, an older DSL supplier whose stock is down 75% since early 1997. PairGain sells to Baby Bells but has grappled with severe price competition from rivals like
. PairGain sales were flat last year, and profits fell 9%, excluding one-time items. The company is also developing G.Lite products, but is lagging behind Aware and will not ship until next month.
The Parisian telecom supplier
does have a serious hold on phone companies' central offices, according to research firm
Ryan Hankin Kent
. But Aware has more of an advantage with consumer modems, says analyst Claude Romans.
Of course, the Baby Bells have broken many Internet promises in the past. In August 1997, for example,
U S West
said it hoped to sign 100,000 ADSL subscribers in 1998. It changed its technology plans midstream and finished 1998 with only 25,000 subscribers.
One reason is that the Bells are trying to avoid cannibalizing their lucrative sales of T1 data lines to businesses. Aware's Moberg explains that a T1 line can carry 1.5 megabits of data downstream and cost anywhere from $800 to $2,500 per month. Aware's G.Lite will match that performance but will cost only $50 to $100 per month.
This time it's different, the thinking goes, because Aware's G.Lite makes life simpler for the Bells. Rather than visiting each home or business, a phone technician can simply install the technology in its central offices. Another spur is new competition from cable modems, promoted in particular by
and its recently acquired
. About 400,000 customers now use cable modems, according to estimates from
is testing G.Lite in Manhattan now and hopes to have ADSL available for 10 million customers by year-end. It hasn't selected a vendor yet.
have paired up to provide ADSL, including G.Lite.
At least with Aware's technology, the Bells might have a chance against cable companies.