As dial-up era ends, firm looks to China
Once-mighty Zoom now lacks customers
Zoom Technologies Inc. has its dial-up, DSL, and cable modems made in China. Now the Boston company is hoping to begin selling them there, because it's having a hard time selling products anywhere else.
"If you want to get into China, somehow you have to have well-connected people in country," said Zoom's founder, president, and chief executive, Frank Manning. That's why Manning is in talks with an unnamed Chinese investment banker. The negotiations could lead to Zoom's outright acquisition by a Chinese firm or an alliance with a company that has access to the country's electronics retailers.
A decade ago, Zoom sold a lot right here. "We used to be a $100 million company," Manning said.
Last year, Zoom had $18.5 million in revenue. But the company posted a loss of $3.5 million.
Indeed, since the end of 2003, Zoom has had just one profitable quarter. First-quarter 2008 sales were down 25 percent from a year earlier, and Zoom's cash balance has declined to $2.9 million.
It's a far cry from the company's glory days of the late 1990s, when most people used dial-up modems to get onto the Internet. Zoom was a leading maker of modems sold in retail electronics stores. At its peak, in 1996, Zoom earned $2.48 million on $100 million in sales.
But dial-up modem margins dwindled as they became standard features on nearly all computers. Worse still for Zoom was the rise of broadband Internet service, which has shriveled the US dial-up modem market.
Gauri Pavate, an analyst at Gartner Inc. in San Jose, Calif., said only 25 percent of Internet connections in North America are made with dial-up modems, and that will fall to 3 percent by 2012. The market for dial-up modems is so diminished that Gartner no longer keeps track of it.
But they do keep tabs on DSL and cable modems, which millions use for broadband connections. Worldwide, DSL modem sales grew 18 percent last year; cable modem sales grew 8.6 percent.
Manning recognized the threat years ago. Zoom makes a variety of cable and DSL modems. They're sold at major retailers like Best Buy and Staples in the United States and Tesco in Great Britain. The trouble is that few DSL or cable subscribers buy their own hardware. "Our biggest problem, honestly, is that most broadband shipments don't come at retail," Manning said. "They come from the service providers."
Broadband providers like Verizon Communications Inc. and Comcast Corp. buy modems in bulk from a handful of favored vendors, then distribute the hardware to consumers. Manning would love to become a favored modem supplier, but said that Zoom can't get a foot in the door. "We honestly haven't even tried lately," he said.
Pavate said that Zoom is in no position to beat major electronics firms like Motorola Inc., Thomson SA, or Siemens AG. "Slowly the market has become concentrated," Pavate said, leaving little room for a tiny company like Zoom.
Besides, the big companies make an entire line of Internet products, from high-end gear at the heart of the network to the low-cost modems consumers use. "They're selling their equipment as part of a broader portfolio," said Pavate, and Zoom can't offer this level of integration.
Still, Manning is fighting on. He said the decline in Zoom's dial-up modem business has leveled off a bit; the company sold 50,000 in the first quarter, many to computer makers like Hewlett-Packard Co. and Chinese vendor Lenovo. Manning said a retail deal with Wal-Mart is in the works. And he has high hopes for a new product that will combine a DSL modem with a wireless router and voice-over-Internet telephone capability in a single box.
But Zoom's always had products to sell; it's the customers who've been hard to come by. Meanwhile, in China, Internet use grew 53 percent last year, yet only 16 percent of the population is online. "In China right now, we're not selling anything," Manning said. He's planning to change that, and restore his company's fortunes in the process.
Hiawatha Bray can be reached at bray@globe.com.
