While the total number of cable installations still exceeds the total number of DSL installations, DSL is growing at a much faster rate. According to predictions from independent analysts, the ratio between cable and DSL installations will invert within six to twelve months.

Cable modems have serious technical drawbacks. Since cable modem users share cable line with other homes in the neighborhood, available bandwidth shrinks during peak hours. Privacy is also compromised. Neighbors can easily hack into your computer over shared cable lines. It is often awkward to extend the physical connection between the cable box (which generally is wired into the living room) and the personal computer (which usually sits in the study).

DSL offers clear advantages over cable. The speed is always the same, since you don't share bandwidth. There's no privacy risk (unless the Justice Department is issued a warrant to tap your phone lines). It's easy to have an additional phone jack installed next to your computer. And you can't argue with the speeds: 1.5 MB downstream and 800k MB upstream (150x faster than ISDN!). DSL has another advantage over cable: more homes have telephone lines than cable TV.

I see DSL advertisements everywhere in major cities. I know people with DSL modems in their offices (in fact, we may replace the T1 line in our office with DSL). Most of the existing DSL installations are provided by CLECs (Competitive Local Exchange Carrier). CLECS are small telecom carriers that offer premium, value-added communication services to high-end customers. RBOCs (Regional Bell Operating Companies), the telecom giants, have dragged their feet in rolling out DSL service.

Bell Atlantic and other RBOCs have had logistical problems in delivering DSL service. DSL modems had to be delivered to the customer, DSL service had to be installed by a technician, and the central office had to connect the copper line to a DSLAM connection. But ORCT's new splitterless DSLAM technology cuts the Byzantine RBOC customer service department out of the loop: you can get DSL service without a technician! The RBOC can wire your line into a DSLAM connection in the central office and send you a simple plug that connects into your phone jack. You just need to buy a DSL modem from any retail vendor. Within twelve to twenty four months, DSL modems (or dual modems, with both 56K and DSL capability) will be pre-installed in standard personal computers.

The RBOCs have deep pockets and massive market muscle. Once DSL modems are pre-installed in personal computers and splitterless DSLAM is widely deployed, the RBOCs will become the dominant providers of DSL. Prices will drop to attractive levels.

In the existing paradigm, data is a value-added service for the telecom companies. Voice is the cash cow. However, this paradigm is obsolete. Internet telephony will replace traditional telephony as bandwidth spread. Telecoms will need to make money on data, since voice traffic will inevitably convert into data traffic. Voice will become the value-added service; data will become the cash cow. In the new paradigm, RBOCs will have to offer DSL access as their primary service.

I believe that the bandwidth market will be split between DSL (60%), cable (30%), and satellite (10%). Regardless of the exact market share split, there's plenty of room for DSL. The driver of DSL growth will be the rollout of splitterless DSLAM over the next twelve months and the paradigm shift over the next five years.

ORCT controls the #2 position in the global DSL market. While monsters like Cisco (CSCO-NASDAQ) and Lucent (LU-NYSE) are threatening to enter the market, they have failed to bring any real DSL products onto the market. The #1 position is controlled by Alcatel (ALA-NYSE). Given ORCT's relationship with Fujitsu, Deutsche Telekom, and other leading telecom giants, I believe ORCT's market position is rock solid. Alcatel recently announced what I consider to be a nuisance lawsuit against ORCT; however, in my view, Alcatel will have to tender for ORCT to get its business.

Since I initiated coverage, ELRNF has risen 150%--and has paid out substantial dividends along the way. ELRNF realized value in major subsidiaries including EMITF, ELBTF, ESLTF, and ZRAN. ELRNF also built up its own internal IT business, Elron Software. Despite the strength in the stock, ELRNF is still trading at a large discount to Net Asset Value (NAV).

Within two years, I expect that operating profits from Elron Software will support ELRNF's entire stock price. As the market shifts from valuing ELRNF in terms of assets to p/e multiples, a new class of investors will enter the stock.

If my projections for ELBTF are accurate, then ELRNF shareholders will benefit from the re-rating of this subsidiary. ELRNF owns 43% of ELBTF. If ELBTF rallies to US$30, ELRNF's stake will be worth US$276 million, or US$13.15 per share. The flotation of Netvision, one of Israel's leading ISPs, will also benefit ELRNF's NAV. Netvision is potentially worth billions as a public company.

Technically, ELRNF has been consolidating in the lower US$20s. This sets the stage for a sustained move into the US$30 range. I continue to rate ELRNF as a Strong Buy. My one-year target is US$30.

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