Computers & Technology Networking Sales Caught In A Price
War Cross-Fire
Investor's Business Daily
Thu, Dec 11 1997
Price wars, mergers and modem confusion added up to a surprisingly rocky third
quarter for networking companies.
Instead of the expected hot growth, third-quarter revenue for some networking
equipment sold largely to Internet service providers shrank.
Santa Clara, Calif.-based 3Com Corp. on Dec. 2 said that revenue for its second
fiscal quarter ended Nov. 30 will be about $1.2 billion, or $400 million less than
analysts' forecast. Where analysts were expecting per-share profit of about 44
cents, they're now looking at about 4 cents, says First Call Corp. Results are
expected Dec. 18.
Its efforts to clear out old inventory, especially modems, mostly caused the financial
misstep, says 3Com.
Analysts say part of the problem for network equipment makers like 3Com that sell
the plumbing behind the Internet is that most slashed prices this summer. Many also
bore the costs of mergers. At the same time, buyers were confused by competing
modem technologies.
The result?
"After seven years of steady growth, we're finally seeing some wear and tear in the
market," said Brad Baldwin, an analyst at International Data Corp., a Framingham,
Mass.-based market researcher.
Perhaps most wearing were products called access concentrators. The industry
expected these would be the wide-area-networking star this year. Working like an
on-ramp to the Web, these products contain ports that house many modems in one
box.
ISPs are hungry for access concentrators so they can connect more users. Yet,
revenue from the product plummeted because of price wars.
Sales of access concentrators fell to $453 million in the third quarter from $466
million in the second quarter, says The Dell'Oro Group, a Portola Valley,
Calif.-based market researcher. The drop marked the first quarterly decline ever.
Largely because of access concentrators, the wide-area-network market will
continue to be sluggish until the first quarter of '98, IDC's Baldwin says.
Alameda, Calif.-based Ascend Communications Inc. once dominated the WAN
space. But this year, Ascend faced new products from San Jose, Calif.-based
Cisco Systems Inc. and Santa Clara, Calif.-based 3Com. Santa Clara's Bay
Networks Inc. and Cabletron Systems Inc. of Rochester, N.H., also stepped up
efforts to court ISP dollars.
Also, in the past six months mergers distracted networking gear makers. 3Com
bought modem maker U.S. Robotics Inc. for $6.6 billion. Ascend snapped up WAN
specialist Cascade Communications Corp. for almost $3 billion. And Murray Hill,
N.J.-based Lucent Technologies Inc. is buying privately held Livingston Enterprises
Inc. of Pleasanton, Calif., to beef up its remote-access products.
Merger mania helped spur equipment makers to slash prices even more than usual
to land accounts.
Access-concentrator prices plunged to $250 a connection this year from $530 in
'96, says Denise Barton, a Dell'Oro Group analyst. That was steeper than analysts
expected.
Market leader Ascend set the tone. Earlier this year, it offered customers a free
access concentrator if they bought two. The promotion has ended.
"We expected prices to come down, but not this much," Baldwin said. "You can't be
giving away the products.
"The vendor community has taken leave of its senses in pricing."
Ascend's cuts won't help it hold off the largest maker of networking gear. Cisco
will gain WAN market share this year at Ascend's expense, says Baldwin. 3Com
might gain, while Bay will stay even. Burlington, Mass.-based Shiva Corp. will lose
share, he says.
The market also is in the unusual position of being slowed by new modem
technology. Modems running at 56 kilobits per second -almost twice as fast as the
existing top-line modems - began shipping this year. But they confused customers
because there are two competing types. They're called K56flex and X2.
Rockwell Semiconductor Systems Inc. - a unit of Seal Beach, Calif.-based
Rockwell International Inc. Lucent Technologies and Ascend are pushing K56flex.
U.S. Robotics and 3Com carry the X2 banner. They earlier this year promised
customers a free upgrade to 56K. Ascend customers wanted the same deal.
For Ascend, that upgrade demanded more, including hardware as well as new
software. 3Com only had to give away new software.
Ascend upgraded 270,000 modems in the second quarter and 500,000 in the third,
Dell'Oro's Barton says.
The upgrades also cost Ascend "focus and momentum," IDC's Baldwin said.
Still, ISPs are on such a buying spree that momentum might be recovered. Ascend
plans to ship a new product called GX550 in '98's first quarter. It will boost
bandwidth, says Bob Machlin, Ascend's marketing vice president.
Remote-access users range from satellite offices to telecommuters. "We're almost
at a stage where it's completely flipped," and now only 20% of the traffic comes
from local-area networks and 80% from remote users, Machlin said.
The bandwidth pipe also is expanding. Companies that now use T3 lines for fast
access are moving to OC12. It's faster than T3.
"It means ISPs are going through another major build-out," said Cliff Meltzer,
general manager of Cisco's ISP division. "When one ISP starts to build out, the rest
follow."
A hot ticket for ISPs in '98 will be "very big routers," says John Coons, an analyst at
San Jose, Calif.'s Dataquest Inc., a market researcher. Smaller routers, which
direct Internet traffic, will feed into their bigger siblings.
With new products and continued ISP spending, the market should rebound, IDC's
Baldwin says. A 56K modem standard should be chosen in '98. Mergers should
slow.
The big question is pricing. "If vendors continue the price wars, then all bets are
off," Baldwin said.
(Copyright Investor's Business Daily, Inc. 1997.
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