Putting the.com in 3Com -- Benhamou discusses recapturing the momentum
[Eric interview; Eric haters, please skip -- Kyros]
VARBUSINESS via NewsEdge Corporation : With a VAR following matched by few others, an award-winning product portfolio and one of the most experienced management teams in Silicon Valley, one would think 3Com Corp. could position itself as the definitive leader in Internet infrastructure technology. But that's not the case. In fact, 3Com has struggled to live up to its promise in network hardware, while rivals Cisco Systems Inc. and Nortel Networks have made gains. Winning in this market, apparently, takes more than merely having .com in your name.
Still, more than a few 3Com executives and employees have suggested to chairman and CEO Eric Benhamou that the easiest way for 3Com to increase the value of its stock price-which has remained in the mid-$20s this summer after slipping last December from a 52-week high of $52 per share-is to simply drop a dot between the "3" and "Com" in the company's name.
But Benhamou knows better. The 12-year 3Com veteran, who has served as CEO since 1990, understands winning on Wall Street requires a little luck, a lot of savvy about today's fickle markets and a whole lot of technology.
In an exclusive interview with VARBusiness executive editor/news T.C. Doyle and executive editor/industry Cassimir Medford, Benhamou outlined his goals for the remainder of 1999. Among other things, he wants to launch a new branding campaign, position 3Com as the undisputed leader in LAN telephony and establish 3Com as a strategic supplier of intelligence-edge products to the carrier community.
If he's successful, he'll help 3Com reclaim the momentum it lost earlier this year, before its stock lost nearly half its value in a matter of months.
Some wonder if Benhamou is up to the challenge. They forget that he's grown the company from $617 million in sales to $5.4 billion in just six years, and that 3Com ranks among the nation's 300 largest Fortune 500 companies. And it's as profitable as it has ever been.
Furthermore, Benhamou points out, 3Com is already a leader in e-business. Indeed, 50 percent of its sales are conducted via electronic means today, and soon that number will be 80 percent.
If the company's fall marketing campaign is as successful as he hopes, people will soon see 3Com in a different light.
VARBUSINESS Q&A
VARBusiness: We've been following the emerging ASP (application service provider) market quite closely and have come to the conclusion that the 3Coms of the world stand to benefit handsomely from the trend. But one question keeps popping up: Does the ASP phenomenon restrict your market to hundreds of thousands of ASPs instead of millions of small companies?
Benhamou: We don't think it constricts our market. In fact, it gives us new partnership opportunities.
We think anyone who is into e-services-to use the HP phrase, which is kind of a generic phrase-needs a very strong e-network partner. We think we are natural partners because we have a clear focus on network infrastructures.
We welcome [the ASP phenomenon], because it will likely result in tighter solutions and probably more satisfied customers overall.
VB: Does it change your revenue model if the fledgling ASPs out there who do not want to take ownership of products set the tone for the ASP industry going forward?
Benhamou: I wouldn't call it a change to the revenue model. It may change who has title to the equipment. But it does not change the nature of the equipment itself. It does not change the architecture approach, nor does it change the need for us to have strong partnerships with ASP-type companies. It is possible, and even likely, that there will be an outsourcing trend for at least some portions of services where the equipment plays an integral role. To the degree that this happens, obviously, we may have to focus our marketing and support programs in a slightly different direction. But it would not change what our engineers have to do and think about all day.
VB: So how does this all affect VARs?
Benhamou: In my view, the successful VARs will be the ones that focus less on the provisioning of the CPU equipment on the enterprise customer premise, [and more] on the total integration of the solution with the application and with the service. For example, many of our VARs who have sold data-oriented networking equipment in the past should really develop skills to sell voice equipment, especially IP telephony equipment. It turns out that there is really a lot of service opportunity for them. A small business that is considering upgrading from a classical circuit-switch PBX to a LAN-based telephony system expects to buy service from that VAR. It's just part and parcel to the model for voice services. The key thing is VARs have to be willing to move; they cannot be stuck in the model of the early 1990s.
VB: You've said you could play the role of the "auditor of the network." How do you become that auditor?
Benhamou: It turns out that as part of a consulting service portfolio, we can provide a security audit. We can walk into a customer, tell them this is where they might have some security exposure in the way they deploy the equipment, or the way they manage it, etc. We can do that in a very holistic fashion, and we can tell them, "By the way, you seem to be using this particular type of service. You'd be much better off if you used this other type of service given your usage." So this offering puts us in the third-party role. We audit without having an a priori agenda as far as a particular type of equipment we want the customer to buy. We've actually done this successfully in large enterprises, and we've been able to derive more standardized service products that apply to small businesses as well.
VB: Sun, Oracle, IBM and a handful of others have made gains with their e-business and e-services marketing campaigns. Less so with Microsoft and, arguably, less so with you guys. Do you have any plans to rethink your branding and imaging so you can demonstrate that 3Com really is the e-business company responsible for the underlying infrastructure that supports much of the new economy today?
Benhamou: We're the company that supplies e-networks to support e-services. We're investing a great deal of marketing dollars in the continuing extension of the brand. Today, we know we are already the most well-known networking brand from the point of view of aided and nonaided awareness. But we'd like to have the images associated with the brand be more closely tied to the e-applications and e-services customers want to deploy.
VB: Do we in the press make too much of the e-business thing-not so much the underlying business opportunity, which we all agree is real, but rather in terms of how it's presented? You're wearing an e-tie now, and you have to hop on an e-airplane, etc. Is there too much emphasis on branding and not enough accurate information that cuts to the chase of what this e-phenomenon is all about?
Benhamou: I'm sure the letter "e" gets abused a bit. I'm glad my first name starts with an "e". I can now start thinking about branding it [laughs]. But the fundamental trend behind e-services is completely valid and we support it fully. We are trying not to abuse the term. The way we try to inject a bit of sanity there is to remind people that not everything can be virtual. It's great to think of service providers as completely virtual companies, but they only exist because you have facilities-based carriers there. Without that, there wouldn't be anything. However, some of our employees and executives have suggested that we drop a little dot in the middle of our name and call ourselves "3.Com." That might be the easiest way to increase our P/E ratio.
VB: So what are your thoughts on valuations? Is Wall Street nuts? Do you sometimes get frustrated that the valuations for some with modest contributions are great while others don't seem to get much credit for the value they provide?
Benhamou: Sometimes I get a little frustrated when smart people behave in a gullible fashion and buy all that. But I think during a period of time-a few months, a couple of years-the fundamental laws of economics will prevail in that companies' evaluations will be primarily a reflection of their return on invested capital. That is how we drive our business. We look to optimize on two dimensions: growth and return on invested capital. We try to move all of our segments around an envelope that sets the trade-offs between the two. Historically, those metrics have always worked. The reason they have always worked is because there are sound economic principles behind them. So, some of the very high-market capitalization that you see associated with virtual companies are predicated on two things: either phenomenally rich earnings streams in the future or the creation of a brand, which is really a high barrier to entry that is recognized by billions of people. If any of those things are not true, then market caps will get readjusted in a hurry.
VB: So what's in store for your brand?
Benhamou: It's interesting to see how, in the world of the Internet, portals have been emerging for two, three years. But now you are seeing people go one or two steps beyond that. Initially, people going through the network at random would go to the Yahoos and the Microsofts and the Netscapes to be able to find the right engines. Now they are going deeper than that, to the center of expertise for a given area.
When it comes to networking and connectivity, they are coming to 3Com. We find ourselves having to live up to this challenge by providing more relevant information, services and products than any other site in the world. I don't believe that there is room for two or three. It's just like when I think of books, I tend to go directly to Amazon.com. I would expect that VARs in the networking industry will tend to come visit 3Com before they go visit anyone else. In fact, traffic analysis of Web visits proves that. That gives us the impetus to create a very compelling site. We have new service offerings and will, in the next few weeks, take that to another level. You'll want to check back.
VB: Between now and the end of the year, what would you like to accomplish most?
Benhamou: Probably three or four things come to mind. One, we are taking all of our e-business activities to a whole new level, and we intend to roll this out in a major way between now and the end of the calendar year. The second most important thing for us would be to establish 3Com as the undisputed leader in LAN telephony, particularly for small businesses, which are driving the telephony industry. That is a key goal. The third one would be to establish us as a very strategic supplier into the carrier community for intelligence-edge products. That's not to say that core products aren't intelligent, but they are going to be less strategic, in our view, in the future because their role will be relegated to transporting bits.
The strategic place to be in the carrier network, from my perspective, is at the edge. That's where the services are defined, provisioned. It's where policies get enforced and where users interact with a service. That is where we are placing all our attention. We'd like to emerge in the next few weeks-literally-as a major strategic provider to the carrier community. That will not happen if we simply proclaim it. It will happen if enough very large, respected customers say it. We've already had the beginning of this campaign, for example, last week when Sprint announced the relationship we have. We built basically the whole Sprint PCS access infrastructure.
We use our platform to provide all the PCS data services. We've announced an aspect of our relationship with Motorola and expect that there will be many other very important announcements in the area of wireless. Finally, there will be announcements regarding voice over IP deployments with large carriers. So the combination of those three things should move us to a top tier in the supplier-net community.
3Com Corp.
Santa Clara, Calif.
www.3com.com
Founded: 1979
1999 sales: $5.8 billion
1998 sales: $5.4 billion
Employees: 13,027
Stock symbol: COMS (NASDAQ)
Fortune 500 rank: 303
Key products: Network interface cards (NICs), hubs, switches, routers, V.90 modems, Palm connected organizers
Key executives: Eric Benhamou, chairman and CEO; Bruce Claflin, president and COO; Alan Kessler, president, Palm Computing; Irfan Ali, senior vice president and GM, Network Systems Business Unit Carrier Systems; Ralph Godfrey, senior vice president, E-commerce; Steve Rowley, senior vice president, America sales
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