I forgot who I had in mind when copied this piece on Extreme and Cisco, so I'll just post it here and assume whoever it was will find it.
tekboy/Ares@alzheimers.com
Breed vs. Brand
[BRIEFING.COM - Gregory A. Jones] As the telecommunications equipment and networking sectors bleed into one, many of the distinguishing traits of their customers are also fading away. Traditionally, telecom equipment companies sold their wares to telecom service providers and networkers sold to enterprises. And as a general rule, service providers were more interested in best of breed and enterprises looked for best of brand. But a shift may be underway, and breed is gaining in stature, with important implications for companies in these sectors.
The Extreme Networks (EXTR) earnings report on Wednesday prompted our ruminations on this topic. Extreme's roots were in the networking sector, with the traditional enterprise customer list. As such, Extreme was a prime target for Cisco Systems (CSCO), whose brand has dominated the enterprise networking space.
Yet as dominant as that brand might seem, Extreme is finding great success in Cisco's markets. Its revenue run-rate is up to $370 mln and the company is now profitable. And Extreme is not alone -- Alteon (ATON) and Foundry (FDRY) are also competing successfully against Cisco.
Waking Up
What these companies are demonstrating is that while brand is an important factor in the enterprise market, it is not the only factor. We talked to Extreme CEO Gordon Stitt after Wednesday's earnings report, and asked him about the decision between best of breed and best of brand in the service provider and enterprise markets. Though he acknowledged that brand is indeed more important to enterprises than service providers, he noted that there has been a shift taking place this year.
Stitt said that corporations are waking up and realizing that IT (information technology) is a strategic tool. While this is a somewhat self-serving conclusion for him to draw as it implies that corporations will be willing to opt for best of breed options like Extreme, there is good reason to believe that it is true. Hubs, routers, and switches were once used primarily for file sharing on LANs (local area networks), hardly a mission critical operation. Now, corporations are bringing their customers, partners, and suppliers into their networks, and connectivity is mission critical. It is not far-fetched to believe that IT departments are becoming more savvy and are demanding best of breed equipment.
Blurred Lines
At the same time that Extreme is demonstrating that breed can beat brand, it is also demonstrating that a networker can be a telecom equipment provider. Networking technology has come a long way since the 10 megabit ethernet hub.
Those humble beginnings were only suitable for enterprise applications. The bandwidth involved was far too small to make this equipment of interest to telecom service providers. But now ethernet technology is producing gigabit and 10 gigabit speeds. And instead of shared bandwidth on hubs, we have dedicated bandwidth on a switch. And intelligence is creeping into the switch, with the equipment having the ability to look inside a packet of data and perform such intelligent functions as load-balancing (this is where the line exists between Layer 3 and intelligent, or content-aware, Layer 4-7 switching).
With these technological leaps, networkers have suddenly found themselves with products that they can sell to service providers. Extreme has designed its new line of Alpine switches for the metropolitan area network (MAN) market. And instead of just selling to large corporations, Extreme now finds itself wooing customers like optical IP network service provider Yipes (privately held). Extreme estimates that 35% of its June quarter sales were to service providers.
On the breed vs brand issue, service providers are a few years ahead of enterprises. Though there was a day when a heavily regulated and not particularly competitive telecommunications market put little emphasis on technology, that day is long gone. The deregulated telecom market is a competitive swarm of RBOCs, CLECs, ILECs, DLECs, and BLECs, each trying to gain dominance through a more cost-effective and technologically dominant network. To these companies -- such as Yipes -- best of breed typically wins over best of brand.
The Horizontal Question
Even if Extreme and others like it can benefit from a customer base that is gradually placing less emphasis on brand, one issue remains: the horizontal, or end-to-end, solution. This might well be the one area where brand still counts for a lot. Let's take the case of Cisco versus Extreme.
A key element of Cisco's branding is its ability to offer a complete solution. When it has a gap in its product line, it makes an acquisition to close that gap. We call this a branding issue, because the reality is that most companies that do not offer this complete solution, such as Extreme, can replicate it with the help of partners. Juniper Networks (JNPR) and Extreme have a partnership that fills Extreme's product gap in the network core. But Cisco's brand undoubtedly wins business many times because customers are convinced that a single company solution is better.
For smaller networking/telecom players such as Juniper, Extreme, Foundry, and Alteon, this is a key challenge. They will often beat Cisco on technological merit, but lose the business due to the narrower product offering.
Because of this continued vulnerability, Cisco and its brand are not in immediate jeopardy. But it is clear that in this hypercompetitive economy which is placing increasing value on IT, the best of breed argument is making serious headway relative to best of brand. This is a favorable shift for the Cisco wannabes and perhaps an ominous sign for Cisco. Right now, booming demand is benefitting all of these companies and will continue to do so for the forseeable future, but over the long term, winning the technology battle may become as or more important than winning the branding battle.
Parting Shot
Our discussion of the Juniper/Extreme partnership begged the issue of repeated rumors that Juniper will acquire Extreme. Though the companies naturally deny the need for a merger, it's hard not to be drawn to the idea. The product lines are very complementary, and the combined company would represent a very real threat to Cisco's dominance in the data networking space. Both companies are performing so well right now that a merger is certainly not a clear necessity, but this is one potential deal that makes a lot of sense to us.
We're in the heat of earnings season, so a quick note about the Briefing.com Earnings Calendar is appropriate. You will notice that next to most companies is a green checkmark, which indicates that a release date is confirmed. Unlike most purveyors of Earnings Calendars, Briefing calls every company on the calendar to confirm its release date. These confirmations are NOT, however, guarantees. Companies frequently change their release dates, sometimes just hours before the release is scheduled. Since we obviously cannot call several thousand companies every day, we will miss some of these changes. We do our best to get every release date right, but please be aware that accomplishing that feat is an impossibility.
Greg Jones - gjones@briefing.com |
