3Com Hopes for Turnaround by Aiming at Network Edge
Feb. 25, 2001
NYTimes
nytimes.com
By REUTERS
SANTA CLARA, Calif. (Reuters) - 3Com
Corp. (COMS.O), which once entertained
ambitions of dominating the networked world,
is now looking to pull back and pick its shots
as it attempts to recover from a long slide.
The company, which once rivaled Cisco
Systems Inc.and followed its strategy of
growth by acquisition, is now aiming at select
niches in high-speed networking to desktop
computers and wireless access for businesses,
the new 3Com chief executive told Reuters.
At the same time, 3Com is continuing its
broad cost-cutting efforts as it seeks to regain profitability by early 2002.
The goal is to slash some $200 million to $250 million in expenses by
cutting or spinning out money-losing product lines.
3Com, best-known for introducing Ethernet networking to the world,
confirmed this week it is eliminating about half of its contract workers in
an attempt to save about $50 million.
``For businesses that can't meet the numbers, they won't be in 3Com for
a long time,'' said 3Com Chief Executive, Bruce Claflin in an interview
with Reuters earlier this month. ``It's a little hard-nosed, but it's essential
for our success.''
Claflin, who took over as CEO in January, is promising a tightened
operational focus around two goals: extending 3Com's reach into the
``edges'' of large-scale next-generation networks, and making its
networking equipment as easy to use as it is powerful.
TALE OF TWO COMPANIES
Nobody is expecting 3Com's turnaround to be quick. Sales have fallen
year-over-year for the last seven quarters. For its fiscal 2001 ending in
May, 3Com is expecting revenues to be about 25 percent less than the
$4.3 billion recorded in fiscal 2000.
Investors remain wary, as 3Com has disappointed Wall Street over the
past year with mounting losses and strategy zigzags. 3Com ended regular
trading on Friday at $9-1/32, down more than 60 percent from its
52-week high, after adjusting for the impact of spinning off Palm Inc.
(PALM.O) last year.
The number of Wall Street analysts covering the stock has also shrunk to
a mere handful as institutional interest has waned.
Founded in 1979, 3Com created the market for Ethernet cards, which
plug into the back of personal computers and allowed them to
communicate via local area networks. Simple and lucrative, networking
cards were at their peak a billion dollar annual business for 3Com.
3Com maintained its edge over newer, cheaper competitors by pushing
the standard speed for networking cards to 100 megabits per second
from 10 megabits per second.
``Without a doubt, 3Com has been the leader for most of the life of the
networking card market,'' said Jason Smolek, networking analyst at
International Data Corp.
As late as 1993, 3Com and cross-Valley rival Cisco, whose trademark
network router dominated the wide area networking space, were virtually
neck-and-neck, in terms of sales.
But with Cisco zooming ahead by introducing new products and
aggressively buying new companies, 3Com embarked on a similar, but
less successful course, culminating in its $9 billion purchase of modem
maker U.S. Robotics in 1997.
Buying U.S. Robotics led directly to the development of 3Com's biggest
recent hit -- the hugely-popular Palm devices. But it also resulted in
hundreds of millions of dollars of unsold modems for 3Com and a
battered stock as investors reacted to the inventory pile-up.
Today, Cisco is a $195 billion dollar company with a run rate of nearly
$24 billion in annual sales; 3Com has a market capitalization just
one-sixty-fifth the size of Cisco's, and an annual sales run rate just
one-eighth the size.
After years of expansion, 3Com finally admitted defeat last year and
began to exit businesses -- such as high-end network routers, with which
it once hoped to topple Cisco.
FROM SMALL BUSINESSES TO BIG CORPORATIONS
Enter Claflin, who helped institute the cutbacks as 3Com's president and
chief operating officer for the past two and a half years.
``My criticism about our company looking backward is that I think we
got too diffused over different products and technologies,'' said the
22-year IBM veteran who headed worldwide sales and marketing at
Digital Equipment Corp. before coming to 3Com. ``We couldn't figure
out who we were. Now we're striving consciously to always be
delivering on this idea of functionally rich, radically simple networking
solutions.''
3Com remains intent on scaling up the value chain from small and
medium-sized businesses toward large corporations, where Cisco
remains the market-leading, 800-pound gorilla.
For one, 3Com is raising the bar on Ethernet again, and aggressively
touting Gigabit Ethernet networking cards that can zip data along as fast
as one billion bits per second. These cards, which hook up PC users to
the network at large, are one way 3Com will attempt to dominate the
network edge, Claflin said.
3Com is also touting gear such as intelligent hubs and switches and Web
caching products, both of which can redirect traffic so that it skims along
the outer edges of networks -- avoiding increasingly-congested central
routers -- for faster travel.
``Intelligence in the network is moving outward, and that favors us as an
edge company,'' Claflin said. And for all of these products, making them
as easy-to-use as possible will attract corporate IT managers, especially
when they consider how to support remote branch offices with few
technical staff.
Claflin downplayed expectations for Audrey, 3Com's new
Internet-enabled information appliance aimed at consumers. Some had
hoped Audrey would immediately replicate the success of the Palm, but
Claflin said Audrey, a white-colored, easy-to-use box that 3Com
envisions will be used in the kitchens of well-off suburbanites, was still
very much in ``market development'' stage.
In most of the markets 3Com is targeting it faces entrenched
competitors: in Gigabit Ethernet, it trails Intel Systems Inc. (INTC.O); in
wireless, it is behind companies like Symbol Technologies (SBL.N),
Lucent Technologies Inc. (LU.N) and Cisco.
Claflin acknowledges that the weakened economy and slowing corporate
spending on information technology -- which caused 3Com to report
second quarter sales that were down five percent from the first quarter --
might mean these markets may take years to develop.
``The conditions that affected our business last quarter are still in place
today,'' he said. ``But the underlying demand is real.''
But IDC's Smolek argued that because these markets remain nascent,
3Com has as good a chance as any other player.
``If 3Com is aggressive enough, they can catch up, as these are still very
young markets,'' he said. |
