Computers & Technology Networking Sales Caught In A Price War Cross-Fire
Investors Business Daily, Thursday, December 11, 1997 at 15:12
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. |
