5/11/98 Forbes article on 3Com. The Avis of Networking
pathfinder.com
The CEO of No. 2 networker 3Com wants to avoid
battling Cisco Systems. He can't. That's a problem.
Erick Schonfeld
Reporter Associate: Tyler Maroney
Plus:
How 3Com and Cisco Stack Up on the Nets in Acrobat
PDF format
In the multimedia lab at 3Com's Santa
Clara, Calif., headquarters, rows of
desktop computers showcase the video
and audio capabilities of networks run on
3Com products. Some monitors display
wildlife videos downloaded on the fly from
a remote server, with images far more fluid
than the hiccuppy video the Internet
delivers today. One monitor plays a live
CNBC broadcast. Another invites a visitor
to a video-conference with a 3Com
employee sitting at a table in a different
room. But the most impressive application
involves no moving images at all. At the request of this journalist, a
phone call is placed to an editor in New York City via a PC, and
the conversation is distortion-free. "The convergence of voice and
data," says CEO Eric Benhamou, "is central to everything we do."
Internet telephony is a long-term bet for 3Com, the second-largest
player in the network-equipment industry, behind Cisco Systems.
Benhamou has good reason to focus on the future. Last June,
3Com paid $8.5 billion for modem maker U.S. Robotics, and
since then the company has reported nothing but bad news. It had
to restate a merger-related charge, costing it $100 million in fiscal
1997 earnings. And as it reduced bloated inventories, 3Com saw
earnings tumble--in the fiscal quarter that ended this February, it
earned a piddling 2 cents a share, a dime below consensus
expectations. The share price is down 45% from last summer, to a
recent $32.
So far Cisco and 3Com have operated pretty much in different
spheres. Cisco is the biggest supplier of the routers and switches
that run the Internet and corporate networks, while 3Com
dominates the edge of the network as the leading seller of such
products as PC-network interface cards, modems, remote-access
devices, and wiring-closet switches (3Com also sells the hugely
popular PalmPilot). Says Benhamou: "Going up directly against
Cisco is the wrong approach. Surround and conquer works a lot
better." Robertson Stephens analyst Paul Johnson thinks 3Com's
share price could rise to $45 in a year if the company does nothing
more than cement its position as the leading provider of edge
devices.
The problem for Benhamou is that whatever path he takes into new
markets--whether it's providing Webtone (a dial tone for phone
calls over the Net) or getting more entrenched in corporate
networks--he's going to run into Cisco. 3Com's bedrock
customers are small and midsized outfits, while Cisco owns the
larger businesses. FORTUNE 500 companies all have computer
networks; less than a third of small businesses do, but demand is
soaring. So is the competition--in the past couple of years, Cisco
has introduced a slew of affordable switches for small corporate
networks. Says Howard Charney, a former 3Com executive who
now heads Cisco's division targeting smaller businesses: "Cisco is a
really annoying presence. We are taking share at the low, middle,
and high ends."
3Com is fighting back with products that challenge Cisco's hold on
the heart of corporate networks and the Internet. The company's
new "layer 3" switch is a hybrid of a switch and a router. All three
devices channel traffic on computer networks; switches
traditionally have been fast and dumb, while software-heavy
routers have been slower but more intelligent. Layer 3 switches
combine the best of both. Already customers are using them to
replace some routers in their corporate networks. "Every customer
win is against Cisco," boasts Benhamou. "Every single one."
Ron Sege, head of 3Com's large-enterprise unit, does not expect
to overtake Cisco anytime soon. Rather, he is gunning to be the
No. 2 player in that market (a position currently held by Bay
Networks). He does say that by obviating the need for routers in
local-area networks, layer 3 switching will have a huge long-term
effect on the networking landscape: "Once the router is eliminated,
the competition between Cisco and everyone else in the industry
becomes even."
Cisco is believed to be working on its own layer 3 switch, so most
analysts think 3Com has at best a six-month window in which to
woo large corporate customers with the latest, hottest technology.
Gartner Group analyst Mark Fabbi says corporate buyers are
interested. But he adds that they are not always confident that
3Com, which sells most of its products through resellers, can
provide the kind of direct support FORTUNE 500 companies
demand.
Gaining their confidence will become even more important as more
voice traffic starts to flow over the packet-switched network;
corporate users will want their PC-based calls to have the same
clean tone they get when they pick up a regular old phone.
Benhamou says that 3Com will deliver just that--with over 100
million modems and network interface cards (cards installed in
your PC that keep you plugged in to your local corporate
network), and with more switches in the network, 3Com will be
able to offer Internet telephony that runs seamlessly across its
products. He's also buying up companies that smooth voice traffic
over the Net, like OnStream Networks, a switchmaker for which
3Com paid $258 million. Here, too, Benhamou faces stiff
competition from Cisco CEO John Chambers. Chambers figures
that anywhere from a third to half of Cisco's future acquisitions will
center on technologies that integrate voice, video, and data.
The truth is that neither 3Com nor Cisco knows what it will take to
win in a future where networks carry a mix of voice and data. Both
believe that network operators will have to establish policies in
which high-priority data are guaranteed bandwidth, while the
E-mail you send your grandmother may have to wait on standby.
But they have totally different ideas of how this can be
accomplished. 3Com talks about distributing intelligence across the
edge of the network, so that edge devices can arrange among
themselves to mimic a dedicated circuit by temporarily opening a
direct path to transmit key data. Cisco, meanwhile, offers a
software-based solution that builds on current Internet standards to
enhance the intelligence of routers and switches. It's a battle that's a
long way from being over, with just one thing for certain: Someday
soon phone calls will be just a mouse click away.
How 3Com and Cisco Stack Up on the Nets
Download the FORTUNE chart How 3Com and Cisco Stack Up
on the Nets in Acrobat PDF format. To view your PDF file,
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