"3Com fights for corporate elite"
By Ben Heskett
Staff Writer, CNET NEWS.COM
March 10, 1998, 11:15 a.m. PT
Most novice computer users think
modems and network connection cards when they
hear the name 3Com (COMS).
Even in the aftermath of last year's merger with
U.S. Robotics, which gave the Santa Clara,
California-based networking firm another $2 billion
in annual revenue muscle, industry pundits and
competitors continue to minimize the company's
role in large corporate accounts--a key market
segment that has proven to be one of the most
lucrative in the high-tech industry.
To counteract a perception that is several parts fact
and some parts fiction, 3Com executives are
attempting to sway the market with current and
future products that are intended to offer a
next-generation "intelligent" network layout for
administrators and users, incorporating lower-cost
equipment and a variety of software tools.
The largest networking firm, Cisco Systems
(CSCO), continues to be the unquestioned leader
in providing equipment to large corporate layouts,
based on its enormous installed base of routing
devices and popular switching products. But rivals
like 3Com, Ascend Communications, Bay
Networks, and Cabletron Systems continue to nip
at its heels, hammering at what they call Cisco's
"outdated" or "legacy" approach to building
networks.
Cisco's routing technology has basically been
installed as the "backbone" equipment that speeds
packets across the vast Net infrastructure. The
previously named opponents, as well as a slew of
start-ups, are trying to unseat the networking
kingpin by providing equipment that offers more
speed for less cost, since routers have historically
been sold at a premium.
"Cisco has incredible incumbency on the Internet,"
Ron Sege, vice president of marketing for 3Com's
enterprise business unit, admitted in a recent
interview. "Their basic proposition is, 'We built the
Internet; let us build your intranet.'
"The problem is Cisco will have a first-generation
network in a next generation world," he said.
3Com is positioning its come-from-behind strategy
for large corporate networks as a case of new
technology outdoing old technology. Sege equates
his company's position to that of Digital Equipment
in the 1970s, when that computer systems giant
developed a minicomputer that outperformed
mainframes from IBM for less cost.
The networking firm already plays a large role in
many networks, due to the prevalence of its
low-end equipment in local networks, such as
departments, workgroups, and branch offices. Yet
in some people's minds, that dominance in what is
sometimes called the network "edge" has not yet
translated into a plethora of account victories in the
network "core," where the money and margins are
huge, and where Cisco dominates.
That is not to say that 3Com is a pushover. The
total networking market reached $6.7 billion for the
fourth quarter of 1997, according to market
researcher In-Stat. Of the total, Cisco garnered
25.9 percent of that business while 3Com gained
16.7 percent of sales--second among the large
networking firms, according to the industry
consultant.
Fred McClimans, CEO of Current Analysis, said
"3Com is in a position where they have a lot of
equipment in the enterprise."
But he noted that most of the gear it claims as part
of this enterprise presence is likely related to small
and medium-sized network edge devices and the
remote access equipment recently acquired from
U.S. Robotics.
McClimans also said that the firm gains 55 to 60
percent of its revenue from remote access devices,
modems, and networking cards, making its
enterprise presence debatable. "I think they've got
a little bit of work to do in that area," he added.
That work could translate into higher profits for a
firm that continues to deal with inventory issues and
the residue from last year's U.S. Robotics merger.
The company's stock is currently hovering in the
mid-30s after hitting a 52-week low of $24. That's
a far cry from the $50 to $60 range the company
flirted with last summer.
Others believe 3Com can do just fine by focusing
on its strengths. "I think it's a matter of incremental
market share gains," said Mary Petrosky, analyst
with the Burton Group. "3Com is not necessarily
going after the largest enterprises. They've
historically gone after the small and medium-sized
accounts. That should do perfectly fine for them."
"I think they're making progress in the enterprise,"
she noted. "Are they ever going to surpass Cisco?
No, I don't think so."
Opponents, such as Bay CEO David House, have
also keyed on 3Com's consumer-oriented revenue
stream, which accounts for roughly 40 to 50
percent of the company's annual sales. House
noted in an interview last fall that those types of
devices--Palm Pilots and networking cards--are
what drives 3Com, not enterprise network layouts.
Sege disputed this notion and separated his
company's enterprise business into various
segments: campus infrastructure, wide area access,
wide area backbone, and remote access
equipment.
The nine-year 3Com veteran also broke down
revenue sources at the $6 billion firm: 40 percent
from small and medium businesses, 30 percent
from consumer products, 20 percent from large
enterprises, and 10 percent from
telecommunications carriers.
A typical example of how 3Com is being used can
be found at the University of Pennsylvania, where
the firm's expertise in Ethernet-based equipment
feeds into back-end routers from Cisco and
interacts with ATM (asynchronous transfer mode)
equipment from Fore Systems.
Deke Kassabian, manager of network engineering
at the sprawling institution, said the choice of 3Com
for Ethernet switching was simple given its historical
"expertise." However, he said the company would
need to prove its worth over time before he made a
greater commitment to 3Com's high-end
equipment.
"There's certainly a great deal of work to do,"
Kassabian said. "That's a different challenge and
they'll have to prove themselves over time. We've
always taken a 'best-of-breed approach.'
"It's not like a new product area is going to displace
Cisco," he noted.
Sege admitted that 3Com is "not as
well-positioned" in wide area networking
equipment, where Cisco and Ascend make much
of their money. But he noted that the company
benefits from both the firm's strength at the edge
and a growing list of high-end products. "We can
come from the outside in, we can come from the
inside out."
Evidence of this is apparent in several recent
victories for installations of ATM-based equipment,
among them Guilford College in Greensboro, North
Carolina, and Brentwood, Tennessee-based
ComData.
To augment its own development, 3Com has
aligned with Siemens and Newbridge Networks in
order to better address the needs of large
corporations, service providers, and
telecommunications carriers. Noting Sege's
admission that 3Com started targeting large
networks as late as 1995, these alliances could be
key in fashioning a compelling argument to go with
3Com into the future.
Like many firms, 3Com sees a chink in Cisco's
armor due to the expected growth in gigabit-speed
Ethernet devices and accompanying equipment that
provides limited routing functions in a low-cost
switch. This emerging technology could threaten
Cisco's dominance as companies move routers
away from more important parts of the network
and install these types of switches.
3Com executives believe they have the strongest
set of products they've had in the last two years
and can leverage expertise in making
microprocessors to handle specific network
application functions. But the company admits it still
must fight its way into the minds of corporate
America's IT (information technology) elite.
"The biggest challenge we have is that CIOs [chief
information officers] are still not thinking enough
about IT as a strategic asset of a corporation,"
Sege said.
Only time will tell if 3Com comes to mind when
they do.
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