The Avis of Networking
Fortune - May 11, 1998
The CEO of No. 2 networker 3Com wants to avoid battling Cisco
Systems. He can't. That's a problem.
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.
[Go to town Moonray <ggggg>]
o~~~ O |
