"Benhamou weighs in"
Network World, 12/14/98
3Com chairman and CEO Eric
Benhamou took time out last week at the
company's annual customer conference
in blacked-out San Francisco to speak -
in the dark -- with Network World
Senior Editor Jim Duffy. Benhamou
covered a host of topics, including the
company's new joint venture with
Siemens.
Q. Why a joint venture with Siemens instead of sticking
with the original joint product development alliance?
A. We felt that the joint venture sends a much more
clearer message to the market and to our joint customers.
Also we've built up sufficient collaboration and trust, and
we knew each other enough that we felt this was the
structure that would work. And as you know, signing a
joint venture with two partners who really knew each
other is like getting married without dating. So we felt
that the time was right, and we also found a reasonable
way for us to address the issues of - they're always
sensitive -- shared intellectual property. Implementing
LAN telephony requires intimate sharing of data
switching intellectual property and voice communications
- the state machine inside a call processor, things like
that. We found a reasonable way to work this out that
would survive multiple generations of products. One of
the secrets of joint ventures is to make them very tight
with a clear goal, clear mission and parameters of
investment.
Q. Any possibility that this joint venture could become a
freestanding company in and of itself?
A. Technically, it's possible but it's not the most likely
outcome.
Q. What's the likelihood of Siemens making an equity
investment in 3Com?
A. It's nil. It makes no sense. They don't have that
much cash to begin with.
Q. Does the joint venture make that even less likely?
A. It was never likely in the first place. What are the
reasons why you make equity investments? Well, if you
simply want to speculate on the stock market, you can do
that. But typically, board of directors frown upon that.
My board would not like me to use $1.5 billion in cash on
an equity investment. Typically you do that in order to
first of all symbolically tell your people and the market,
'We're serious about this partnership; we're putting our
money where our mouth is.' The second is to get
something in exchange for it. In exchange for this equity
you're getting some preferential licensing terms or
technology. That is quite legitimate, we do this often. But
in this case, the technology Siemens wanted to have
access to we were able to provide some focused access
within the context of this joint venture. It was just a far
easier way to package it.
Q. Of your four market segments - large enterprise,
small/medium enterprise, consumer and service provider
- is there any one or two that represent the potential for
greatest growth for 3Com?
A. Yes, they're not all created equal, they have very
different dynamics.
The one that we're the most excited about in the near
term is the small/medium enterprise segment. I don't
want to sound like we'll neglect the others, but that
market segment has a native growth rate which is far
greater than the large enterprise segment. It simply has to
do with different points of maturation in these markets.
The large enterprise segment is much more mature, it is
growing still. And our opportuntiy to grow in that
segment is greater today than ever. We're just starting a
strong product cycle. We just talked about Home
Shopping Network as an example of a gigabit backbone.
They're using the new CoreBuilder family. We have
hundreds and hundreds of customers like that, using that
kind of (technology) for structuring their backbone. So
we feel the our opportunity is very strong there today.
However, we know in the fullness of time, this market
has peaked two years ago.
The SME market, on the other hand, is very early in its
stage of life. Last time I looked I found that less than
20% of small businesses in this country were
unnetworked. The percent is even lower outside of the
US.
So it is basically a market which is in its early stages, and
the pull is great for two reasons: small business have
bought more PCs than large businesses in the last two or
three years. So they have the compute power, they have
leverage.
And second, the Internet and the Web are making it
possible for small business to look like a large business,
and to not be at a disadvantage when it comes to
e-commerce. So they have many reasons to want to
network at an accelerated rate. So today, who knows
what the growth rates really are but I'd say roughly if the
large enterprise market grows in the low teens, the
small/medium business market grows 10 points higher
than that or twice as much as the large enterprise market.
The carrier and ISP market really is growing fast also,
faster than large enterprise. We don't address the full
market there. We don't focus on creating the core
backbone. This is a market that is fought for by a number
of large companies, including Siemens, Lucent, Nortel
and Cisco.
And we find that while this market is large it is not one
we can address successfully. And it is not one that is the
most strategic. Because the way public networks are
built, the intelligence clearly has moved to the edge. This
is where the strategic points of the public networks are.
The core is increasingly turning into a dumb, very
high-speed aggregated transport on fiber. The products to
build the core networks are large and expensive, but they
don't play a strategic role.
Different services actually use different cores and that
does not really change their complexion.
The edge piece, on the other hand, is where all the
exciting things are happening. This is where all these
methods of access are processed and mediated; this is
where all of the new services are hosted like voice over
IP. And we've had a corroboration of our assumption in
the last few months when we saw that all the large VoIP
procurements initiated by large ISPs and carriers made no
mention of the core. They have no figured out yet which
core to use and which transport is best. This is a way of
defining where we focus and where we don't focus.
And where we focus, we expect this market has a very
strong growth opportunity for the many, many years, 10
years probably. And while this market will be very
competitive, the unit growth rate and the number of ports
that have to be deployed with this kind of intelligence has
to grow so fast that overall this market will be a lucrative
market.
Finally, the market of networks for consumers is a very
exciting market because eventually it will be the biggest
market of all. The market is still embryonic today, people
are just positioning themselves.
We are positioning ourselves to be the clear leaders in that
space because our analysis suggests that this market will
recognize companies that can offer a complete solution
and have mastered skills of volume manufacturing and
retail distribution, and have developed a brand which is
trusted. We score very high in all of these skills.
And we have made substantial investments. We expect
home networks, for example, to appear in three
categories: home networks that use new wires - these
ones are less interesting because they tend to look very
much like a small business. My home network is exactly
the same as a SOHO home network.
The more interesting segments are the wireless and the
existing wire. For wireless, we may have to wait a little
while before wireless solutions really become broadly
accepted but obviously they offer the most flexibility.
Existing wires is going to be the bulk of the market for a
long time.
You have two kinds of existing wires in your home: you
have power wires and you have telephone wires. While
both could work, it's far easier to make it work on
telephone wires than power wires. So we have invested
in the phone wire (method).
Another segmentation is how fast you want to go. So we
think there will probably be two classes of industry
standards for home phone wires. One around 1M bit/sec,
the second around 10M bit/sec. In the next few weeks
we will be introducing a line of (1M bit/sec) products.
More recently, we have made an investment in Epigram
that has really very attractive technology for 10M bit/sec.
Very Ethernet-like technology.
So these are just different ways of slicing and dicing the
market, but the important thing is to offer a complete
networking solution for the home.
It's not just a bunch of network interface cards. You
have to be able to connect the home to the Internet. If
there is one killer app for the home, it is that. And there is
more than one way to do that. So we have to look at all
of these technologies and figure out ways to integrate
them into another set of technologies to connect to the
Internet.
You can connect with plain analog lines, many multiple
phone lines to increase bandwidth; you could do this with
a flavor of DSL, you could do this with cable modems,
you'll eventually be able to do this with wireless. So our
HomeConnect product line, as it will be branded, will in
fact incorporate variations on those two dimensions: how
you connect to the Internet and how you connect inside.
We've positioned the company to have complete
ownership of all of the technologies to do that. We're
bringing out a variety of combinations with the most
important ones.
Q. Do you see 3Com becoming more of a
consumer-oriented company? Is that where most of your
growth will come from in the next 5 to 10 years?
A. I would say not most but certainly this will be one of
the key dimensions of growth. We will do nothing more
than mirror what the market does. The market will
eventually be extremely large, larger than all of the others.
If we want to be true to our mission, our mission has not
changed in 20 years: connect people to in formation.
These are the people we should turn to next. But it would
be wrong to think of 3Com as a home networking
company. Right now it's less than 1% of the revenue.
Within five years it will still be a small amount of our
revenues. But it is very clear we are focused on that.
We have a developed alliances so we are not going it
alone. We have chosen to be very close partners with
Microsoft in this area because we found that if you really
want to achieve breakthroughs in simplicity and
ease-of-use you have to figure out how the software
interacts with the hardware and simplify it as much as
possible. Basically ensuring that there is never, ever a
need to visit a home user to fix things. To achieve that
we have to agree on some important configuration
approaches.
Q. The opportunity at the service provider edge, does
that give 3Com the opportunity to re-enter the high-end
router market?
A. We continue to build up our routing technology and
expertise but it is not to address the small focused terabit
router market. The fundamental point that you were
making however is correct. With all of the MSOs who
are serious about deploying Internet over cable are
turning to 3Com as one of two leading providers - and
today the leading provider -- of data over cable solutions.
It's both the infrastructure proposition and the CPE
proposition.
If you take TCI, for example, TCI selected 3Com as its
exclusive provider of headend and switching equipment
for its infrastructure, and selected us for cable modems
for their subscribers. And this was a case where there
was a clear synergy between the two because it's the
same cable modem solution on both ends. And we're
leveraging our ISP sales force and our retail sales force
together. You cannot find that combination of skills in
any other networking company. This is one of the
reasons why we won that procurement.
Q. Do you see the large enterprise market going back to
the growth rates in enjoyed in the early and mid-1990s?
A. I do think it will accelerate again as a result of
convergence becoming real for these customers. I'm
convinced it will because what's going to happen in the
next few years is basically the PBX market for the large
enterprise is going to be swallowed up. Just this alone
will give a kick to the growth rate of the large enterprise
market.
That joint venture with Siemens is going to address that.
Siemens is very strong in SMEs but even stronger in the
high-end of the PBX market. So today I gave you a
growth rate in the low-teens; I do think it could pass 20%
in a couple of years.
Q. You mentioned wireless as a growth opportunity in
the home/SOHO market… what about medium and large
enterprises?
A. If you talk about wireless LANs, I do think it's now a
good segment to invest in. Up until now, multiple times
we've come this close to introducing a line of wireless
LAN products and we'd say, 'No, why do we want to get
into this now? Why do you want to all go vie for a $100
million market segment?' But things are changing. There
is now much more certainty around the IEEE 802.11
standards. So we see wireless as a much more natural
technology for the large enterprise. Another kind of
wireless which is very important is fixed wireless for
long haul. There have been such advances in technology
there. I remember the time when we just couldn't figure
out a way to the rainy day phenomenon. You had line of
sight (products) and on a day like this, forget it. Today
you can get around that. In Europe, there's a new
generation of GSM technologies that will be deployed in
the next two or three years to achieve megabits per
second transmission. That's quite a phenomenon.
Q. So are we likely to see 3Com get into the wireless
LAN and WAN markets?
A. Oh yeah, we will be fully engaged with a line of
products.
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