Cisco has a long lead over 3Com
San Jose Mercury News - Sunday, April 18, 1999
Networking is on a fast pace and they need to keep up
As the distinctions between computer networks and telecommunications begin to blur,
the industries are consolidating at a breakneck pace.
In the past three years, companies have spent more than $50 billion on acquisitions to
compete in the emerging field of moving voice, data and video over a single connection.
Silicon Valley companies that have made their money selling computer-networking
equipment are among those positioning themselves for the battle with
telecommunications companies.
Traditionally, phone calls have been carried around the world on networks designed to
do just one thing: carry voice signals safely and reliably. As the Internet grows,
however, companies are increasingly looking at using Internet technology to carry voice
and video traffic, as well as data. Profits in this new market could potentially be much
larger than in voice-only networking.
The two biggest data-communications companies in Silicon Valley
are Cisco Systems Inc. of San Jose and 3Com Corp. of Santa Clara.
Cisco, the fourth-largest Silicon Valley company, has a long lead
over 3Com in sales, profitability and prospects. Its strategy of
focusing mostly on premium products appears to have paid off --
so far.
3Com -- despite declining profits -- saw sales increase during the
year and climbed three rankings to become Silicon Valley's ninth-
largest company. 3Com has successfully used its strength in
manufacturing and logistics to expand beyond the low-end
products -- adapters and network hubs -- that until just three
years ago accounted for most of its sales. Like Cisco, it made
several acquisitions in the process. But this year, its prospects
are uncertain, because of slimmer profit margins and far greater
competition.
Cisco, one of the most profitable companies in the valley, is reshaping itself to include
voice and video delivery. As a result, it is confronting a different set of rivals than it was
a year ago. Since then, companies that sell telecommunications equipment have entered
the data networking arena. Lucent Technologies Inc. of Murray Hill, N.J., has made
several acquisitions, most notably its $21 billion purchase of Ascend Communications
Inc. Northern Telecom of Canada bought Bay Networks Inc., for more than $9 billion,
to become Nortel Networks Inc. Siemens AG of Germany and Alcatel of France have
also acquired companies making data-communications technology.
Cisco sales up 31%
Cisco had sales of $8.46 billion last year, up 31 percent, while profits soared 79 percent
to $1.88 billion. As a percentage of sales, profits were 22.2 percent. Despite this
glittering performance, Cisco faces a formidable challenge this year. It must make the
transition from a data-network vendor, a field it has dominated for years, to a
full-fledged competitor of much larger companies all jostling for leadership of this
nascent market. Otherwise, Cisco will be in the not-so-enviable position of being a
leader in a slowing market: selling computer-networking devices to companies.
Analysts say Cisco has a good chance of getting it right, citing the speed of its reaction to
market shifts in the past.
''The management at Cisco absolutely understands time to market,'' says Dave
Passmore, research director at NetReference Inc., a network consulting firm in Sterling,
Va. ''The whole culture of the place understands that.''
But analysts also say that to compete effectively, Cisco must rapidly broaden its product
lineup, adding telephony and telecommunications equipment to sell to carriers and
Internet service providers.
''This is the year when Cisco finally has to decide what they want to do,'' says Tom
Nolle, president of CIMI Corp., a Voorhees, N.J. network-consulting firm. ''They can
either decide to stay an enterprise-network player and be bought by a larger company. Or
they have to expand their product repertoire -- quickly -- so that they can be a real
competitor for the likes of Lucent and Nortel.''
Also, Nolle said, Cisco needs to be more aggressive in presenting alternatives to its
routers--alternatives such as ATM switches. ATM (asynchronous transfer mode) is a
technology that chops up voice, video and data into equal-length cells. Though Cisco
sells ATM switches, it has until just recently been cautious in marketing the technology,
for fear of cannibalizing sales of its routers. Both ATM switches and routers can control
how traffic flows over networks but use different technologies and different
communications rules.
Though 3Com's sales are up 72 percent in its last fiscal year
to $5.4 billion, its bottom line is eroding: profits plunged 92
percent to $30.2 million. As a percentage of sales, that's a mere
0.6 percent.
Why is 3Com, run by sound managers who gradually built up the
company from a vendor of Ethernet adapters into a large networking
conglomerate, in this hole?
The company embarked on an ambitious $6 billion merger with U.S.
Robotics early last year and became preoccupied with making the
marriage work. Meanwhile, prices for most of its offerings were
declining rapidly, as more competitors flooded the market and
products such as adapters and local-area network switches became
commodity items.
Prices on high-end products such as routers have declined much
less steeply, but 3Com doesn't sell high-end routers, and has only
recently started selling a new generation of sophisticated routing
switches.
Less attractive
As a result, Nolle says, selling 3Com devices is becoming less
attractive to companies that design entire networking systems
for their customers, the so-called Value Added Resellers. ''As
prices decline, 3Com has to move away from Value-Added Resellers
and move into storefront retail, where what matters is shelf
space. Now they collide with Intel, which can sell from a shelf
as easily as 3Com can.''
Intel Corp. has become steadily more aggressive in low-end
networking products over the last two years, selling network
adapters, hubs and switches.
Rumors have surfaced over the last few months that 3Com might be
a target for a European or Asian company looking to enter the U.S.
data, voice and video networking market. But Nolle, for one, says
he doesn't see any likely buyers except a computer vendor like
Dell Computer, or Intel, which has the requisite deep pockets and
wants the networking expertise in a hurry.
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