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Cisco makes new moves into 3Com's market

In a battle of computer networking titans, Cisco Systems is starting to chip away at 3Com's dominance in the small and medium-sized business market.

In a battle of computer networking titans, Cisco Systems is starting to chip away at 3Com's dominance in the small and medium-sized business market.

Based on third-quarter figures, Cisco has seen its projected yearly revenue for the niche jump from zero to $2.2 billion since it started targeting small business needs three years ago. And some analysts believe the network equipment giant is also eating into 3Com's market share.

"There's no question 3Com is the dominant supplier in the smaller markets. They have an excellent brand. But Cisco's No. 1 target is 3Com," said analyst Esmeralda Silva, of market researcher International Data Corporation (IDC). "Everyone is quite surprised at how well Cisco has done in a short time frame. They've penetrated a lot of accounts that 3Com, Hewlett-Packard, and Nortel Networks were hoping to upgrade and grow."

Cisco is expected to announce further success in the small and medium-sized business niche when it releases earnings for its fiscal fourth quarter and 1999 fiscal year tomorrow. A consensus of analysts' estimates peg the company's earnings at 20 cents per share for the quarter, according to First Call.

Cisco, Intel, and a number of smaller companies have dived into this growing market. This year, sales of networking hardware to small businesses will reach $9 billion--an increase of more than $1 billion from last year--while sales to mid-sized businesses will increase slightly to $14 billion, according to a recent Cahners In-Stat Group study.

The high-growth trend will continue for years to come as smaller companies embrace the Internet and networking products get cheaper and easier to use, analysts said. By 2002, small business revenue will climb to $13 billion, while mid-sized business sales will mushroom to $17 billion, the study found.

The phantom menace?
But 3Com executives dispute the notion they are losing market share. Despite Cisco's sudden market entry, 3Com executives say revenue in the small and mid-sized market has grown 30 percent in the past year. They refused to offer further specifics.

"Cisco is not eating into our market share," said Jarek Chylinski, 3Com's director of small business. "We are meeting our targets and growth rates. We're expanding and leading in this space."

How does 3Com--a company that has struggled financially the past year--account for Cisco's rise if it's not stealing market share?

"I don't know," Chylinski said, "Let's call it 'The Phantom Menace.'"

Cisco thinks otherwise.

"We've gone from zero to $2 billion in a short amount of time. I can't imagine it's possible to achieve that kind of growth without taking share," said Eugene Lee, Cisco's vice president of marketing for small and medium businesses.

Analysts have not broken out data on the small and mid-sized markets, but some numbers indicate that 3Com is losing market share, while others are less conclusive. 3Com still leads in the modem, network interface card, and networking "hub" markets, but Cisco is creeping up in low-end switching device sales--a product that is experiencing increased growth in the small and mid-size markets as prices drop, analysts said.

3Com's lead in the market for Cisco eyes home marketfixed configuration (or non-expandable) switches shrank from 31 percent in its first quarter to 30 percent a year ago, while Cisco's slice rose from 22 percent to 27 percent in the same period, according to the Dell'Oro Group. Nortel ranked third in the switching market, rising from 16 percent to 17 percent.

An IDC study showed similar results. For Ethernet-based 10/100 megabits per second (mbps) switches, 3Com's market lead fell from 36 percent in the first half of 1998 to 25 percent of the market in the first quarter of 1999. Meanwhile, Cisco jumped from 15 percent to 24.9 percent and Nortel fell from 23 percent to 19 percent.

While the figures also include sales to large businesses, "It shows how Cisco can quickly eat into a vendor's share," said IDC's Silva.

Cisco's success may also be due, in part, to overall high growth in the market, with the data networking leader grabbing a significant share of new business.

"We know Cisco has to be taking some share. They have to be," said Forrester Research analyst Charles Rutstein. "Because the market is growing, it may be masking the fact that Cisco is gaining an inordinate number of new customers."

Sell, sell, sell
Cisco--which traditionally has sold its equipment using its own sales force--has pumped up its partner and reseller program to go after a market that 3Com has traditionally controlled. Because most large businesses already have purchased the networking gear they need, Cisco has gone after two new markets--service providers and small and mid-sized businesses--to maintain its revenue growth, analysts said.

According to Cahners In-Stat, some 9,300 large firms do business in the United States. In contrast, there are 8.1 million small businesses with fewer than five employees, 2.3 million small businesses, and 85,000 mid-sized companies. A small business has fewer than 99 employees, while a mid-sized business is one with 100 to 999 employees, according to the firm.

Cisco has done a good job recruiting new partners and resellers by giving them sales leads, training, and free software tools, Rutstein said.

"3Com has some deep relationships. Cisco has had to climb uphill, but they've been pretty successful," he said.

News.com's Ben Heskett contributed to this report.