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3Com fights for corporate elite

The industry continues to minimize 3Com's role in large corporate accounts--one of the most lucrative markets in the high-tech sector.

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Communications, Bay Networks, and Cabletron Systems continue to nip at its heels, hammering at what they call Cisco's "outdated" or "legacy" approach to building networks.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.