3Com's new strategy doesn't change much for firm

The company has excelled within a certain niche of the networking industry, providing technology to connect computers to the Internet or together on a small network. But a series of strategic missteps has it sending confused messages to the market, causing many to wonder where the firm is heading.

Over the past year, 3Com has shown an on-again, off-again love affair with its Palm division as a central tenet of its strategy, and over the past two years it has altered course on several initiatives, which climaxed with this week's plans to restructure and shed some of its slow-growing businesses.

Discarded strategies include its bid for a greater share of the high-end corporate networking market, its brief flirtation with computer data storage networks, and its desire for a greater role in networking software.

3Com's muddling is a sign of the changing dynamics of the networking industry. Increasingly, high-end networks built by the likes of Cisco Systems, Lucent Technologies and Nortel Networks are where the big bucks are stacked.

The rest of the industry is left targeting niche markets, such as Juniper Networks in high-end routers, Ciena and Sycamore Networks in optical capacity gear, and Extreme Networks and Foundry Networks in high-speed corporate switching.

At the same time, these companies are benefiting from the insatiable demand for network connections. This is driving an explosion in equipment sales and the birth of new players in the industry. Market researcher Cahners In-Stat Group found that the worldwide corporate networking equipment market grew 25 percent in the fourth quarter of 1999 to $10.6 billion.

Amid this trend, 3Com has found itself with some pieces to a puzzle but no coherent strategy. This has resulted in flat revenues and shrinking businesses over the past year, saved by the stunning adoption of Palm by consumers. As a result of 3Com's plans to restructure, the company's annual sales will be sliced in half, at least, from nearly $6 billion to between $2.5 billion and $3 billion, according to analysts.

"Their future revenue will be half of what it is today, and they're cutting their work force by maybe a quarter. It tells me something is not quite right with their cost structure," said David Toung, equities analyst with Argus Research. "By taking those (slow-growing) businesses out, they're saying they'll have 20 percent growth in the future. I'm not saying they can't do it, but I'm still waiting for the execution.

"Does this company have a vision of their strategic direction? That's a question mark," he added.

Making waves?
3Com has now fastened itself to the idea that it can go "back to the future" to reclaim its dominance in catering to consumers and small to midsize businesses, offering simple networking technologies to those markets. It has also claimed a role in several emerging markets and latched on to a trend that has escaped few networking companies: selling software and equipment to Internet service providers and telecommunications companies.

But will this altered course right the 3Com ship? Many are skeptical--even with the company's revised strategy--that it can recapture a lucrative role in the networking industry.

"At first blush, it looks groundbreaking. But when you take a minute, it's 3Com," said Tere Bracco, director of enterprise infrastructure for market watcher Current Analysis.

"Nothing is going to change," she added. "3Com has not entered any new markets. It has exited markets where it had potential."

3Com claims it has targeted several new markets, including wireless networking, voice over the Internet, high-speed--or broadband--technologies such as cable and digital subscriber line (DSL), and home networking. But those intentions have been in the works for some time, leaving many to believe that 3Com's latest gambit is too little, too late.

The company will still receive about 80 percent of its revenue from its remaining traditional products in the 2001 fiscal year, according to Martin Pyykkonen, equities analyst with CIBC Oppenheimer. The remaining 20 percent of 3Com's sales will come from emerging markets, according to his estimates.

"'Is it enough?' would still be a question," Pyykkonen said.

Also curious is 3Com's exit from the corporate networking business as it turns over its technology and customer base to upstart Extreme. That niche remains lucrative, but 3Com may have spent too many of its resources focusing on Palm, thereby sending mixed messages to customers who usually demand coddling as part of the deal.

"Any world-class company focuses on where it can win," said Ron Sege, former chief of 3Com's enterprise business and current Lycos executive.

Changing times
3Com is only the latest to alter course in the networking industry. IBM surrendered to rival Cisco recently, while Cabletron Systems--another once-formidable firm--has chosen to split into four distinct businesses. Lucent, beset by recent earnings woes, also has chosen to spin off slower-growing portions of its businesses, including its corporate networking division.

Who's left? The corporate networking market is dominated by Cisco, with various niche providers finding success in certain segments, such as Extreme and Foundry.

"If there's one common thread, you can characterize the decade of the '90s as when the networking industry had to come of age," 3Com chief executive Eric Benhamou said earlier this week.

"To reach critical mass, we constructed and now are deconstructing in different boundaries," he added. "We've chosen new markets to structure ourselves?That is going to be, we believe, a strong trend in the networking industry: Be extremely focused on what you can do best."

3Com retains a large share of the market for equipment that caters to the needs of small and midsize businesses--its classic strength. But amid 3Com's strategic waffling over the past year, rival Cisco has gained significant ground in the market.

Some view 3Com's latest altered state as the best it can do. "I think they had to do this," said Mike McConnell, an analyst with Infonetics Research. "They're focusing on their traditional strong points. Now it's up to the execution of the strategy."

News.com's Wylie Wong contributed to this report.