HP's success spits in the face of the assumption that large systems players with diverse business interests are ill-equipped to compete in a networking market dominated by multibillion-dollar specialists such as Cisco Systems, Nortel Networks, 3Com, and Lucent Technologies.
A new study shows HP has surpassed Cabletron as the No. 2 supplier in a sub-segment of the Ethernet-based switches--so-called "modular" hardware used to connect PCs and workstations in a local area network (LAN)--that run at both 10 mbps and 100 mbps.
Although these switches make up only a small portion of the networking market---and giant Cisco Systems retains an overall lead in Ethernet-based equipment---the technology has become one of the industry's hottest niches as medium-sized businesses and large organizations look to connect PCs to a larger network. As prices have dropped, switching technology has become increasingly attractive to even the most budget-conscious companies.
According to industry researcher Dell'Oro Group, Cisco still leads in the growing "layer 2" switch market with 66.2 percent of all ports shipped during the second quarter of this year. But HP has catapulted to second with 12.8 percent of all ports shipped, beating out stalwarts like Cabletron, which claim 9.6 percent of the market, and 3Com with 2.7 percent.
While "layer 2" technology offers an easy-to-use set of switching features for simple computer connections on a network, "layer 3" switching capabilities are generally associated with more advanced corporate network demands.
In comparison, HP held third place during the third quarter of last year, capturing 5 percent of the market.
Analyst Greg Collins of the Dell'Oro Group said HP's quick rise is due to its low prices. HP's ProCurve switches cost about $57--compared to its competitors, which charge in the $250 range, he said.
"HP has really taken the low-price tack and has been much more aggressive at promoting their products," said Collins, who believes HP's strategy is to gain enough customers to sell higher-end, more expensive products to those same customers in the future.
Analyst Mike McConnell of Infonetics Research said HP has honed its marketing drive and has made its products more attractive by including special features.
"I think they're aggressively using their resources," McConnell said.
In a recent study of customer buying patterns, industry consultants Infonetics found that as of February of last year, only 1 percent of users surveyed said they planned to buy networking equipment from HP. But when asked the same question only 15 months later, 12 percent of users said they would purchase network hardware from HP, surpassing Cabletron for the No. 4 spot in the industry.
"I don't think they're just focusing on Cabletron," said McConnell. "They're focusing on 3Com and Nortel as well. They want to move into the No. 2 position behind Cisco."
But because of the lower prices, HP makes less money than Cabletron and 3Com, said Dell'Oro's Collins. In the second quarter of 1999, Cisco reported sales of $530 million, while Cabletron came in second with $72.8 million. While 3Com took the third spot with $32 million, HP ranked fifth, claiming $22.3 million in revenue, just behind France's Alcatel with $22.7 million.
Cabletron, however, has increasingly targeted higher-end networking products and is the No. 1 supplier for advanced "layer 3" switches, which combine routing and switching capabilities. Cabletron operating chief Romulus Pereira said his company only goes head-to-head with HP in the low-end of the switching market. While that market is huge, Cabletron has stuck to the more lucrative high-end market where it can sell to larger businesses, Pereira said.
According to Dell'Oro, Cabletron claims 28.5 percent of the high-end switching market, while Nortel is a close second with 24.7 percent, and Cisco is third with 13.5 percent.
Nevertheless, Cabletron executives today scoffed at HP's moves in the switching market and questioned the company's technology.
"They've been extremely aggressive with their ProCurve sales. But price isn't all that matters. There's a whole service and support and interoperability issue," said Trent Waterhouse, Cabletron's senior architect.
Waterhouse said users can easily upgrade Cabletron switches with more advanced capabilities, while other networking firms will force customers to buy new switches. "We can say with confidence that every Cabletron switch is voice ready today," he said. "When voice over IP [Internet Protocol] and video comes along, you don't have to throw out your switch."
Darla Sommerville, HP's product marketing manager for networking products, disagrees with Cabletron's assertion that HP is going the low-end of the market. HP also sells layer 3 switches, she said.
"The bulk of the market is Layer 2. It's the critical, sweet-spot of the market. It's where the dollars are and we're really shooting for leadership in that space," she said. "But we're positioned in both markets. We've got some high-end boxes with full layer 3 capabilities. We're absolutely poised to provide switches for companies of any size."