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3Com in the hot seat

If 3Com had a dollar for every merger rumor it has been associated with, it would price itself out of the range of potential suitors.

8 min read
CNET News.com Newsmakers
May 27, 1999, Eric Benhamou
3Com in the hot seat
By Wylie Wong and Ben Heskett
Staff Writers, CNET NEWS.COM

If 3Com had a dollar for every merger rumor it has been associated with, it would price itself out of the range of potential suitors.

Over the past eight months, the buzz on Wall Street suggests that any number of telecommunications behemoths could acquire the struggling networking firm. International networking player Siemens is the latest to say it has no interest in acquiring 3Com.

Chief Eric Benhamou insists he won't let the rumors distract him. Instead, he has focused his energy on refining the business strategy for a company he's led for nine years.

And he's making some serious changes, moving 3Com's investments away from analog modems and mobile networking cards to newer, growing markets in home networking, Internet telephony, broadband, and wireless technology.

3Com rolled out trials this week for its latest version of the PalmPilot handheld device, the Palm VII, which features a wireless connection.

In a recent interview with CNET News.com, Benhamou discussed the central role the PalmPilot has to his company's future, and why he thinks his investment strategy will turn 3Com around.

Given the recent financial struggles at 3Com, there is a lot of speculation about your company's future. What lies ahead?
Our mission is to connect people and organizations to information, but we want to do it in a way that is innovative, simple, and reliable. The product that illustrates this the best is the product people keep in the palm of their hands. When we look at Palm, we think it conveys and captures the innovation for simplicity and reliability. But obviously, the rest of the infrastructure also should be there to support that, so this does not mean that 3Com is just a Palm company.

We're the only [company] that not only lives in the [network] infrastructure, but we live in the contact between the user and the network. We are the only one who has connected users physically through their PCs, through NICs and modems, and now through Palm devices. Palm is intimately related to telephones, to network management, to infrastructure. Palm is a networking play. This is what the soul of the company is about. And you are going to see this more and more in how we choose to position the company.

The picture you are painting revolves around the Palm, but the product generates less than 10 percent of your revenue.
Palm is to us what Java is to Sun, a technology which enables a new form of computing. Sun does not have a lot of revenue derived from Java, but Java is embedded into many Sun products. In the meantime, Sun continues to sell workstations, servers, and storage devices. So this is not the whole company. We help people broaden their horizons, [but it] does not mean that we do not sell switches, routers, access concentrators, and network management devices.

It sounds like you've given up the fight against your classic competitors, such as Cisco and Nortel, and have chosen to tie your future to Palm's success while they sell equipment to communications carriers. Is that accurate?
You're misunderstanding this a little bit, because you think, "Well, you're going to build everything around Palm." No, I was just using it as an example of how intelligence has migrated to the periphery.

Palm is a networking play. This is what the soul of the company is about. Carriers are customers of ours, but we don't focus on the core infrastructure. All the moves made by the Nortels, Lucents, Nokias, Ericssons, and Ciscos have really focused on that. I understand why, because there's big bucks there. But our business is really focused on the network, from the Palm all the way to the edge of the public network, but not beyond that.

So, it doesn't really matter how many trillions of dollars are spent there. In the past, it was blurred, but I made it very clear what the scope of 3Com was. So when people say, "You can't compete against Nortel and Lucent," there is a presumption that we want to compete with these people, and we don't.

Who do you compete with?
We compete with Cisco in the enterprise infrastructure. We compete with a portion of Nortel, their small business [products]. We compete with Microsoft because we enable other device vendors for Palm. We compete with Intel. We compete with a whole raft of companies who build cable, digital subscriber line (DSL), and analog modems.

Cisco, Nortel, and others concentrate on the core of networking, and you operate outside the core. You're the next step to the user. Is that what makes the company attractive?
The talk of attractiveness as an acquisition candidate? I don't comment on rumors. I'm happy to explain our strategy, but I'm not going to feed the frenzy of rumors. Every Friday, there is a new one. If I had started to comment on the first one, then I would spend my time doing that and I couldn't run the company in the meantime.

It sounds like Microsoft is an increasing competitor to your vision of what the user wants and how you plan on delivering that through the Palm.
This business has three components: a device business; a platform business, which is software that you license to others; and the service/portal business. We compete with Microsoft on the platform business.

We are convinced that you need an environment that is optimized for handhelds and that environment is not Windows CE. Microsoft thinks that they have to make big strides in the direction of simplicity. Bill [Gates] talks about this a lot. Of course, he is a prisoner of architecture, the always-valued Windows look and feel. We are not a prisoner of the past, we did not build an OS for PCs, so we could take a clean slate and build something optimized for that.

As the rest of 3Com is concerned, Microsoft is in fact a close ally. Microsoft chose to partner with 3Com as it's primary home networking partner because we focus on simplicity and reliability. It's normal that Microsoft would look to us for the hardware infrastructure. We are also partnering with them on many enterprise plays, small businesses, but also large enterprises as well as voice-over IP for ISPs.

NEXT: 3Com in transition


Age: 43

Education: Honorary doctoral degree from Ben Gurion University of the Negev, a Master of Science degree in electrical engineering from Stanford University, and a degree from ?cole Nationale Superieure des Arts et M?tiers, Paris.

Claim to Fame: The youngest national college graduate in France, at 19 (1975)

Hobbies: Playing the guitar

Favorite Web sites: www.reel.com, www.amazon.com

The book I'm reading now: "Breaking the News" by James Fallows

In my dreams, I would: Write a book about the golden age of the networking industry.

CNET News.com Newsmakers
May 27, 1999, Eric Benhamou
3Com in transition

Let's talk about your financials. You are moving away from network interface cards (NICs) and analog modems and toward higher-growth markets.
We are moving away from analog modems, but that doesn't mean we have stopped selling them. It just means most of our investment will go into the new generation of DSL and cable.

NICs are a different story. NIC segments are high growth still, particularly the mobiles. Secondly, there is NIC software that carries more and more intelligence, which up until now we have not sold independently. We have given it away and yet the majority of our investment in NICs is in the software. So we are going to transform this into a true business in its own right.

Back to the big picture, we have three classes of business at 3Com: businesses that will no longer grow, existing growth businesses, and emerging growth businesses. They represent respectively 45 percent, 45 percent, and 10 percent. In any company, you are going to have segments that fall into mature businesses. The issue we face right now it that they represent too much of our profile. We would like them to represent 25 percent. We're going to take resources away from here and put them there. And we're ensuring that the emerging high-growth wedge of the pie charts is given full resource commitment, full investments, to ensure that we have maximized the chances to grow.

What are your plans for licensing the Palm OS?
Apple has been criticized for having missed the opportunity to license their OS, and keeping it proprietary and close to the vest. We are certainly not doing that. We decided to create a Palm computing platform We are convinced that you need an environment that is optimized for handhelds and that environment is not Windows CE. business. So we crossed the line of saying, "What if we enable clones to compete with us?" It is good because we want to expand the Palm economy and create a broader population of Palm devices.

The third leg of this is the service business. The service business is basically enabled by the Palm VII. I connect to the Internet and it gives you access to content. This is not a portal just for a Palm VII. It's going to be a portal for all Palm devices.

What model do you see for the portal--is it advertising, e-commerce, content, or subscription-based?
It will be funded by advertising, but not completely. It will be funded by subscribers who will be willing to pay for the convenience of having clean, simple, concise content pre-aggregated for them. There is a difference between what the subscriber pays and what we receive in the way of revenue. A business model starts at maybe one cent. If you have caused a click as a result of a banner, probably $1. If you cause an actual transaction to take place, you have an intermediate point; 25 cents if you cause multiple click-throughs that lead you to request information or user profiling.

This is how portals work. And a slightly modified version of this that can be adapted to Palm. And frankly what I'm talking about doesn't exist today; there is no wireless portal in existence, except for Palm.Net.

If I were Cisco chief executive John Chambers, and I was listening to you talk about Palm and portals, I might say to myself, "I don't have to worry about 3Com in corporate networking anymore." What would you say to that?
He would be completely wrong. We spoke mainly of new things and the things that are going to shrink. We did not talk about things that are continuing as before, such as the commitment to the enterprise network. There is no change there, except that we are stepping up our efforts to tailor the infrastructure to the personal user. If John [Chambers] was here he would know that this part hasn't changed. He's going off to compete against the Lucents and the Nortels and the core. He is not going to find me there, and I am not going to find him here.

As you make the transition, how long will it take?
It will probably take us more than a year, but less than two to have the right mix of businesses between high-growth businesses, growth businesses, and mature businesses. If we just let it go its current speed and course, it would probably take us two to three years.

Is Wall Street is prepared to give you that time?
No, they're not. This is why the stock is trading at $26 or $27 instead of $40. The faster we do this, the quicker we will get back up.