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Commentary: Dell's switch pitch looks on-target

The company's plan to launch a line of network switches will pose both opportunities and challenges, and force competitors to pay closer attention to the direct-selling channel.

    By Mark Fabbi and Mark Margevicius, Gartner Analysts

    Dell Computer's plan to launch a line of network switches will pose both opportunities and challenges for the company, and force competitors to pay closer attention to the direct-selling channel. This and other recent entries into the low-end network equipment market should benefit small and midsize businesses (SMBs) with more options and price competition.

    Dell's strategy is to leverage the customer relationships it has built up with the SMBs through its PC and server businesses, targeting what it believes is a $5-billion-plus market for selling SMBs low-cost, commodity switch equipment. Curiously, in entering this market, Dell is taking an opposite path from other system vendors--such as IBM and Compaq Computer--which have moved out of the networking-equipment business (a notable exception being Hewlett-Packard, which has also taken more of a commodity approach in this market).

    Gartner believes this move presents several positive opportunities for Dell. First, SMBs have a strong affinity for making network- and PC-related purchases simultaneously, providing an opportunity for Dell to leverage its PC sales into additional sales of switch equipment. Second, because Dell's direct-selling model provides a different sales approach than many of the competitors in this market, it shouldn't have to compete as much for "virtual shelf space" in this channel.

    Moreover, there is no single dominant vendor in the low end of this market: Cisco Systems and 3Com are the two biggest network switch players, but Cisco is more focused on the high end and 3Com is still going through its transition to focus on SMBs. Given that there is little customer loyalty in the SMB networking market, other recent entrants (D-Link Systems, Linksys and NetGear) have demonstrated that market share can be snapped up relatively quickly.

    See news story:
    Dell to sell network switches
    The move is not without challenges for Dell, however. First, because networking services are more complex than those of PCs (for example, there are more points of potential failure in an implementation), Dell will need to build up its network expertise in offering service and support for the new line. In addition, local systems integrators are often needed to put the network together, and Dell has far fewer partners in this regard than many competitors given its preference for the direct-selling model.

    Nevertheless, because the margins on networking equipment are typically higher than those of PCs, focusing on this market looks like a good move for Dell. Gartner believes Dell has a good shot at capturing between 5 percent and 10 percent of SMB L2 switching market by year-end 2002, and we expect its entry to impact the market by helping to push the cost of workgroup switching equipment further down the price curve. Further, Dell's direct-sales model should pose some challenges for competitors, forcing players like 3Com to increase awareness of online-purchasing options.

    Entire contents, Copyright ? 2001 Gartner, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.