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Linksys leapfrogs wireless networking titans

The company is winning a David-and-Goliath battle against the likes of Intel and 3Com in the emerging market for technology that connects PCs within a home.

Linksys is winning a David-and-Goliath battle against the likes of Intel and 3Com in the emerging market for technology that connects PCs within a home.

For years, Intel, 3Com, Nortel Networks spinoff Netgear and other network hardware makers have championed the virtues of home networking, technology that allows consumers to connect their PCs and other peripherals in the home so they can share printers, files and a single Internet connection.

But little-known network equipment maker Linksys has catapulted its way to become the early leader in a market that most analysts believed would be dominated by Intel and 3Com, two well-known brand names that spent heavily on advertising to tout their initial products in consumer magazines.

"If you could bet in Vegas, the odds would have pointed to Intel and 3Com, but Linksys managed to rise above all the companies with more brand recognition," said analyst Michael Wolf of Cahners In-Stat Group. "Linksys has good products and does it cheaply. The bigger companies have a lot more overhead and cost a little more."

In just five months in the market, analysts say Linksys has surpassed Intel, Lucent Technologies spinoff Agere Systems and others to become the leader in wireless networking kits, technology that allows people with laptops to roam around the house and still surf the Web. The 13-year-old, Irvine, Calif.-based company has captured more than 50 percent of the market for simple "routers," devices that connect multiple PCs in the home to a cable or DSL (digital subscriber line) modem.

Last year, Linksys was the first to come out with a low-priced router that connected multiple PCs to the Internet, Wolf said. "That hit a chord with consumers. It was a product that did what people wanted it to do, it was simple to use, and it was cheap. They hit a sweet spot in that market and the timing couldn't have been better."

Linksys' low-end routers sell for between $99 and $129, while its wireless networking hardware is priced between $200 and $250.

Home networking to connect with consumers
Sales of home networking products reached $290 million in 2000, a 97 percent jump from the previous year. The market is expected to more than double to $585 million this year, according to Cahners. Because the market is still in its infancy, analysts say it's too soon to know which of the many network equipment makers in the home networking market will become the eventual winners.

Analysts expect the technology to take off in the coming years as more consumers get high-speed Internet access and want to share that access between every electronic device in the home. Although most products today are simple networking kits that connect PCs together, analysts envision a future in which a PC in the study could be used to turn off the oven in the kitchen.

With its many reorganizations and economic woes, 3Com in March dropped out of the home-networking market, although a 3Com spokesman said the struggling company could re-enter the market. In the meantime, a recent 3Com spinoff, modem maker U.S. Robotics, has entered the market with its own line of products. Other remaining players include Proxim, D-Link, SMC Networks and Sohoware to join Intel, Nortel's Netgear and Lucent's Agere.

Analyst Stephen Baker of market research firm NPD Intelect said lesser-known companies, such as Linksys, can thrive in the market right now because most buyers of home networking equipment are people who use cutting-edge technology and aren't afraid to buy products from a company that's not a household name.

"Maybe in a year or two if it starts to explode, people will say, 'I want my Intel,'" Baker said. "But we're still in the early-adopter phase. The customers who are buying know specifically what they want. They're willing to trust" the smaller companies.

Naming the leaders
Janie Tsao, a former information systems manager, started Linksys in 1988 out of her garage in Irvine. The company had only a handful of employees in its first few years and made networking equipment for small businesses.

Tsao, now vice president of sales, broadband and business development for Linksys, originally oversaw the company as it built PC cards that linked computers together in an office network, as well as devices that connected PCs to an office printer. It then expanded to networking devices for medium-sized businesses. In 1996, it released its initial home networking products.

The company has grown to 350 employees and has seen its yearly revenue increase from $6.4 million in 1994 to $206 million last year. Tsao expects to rake in $350 million in sales this year.

Linksys captured 57 percent of all sales of low-end routers this year through May 2001, followed by Netgear with 15.6 percent, Cisco Systems with 12 percent, SMC with 2.5 percent and D-Link with 2.4 percent, according to NPD Intelect. Cisco, which has postponed plans for high-end home networking equipment until the market takes off, has primarily sold its low-end routers to small businesses, analysts say.

Of the estimated $65 million spent in wireless networking products in the first five months of this year, Linksys took the top spot with 28.3 percent of the market, followed by Lucent's Agere with 19.3 percent, U.S. Robotics with 9.3 percent, and SMC and D-Link with about 8 percent each, according to NPD Intelect. Intel and Proxim ranked fifth and sixth in the market, with 5 percent and 3.1 percent, respectively.

Linksys, which also sells to the small and midsized business markets, doesn't lead every home networking category, however. Intel dominates the market for phone-line networking kits, technology that allows people to link their PCs by plugging them into regular phone jacks. According to Cahners, Intel grabbed 53 percent of the market in 2000, followed by Linksys, 3Com and others.

Besides having low prices, Linksys has flourished in the home networking market, analysts say, because it has managed to get its products in every major retail store, such as Best Buy, Wal-Mart, Circuit City and RadioShack, as well as on high-traffic e-commerce Web sites, such as Amazon.com and Buy.com.

Meanwhile, Wolf said Intel and 3Com made some mistakes in their initial forays into home networking. Intel, for example, placed its bet on wireless networking technology called HomeRF, while most of the industry supports technology called Wi-Fi. With Wi-Fi's popularity growing among businesses and consumers, Intel has since stopped supporting HomeRF and will sell its first Wi-Fi product later this year.

3Com, for its part, has been unable to parlay its past successes in the consumer market, with products such as dial-up modems and Palm devices, to newer areas, such as home networking and Web surfing devices. The company earlier this year killed off its consumer division, which included the Audrey Web surfing device.

"Intel had the wrong products and 3Com just kept stumbling in the consumer networking level," Wolf said.

Barry Bonder, Intel's director of residential networking products, said Linksys has taken an early lead in the market because it was first to release a comprehensive family of products. But he believes Intel will be more competitive in the future, especially in the area of wireless networking.

"They were the first to offer a full line of routers and 802.11b products. They made some good decisions," Bonder said. "This is a fast-growing market and we expect to be a leader in market share."

Linksys, which contracts with Taiwanese companies to build its products, can sell products cheaper than those of its rivals because of the company's more efficient business operations, said Tsao.

What's next
Linksys isn't resting on its laurels. The company, which has primarily focused on low-end networking devices, has plans to come out with a family of new high-end home networking devices, called "residential gateways," which act as the central device in the home that connects a broader array of electronic devices like PCs, appliances and security systems to the Net.

The company will join Motorola, Scientific-Atlantic, Intel, 2Wire, Coactive Networks and others that will build the devices touted as allowing numerous advanced services, such as video-on-demand, the ability to easily add new phone lines, and the capability to monitor and manage energy use.

Linksys this fall will demonstrate a residential gateway for consumers interested in entertainment. The product, which will have its own hard drive, will let people connect their PCs, printers and home appliances such as stereos and TVs to the Internet, allowing them to download audio and movies from the Web as well as make Net-based phone calls, she said.

Like its rivals, the company later this year plans to ship home networking kits that allow people to network their PCs together by plugging them into power outlets in the home, Tsao said. In the coming month or so, the company also expects to announce deals with DSL and cable operators that will bundle Linksys' home networking products with their broadband service, she said.

Cahners' Wolf said Linksys has developed a reputation for putting out quality products and believes the company will continue to thrive as the home networking market develops.

"Linksys will do well because they have a growing brand-name recognition among users," he said. "As long as people get broadband and want to share it, they will do fine. They're also well positioned with wireless products that are the right price. They're hitting all the right chords."