Networking: Network Suppliers Rethink Market Strategies

After riding high on the coattails of a bullish Internet market, today's bear market has forced many network suppliers to rethink and reshape their product lines and business strategies.

The only constant has been Cisco Systems' continued dominance of the network hardware market. The San Jose, Calif.-based network equipment supplier's share of the Layer 2/Layer 3 switching market increased to a current 58 percent from 50 percent at the beginning of the year, according to The

Dell'Oro Group, a Portola Valley, Calif.-based, market research firm.

"Because Cisco has locked up the enterprise network equipment market, it has become a tough place for competitors to do business," says David Passmore, research director at the Sterling, Va., office of The Burton Group, a network planning services company. Consequently, competitors, such as Cabletron, Lucent Technologies and 3Com, have undertaken dramatic corporate restructurings designed to increase sales and boost profit margins.

Perhaps the most gut-wrenching move came when Santa Clara, Calif.-based 3Com, a solution provider favorite and the top-rated supplier in last year's Annual Report Card, exited a handful of markets. "3Com had made significant investments in products designed for high-end enterprise networks, and decided that they weren't paying off," says Greg Collins, a director at Dell'Oro.

The network hardware vendor dumped its CoreBuilder ATM and Gigabit Ethernet switches, Transcend network management software and PathBuilder and NetBuilder WAN connectivity products. The immediate results were negative: 3Com's market share in the Layer 2/Layer 3 switching market has dropped from 11 percent to 5 percent since the beginning of the year, Dell'Oro found.

While acknowledging short-term glitches during the transition, 3Com predicts the outcome will be positive. "We are concentrating on high-growth markets where we expect to gain a leading position: broadband, IP telephony, wireless and LAN switching," says Tom Hayes, vice president of 3Com's commercial business unit.

3Com continues to market its SuperStack switches, and still has a loyal following. "When it comes to price/performance, installation and maintenance, 3Com offers better products to small and midsize businesses than any other network equipment vendor," says Bill Smeltzer, vice president of sales at URS Information Systems, a Wilmington, Mass.-based integrator.

Competitive Makeovers

Competitors hope to benefit from 3Com's tribulations. And at least one,Nortel, appears to have been successful. Synercomm, a New Berlin, Wis.-based network equipment supplier, was a 3Com premium partner for eight years, but now views the company only as a niche-product supplier.

"3Com seemed to be distracted by spinning off its handheld business, and its networking products fell behind competitors' systems a bit in terms of features," says Mark Sollazo, president of Synercomm, which considers Nortel its top network equipment vendor.

Like 3Com, Cabletron has undergone a corporate makeover. In March, the vendor sold off its DSL and stackable switches and discontinued its ISDN SNA remote backup solution and RAS modem banks. It now acts as a holding company for four companies expected to be spun off as autonomous entities.

After making the changes, Cabletron became more aggressive in courting solution providers. "Cabletron has established programs so integrators that generate a few hundred thousand dollars in sales get top-level joint marketing, service and support; competitors limit such perks to companies with millions [of dollars] in sales," says Jonathan Colby, vice president of engineering services at ASCC, a Cranberry, Pa., systems integrator.

Lucent launched its enterprise business, Avaya Communication, at the end of September. "We think the spin-off will put more focus on the company's enterprise products, which were not receiving as much attention as its telco gear," says Jon Wiese, president of integrator Xeta Technologies, Tulsa, Okla.

As the data networking market constricts, telecommunications is playing a more important role for solution providers. Network equipment vendors have been working to deliver products so the Internet can carry voice transmissions as efficiently as data packets. "To date, the uptake in IP telephony has been low, but that should change during the next 12 months," predicts Tom Mitchell, vice president of worldwide channels at Cisco.

Because the technology is new, IP telephony products carry high margins, generally from 20 percent to 30 percent, industry executives say. Another plus: Corporations need add-on services, such as design and installation, and integrators can bundle them in their bids. But this market is not a slam-dunk for data equipment integrators. Since those sales involve voice communications, third parties must have expertise in that area, something many of them lack.

Training programs can help to address the problem, and vendors have been developing new courses. For instance, 3Com has created a certification program for its NBX convergent switch, and 500 solution providers have completed it.

Alliances can also help integrators. "Our heritage has been on the voice side, so when there is a data-only sale we won't bid," notes Mike Theisen, executive vice president for convergent services at Norstan, a Minneapolis-based solution provider. "Recently, we've teamed with a few data networking specialists on bids for convergent systems, and we expect to do that more in the future."

Even as this market opens up to integrators, pundits wonder how much life is left in the IP telephony enterprise market. "Network equipment sales have been moving away from the enterprise to carriers," The Burton Group's Passmore says.

With the emergence of Web-hosting and ASP services, corporations frequently are off-loading network infrastructure purchases and maintenance to third parties. "We've seen our router sales drop because the devices are often included as part of hosting services," URS Information Systems' Smeltzer says.

Certain solution providers view this change as opportunity. "Earlier this year, we formed a new group geared to selling products to ASPs," Synercomm's Sollazo says. "Currently, they account for about 5 percent of our revenue, but we expect that will increase to 20 percent in three years."

Not all integrators think that will be the case. "We don't see a reason to target ASPs, and view the enterprise network equipment market still as a growing business," ASCC's Colby says.

But everyone does agree that less volatility would be welcome. "I sure hope there aren't as many dramatic changes this year as there were in the last one," Smeltzer says. "It's been a wild ride."