Bruce Claflin, 3Com

CRN: What's the competitive scene for 3Com now?

Claflin: From a competitive viewpoint, if you were to think back to just before the economic bubble burst, 3Com had been going through a substantial amount of restructuring, even during the good times. On a competitive basis, we looked vulnerable relative to companies that appeared to be more stable. [Now go to today. Since those major changes, 3Com essentially has been very stable in terms of its product line and direction, whereas our competitors have been going through massive restructurings, including the elimination of product lines.

Just think about specific names. Enterasys [Networks was a darling of the industry over the last year; [research firm Gartner had them in their magic quadrant. I don't need to say more about that, [given the enormous implosion of the company. Lucent [Technologies and Nortel [Networks were among the most reputable networking companies in the world. Their CEOs were featured on every magazine. Today, frankly, their very survival may be in question. Think about Intel. A year-and-a-half ago, they made a big splash that they were going to be a network products company, and they had a dramatic product road map. Today, they have exited [that market. So I think the competitive environment has materially improved from what it was a year-and-a-half ago.

CRN: You didn't mention Cisco Systems when you were discussing competitors.

Claflin: I did ignore Cisco in that little soliloquy I gave. So I guess I ought to mention them, since they seem to be in networking these days. I think Cisco, relative to its position a year or two ago, is not as strong. But they are clearly still a dominant player.

Like other networking vendors, 3Com has been hit hard by the sour economy. President and CEO Bruce Claflin has spent the past year restructuring the company to achieve profitability and position it for growth. Claflin discussed the competitive landscape in an interview with CRN Infrastructure Editor Larry Hooper. Here are the excerpts:

CRN: Cisco is facing some channel conflicts, but they've gained market share from other networking vendors during the economic downturn.

Claflin: I would not assert today that Cisco has lost its competitiveness. [But I think they are more vulnerable today than they have been in years,maybe ever. And it's for a variety of reasons. At a customer level, Cisco was the safe choice. Whatever you brought in would get signed. Today, with tight capital dollars, I think CFOs are first saying, 'Why am I even spending the money?' But then [they say, 'Has this been competitively bid? Am I getting the best value for my money?' Those kinds of questions were not being asked during the go-go years. I think that favors us because we are clearly the better value for the money. The second thing about Cisco is related to [channel partners. In their opinion, Cisco is overdistributed. I read [CRN's May 6 article in which [Cisco CEO John Chambers acknowledged that they have a serious problem with profit pressure on the channel. That was not just something that happened. It was a conscious strategy on Cisco's part that led to overdistribution. I read with great interest that he said this could take up to a year to fix.

I'm going to give you my take: I don't think he can fix it. I think he's between a rock and a hard place. He has a business in both enterprise and telecom. As part of getting the telecom infrastructure business, he promised to bring enterprise business to the carriers. In order to do that, he authorized the service providers to resell his products. They compete with the traditional VAR. But the service provider has such a disproportionate amount of services they want to sell that the hardware can be discounted at any price they want. It's true that the VAR also has services, but the relative ratio of services to product revenue in a typical VAR sale is so different from the service provider's that they cannot compete. The service provider is subsidizing hardware with services revenue in a way that the VAR cannot compete. They always have, and it's getting worse. I really believe there is a fundamental business-model issue Cisco has run up against. It always was there, but there was sufficient growth so that everyone could live with it. Unless the market resumes 30 percent growth,which I don't see in the near term, if ever,I don't think Cisco has a way out. I think the VAR is permanently, forever squeezed. We see that as an opportunity.

CRN: How are things going with 3Com's partners?

Claflin: We knew when the bad times hit that we had to improve our profitability, and we made a conscious decision not to do it on the backs of our partners. It would have been tempting to take actions that would have reduced their margins or [had 3Com distribute more broadly, which ultimately would have put pressure on their margins. We made the fundamental decision that we could not solve our problem on the back of the channel. In fact, we decided the only way to solve our problem was to make us more attractive to the channel. So we embarked on a plan saying that as we improve our profitability, we want their profitability to improve, too.