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Many within the industry think vendors are just throwing in the towel, giving up the big fight against the Cisco Systems marketing machine. Others think this is all a big hand-waving exercise; indeed, some of these vendors wave so high and hard they're about to take flight. But for all that hand waving, a common thread ran through conversations with managers at all three vendors: shareholder value. Investment analysts are driving these vendors' strategies, taking precedence over short-term profit-and-loss statements and customer satisfaction with product offerings.

And yet, investors' reaction has been anything but enthusiastic. Of the three, only Lucent's stock price reacted positively to its recent announcement, according to Abid Mansoor, an investment analyst from Zacks Investment Research. Mansoor speculates that even Lucent's upticks reflected the fact that the stock was underperforming prior to the announcement. Still, with the completion of the spin-off, Mansoor expects the old Lucent business to show greater margins and profitability, thus improving stock performance.

These vendors might eventually win their battles at the expense of customer trust. Certainly the vendors aren't helping their enterprise image by spinning off separate companies. Why shouldn't customers drop these companies' products and head to Cisco's more solid ground? What possible benefit could these announcements and spin-offs have for you, the enterprise-computing customer? That's exactly what we asked the executives of Cabletron, Lucent and 3Com.

3Combobulation

On March 20, 3Com announced it would be "narrowing its focus" toward markets, products and technologies in which it could hold a leadership position. The company is departing from several key spaces in which it previously held significant market share. Instead, 3Com is targeting consumers, small and midsize businesses, and network service providers, with IP telephony products, wireless and broadband access devices, and Web-based solutions.

We asked 3Com's president and COO, Bruce Claflin, why the company is moving out of the enterprise market space. He cited two key reasons. First, 3Com's share in the enterprise market is very low, especially when compared with "some large incumbent vendors"--which is Cisco, in case you've been living in a box the past few years. We agree that's probably a good decision. The company's CoreBuilder is far from a best-of-breed product, for example. It made a big splash when it appeared on the market, but 3Com failed to deliver on long-term promises for feature and functionality upgrades.

The second reason, Claflin said, is the poor return on investment. The high-end LAN and WAN switching business sapped 60 percent of 3Com's development resources while providing only 20 percent of its revenue and none of its profits. That's not a bad reason to get out of the market either, but it leaves many customers stuck with a large investment in 3Com infrastructure.

Gary Habermann, Widener University's director of technical resources, said he's very disappointed with the company's actions. And while he appreciates 3Com's Extreme Networks migration program, he has doubts about the viability of a 400-person company delivering products for his network core.

3Com hasn't totally abandoned its customers but has put a significant time and budgetary crunch on large IT shops, forcing them to cancel and postpone other rollouts in order to re-evaluate their 3Com infrastructures. For some customers considering jumping ship anyway, this is the kick in the pants they needed. 3Com customers have until June 30 to get their final orders in for the discontinued lines. 3Com will support the hardware platforms for up to five years, until contracts are fulfilled by attrition. Likewise, software development for the hardware platforms will continue until June 30, 2001, to ensure that outstanding customer issues are properly put to bed before the development teams move on to other projects. 3Com maintains most of its engineering expertise and all the intellectual property for the CoreBuilder and NetBuilder products, as this technology is being recycled into some of its midrange enterprise offerings.

Competing vendors are champing at the bit to seize a chunk of 3Com's market share--18.3 percent of all ports shipped globally, representing 10.8 percent of global market revenue for Ethernet switches, according to fourth-quarter 1999 statistics from the Dell'Oro Group, a market research firm. Cabletron, Foundry Networks and Lucent were quick to offer to buy your old 3Com gear and give some juicy discounts on their own stuff. And 3Com has worked its own deal with Extreme Networks, sending 200 sales and marketing staff to Extreme, and cutting a good migration deal to 3Com customers willing to take the purple Extreme road.

3Com will exit other lines, too. Its analog modem business is being sold off wholesale to a new company being formed by Accton and NatSteel. 3Com will have a 20 percent minority investment in the new venture. This sell-off includes all the U.S. Robotics products.

Also on the way out is the high-end Transcend network-management platform. 3Com will retain the Transcend Supervisor element manager software, which is merely a single switch management agent for Wintel-based small-to-midsize shops. All the high-end offerings (node management, network design, planning, discovery, VLAN management--essentially all the enterprise-caliber tools) are being taken off the market. The RMON (Remote Monitoring) line, which includes Traffix and LAN Sentry, are staying, however, and could be good sell-off targets, as so few RMON vendors are left.

The new 3Com will focus on four key markets: Web-based solutions, LAN switching/Internet telephony, wireless access products and broadband devices. At least, that's the company's story. Web-based solutions fall under a partnership with a company called March First, which will be the consulting services arm of 3Com's new corporate model.

In the enterprise space, 3Com will continue to sell its NICs, SuperStack hubs and switches, OfficeConnect products, and other products that don't fall under the CoreBuilder umbrella. 3Com has no intention of exiting the LAN switching business. However, if aggressive vendors capitalize on the fear, uncertainty and doubt 3Com has created--and who wouldn't?--the company is likely to lose significant market share.

3Com's drastic move shocked the industry. It surprised investors, too; however, Zacks analyst Mansoor believes 3Com's poor market response was clouded by the Palm Computing spin-off, which happened almost simultaneously with the enterprise divestiture. Arbitrage traders had a significant impact on 3Com's stock following the Palm spin-off.

But 3Com is really putting all its cards on the table. It has told the world what it's going to do, and rather than dragging the CoreBuilder products and customers through a long, slow death, the company is attempting to come clean now.

Moving forward, the company sees new product lines arriving on the market much faster and with a lower price tag. Claflin speculated that because 3Com is no longer supporting non-revenue-generating products, it will be able to offer more competitive pricing in its markets. The R&D budget will shrink by about 1 percent to 2 percent, but the overall R&D effort will focus on a smaller range of products. Thus, the overall effect is a significant improvement for new products.

Where will 3Com be in two years? The company views itself as showing expansion in new markets, with total company growth in excess of 20 percent and operating returns of more than 14 percent. "We expect ourselves to be absolute leaders in these markets," Claflin said. 3Com is trying to become a broadband company. With 3Com's leadership position in the cable modem, DSL and CDMA wireless markets, we understand why. As for the enterprise market, 3Com will continue to try to penetrate the wiring closet with high-function, high-density edge switching. But frankly, its real strength will show in the SOHO (small office/home office) and small business markets, where the word "Cisco" doesn't carry the brand recognition it does in the enterprise.