3Com Corp. last week said it is jumping back into the large enterprise LAN core switch market in a resale deal with China-based Huawei Technologies Co. Ltd., a maker of enterprise LAN core switches and routers.
The deal creates a joint venture between 3Com and Huawei, where 3Com will resell Huawei's gear under the 3Com brand in the U.S. and foreign markets, except Japan and China. The move also raises questions, such as how customers will view 3Com's refocusing on the enterprise core - a market it abandoned in 2000. And a pending lawsuit brought by Cisco against 3Com's new partner raises other issues.
"In large enterprises, I believe business think well of 3Com for the network edge, but they don't think of us in terms of the core of the network," 3Com CEO Bruce Claflin says. "As we go forward, we'll demonstrate that we're a tier-one networking company that has a broad line of products for businesses of all sizes."
To bolster this enterprise push, 3Com also said it will produce a new high-end enterprise IP PBX product based on carrier-class softswitch and gateway products from 3Com's former carrier division CommWorks (which it sold this month). 3Com had among the leaders in IP telephony market, but its customers are mostly small and midsize firms.
As part of the joint venture, 3Com will pay US$160 million in cash, and Huawei will contribute its enterprise networking business assets, including products, engineering, sales and marketing resources and personnel, and licenses. Huawei will own 51 percent of the joint venture, and 3Com 49 percent. After two year, 3Com will have the option to own 51 percent of the venture.
3Com also contributes its operations in China and Japan, and some intellectual property to the venture. The deal is expected to be closed in the third quarter of 2003.
Rankling competitors
By picking Huawei as a partner, 3Com is teaming with a firm that makes market leader Cisco nervous. At a financial analysts meeting in January, Cisco CEO John Chambers mentioned Huawei in the same breath as market powerhouse Dell (which recently entered the switch market), when citing potential threats to Cisco's dominant market share.
In fact, Huawei bothered Cisco enough that the networking giant sued the China-based firm in January for alleged patent infringements. The suit involves Huawei's routing software, which Cisco says is too similar to its market-leading IOS routing code. Huawei reacted to the suit in last month by pulling its Quidway line of routers and core switches from the U.S. market.
Claflin says he cannot comment on the pending litigation, but adds that 3Com will review all products it chooses to resell won't infringe on the patents of rivals.
"We're confident that the products 3Com will offer as a result of this joint venture will be respectful of all competitors' intellectual property."
3Com recently reported earnings, with a loss of US$79 million, compared to a $69 million loss in the previous quarter and a US$227 million loss in the third fiscal quarter last year. Revenue of US$244 million was down 19 percent from the previous quarter.
While 3Com slogs through the same depressed market as its competitors, the company is flush with cash - US$1.4 billion in cash and investments - which helped the firm pay for its share of the joint venture with Huawei.
New VoIP push
In addition to renewed datacomm enterprise push, Claflin says 3Com will also beef up its IP telephony offerings for large corporations by introducing a high-end IP PBX based on the softswitch architecture from its former Commworks carrier subsidiary, which 3Com sold this month to China's UTStarComm for US$100 million. (3Com retained all intellectual property on CommWorks products as part of the deal). Claflin says the softswitch, which is based on the Session Initiation Protocol and can scale to "hundreds of thousands" of seats, compared to 3Com's NBX voice product, which scales to around 1,000 seats. The former CommWorks product will become part of the NBX product line.
"We'll now have a (VoIP solution) that can go from ten phones, to hundreds of thousands," he says, adding that the enterprise softswitch is in customer trials now, and will targeted for release in the third quarter.
A long road back?
In May of 2000, 3Com began a radical restructuring effort, where it shed most of its chassis-based Layer 3 LAN switch gear and routing products aimed at the core of large enterprises. At the time of the restructuring, the company cited diminishing market share in the core enterprise switch market and poor margins. Now, Claflin, who was president and chief operating officer under CEO Eric Benhamou during the restructuring, says the market has changed since 2000; he says there is more demand now for an alternative, cost-competitive vendor for end-to-end enterprise networks.
"You don't overcome any issues from past (with customers) by just being there," Claflin says, adding that 3Com will use "superior products" and aggressive pricing to win back large enterprise customers.
As to whether it will be difficult for 3Com to reenter the enterprise market after its exit may have left some customers feeling burned, Claflin says "I don't believe it will be (difficult) for a variety of reasons."
He dispels the notion that 3Com would be calling on a large number of firms with negative attitudes about the company's 2000 restructuring by saying, "our installed base was only around 4 percent at that time, which is relatively small. As for the customers that did have our products, a vast majority of them liked our products and kept them, while we lived up to our service and support commitments."
Still, bad blood among some former 3Com customers still lingers.
"I wouldn't go anywhere near that company," says Tony Crognale, a network technician at Scottsdale Insurance, in Scottsdale, Ariz., referring to 3Com's reentering the LAN core market. When 3Com pulled its CoreBuilder LAN swithces in 2000, he says, "we had just invested a huge amount of dollars in the CoreBuilder line … and we were completely misled by them. We didn't have it installed for 30 days when they made the announcement that they were getting out of enterprise switching."
Scottsdale Insurance turned to Extreme Networks, which 3Com had named as a migration partner, Crognale says. With over 30 Extreme BlackDiamond Layer 3 switches now in place, he says going back to 3Com is not an option.
3Com's foray into larger enterprise IP telephony is of interest to Peoples Bank, a regional bank with 50 locations in Ohio, Kentucky and West Virginia, recently installed at 3Com NBX system for its 600 employees.
"We're 100 percent bought into the NBX system for now," says Steve Nulter, vice president and manager, information systems at Peoples Bank. "But for future growth we'll we'll look into it," he adds, referring to 3Com's enterprise softswitch offering. Getting 3Com in on the LAN core side will be a different story at Peoples Bank. "We've committed to Cisco for our whole LAN and WAN infrastructure; I don't see that changing," Nulter adds.
3Com's Claflin says new enterprise data and voice products from 3Com could be shipping sometime in the third quarter of 2003. He says 3Com will work to integrate its technology, such its management software and Layer 3 and 4 policy based switching technology into the Huawei products. 3Com's Expandable Resilient Networking (XRN) technology for meshing backbone switches with high-speed redundant links will also be integrated into the new products.
While recharging its U.S. enterprise presence, Claflin says the joint venture with Huawei will also spur growth in networking in Asia.
"I've long believed China is one of the most potentially (lucrative) markets in world," Claflin says. "I think it can drive a lot of growth. Our combining with Huawei there will help drive that."