Breaking News -
Networking:
Dell Confirms Commitment To
Networking Business
Dell Computer Corp. remains intent on making itself a feared rival in the
networking equipment sector despite questions about the No. 1 personal
computer maker's commitment.
"We are committed to this market," Dell networking chief Kim Goodman told
Reuters this week, addressing concerns arising from Dell's recent comments to
analysts that networking is a "tier 2" business.
"The Dell strategy is very clear in this space."
Dell's entry not quite two years ago into the switching market has driven
down
prices on the low end, but does not currently have market leader Cisco Systems
Inc. or its smaller rivals shaking in their boots.
"I get continually bombarded by people ... that networking is going to be
commoditized, it's all over, it's a mature business. I just don't buy it,"
Extreme Networks Inc. President and Chief Executive Gordon Stitt told Reuters.
"Clearly we watch Cisco much more."
Cisco officials, pointing to recent product launches, said switching
remains
one of the San Jose, California company's core markets, accounting for about
40 percent of sales.
Cisco CEO John Chambers has said in the past the company will fight
low-cost
rivals. He also has said price is not a key factor when customers are choosing
switches, but features and service are.
Ignore Dell At Your Peril
However, investors and analysts say the established players ignore Dell at
their peril.
"If you're the incumbent and they enter your market, you've got to be a
little
bit worried because Dell has obviously had great success in commoditizing
everything they've entered," said Ken Smith, a portfolio manager with Munder
Capital Management, a Detroit-area asset management firm that owns shares of
Cisco and Dell.
Other technology markets, including personal computers and data storage,
have
been radically changed as Dell and others moved in to compete on price and
took market share.
While Dell's share of the Layer 2 switch market remains below 1 percent, it
is
adding products and still intends to enter the more profitable Layer 3 segment
by year end. Smith thinks Dell could ultimately boost its share to the low
teens.
The company has not set forth any specific targets for the networking
segment.
In 2001, Dell began selling entry-level Layer 2 switches, which are used on
the edge of computer networks and account for about two-thirds of all
switches. Layer 3 switches determine the best paths across the Internet.
Cost-conscious small and medium-sized businesses are the bulk of the Layer
2
customers, offering Dell an opening as it already sells many of them desktop
computers and servers, analysts have said. On the other hand, the Layer 3
market is mostly large corporations, where Cisco has a stronghold.
The Layer 2 and Layer 3 switch markets totaled about $10.7 billion last
year,
of which Cisco -- scheduled to report fiscal third-quarter results next week -
- had a dominant 70 percent and no other company had more than 5 percent,
according to research firm Gartner Dataquest.
Dell Undercuts Rivals
Dell has a history of rolling into markets with big profit margins,
building
products at low enough costs to drastically undercut rivals on price while
still eking out a profit.
"We have the belief that the (networking) industry will behave like many
other
industries and is already doing so, in that it will move to standardization,"
Goodman said.
Analysts and investors agree the networking industry, at least at the
moment,
is more complex than some of the other industries, but Dell's past successes
are reason it should be feared, especially by such smaller players as Extreme,
3Com Corp. and Foundry Networks Inc.
"If Dell gets even a 5 percent market share, it's going to hurt a lot more
the
other marginal players that are really trying to compete on cost," said Bill
Kornitzer, senior analyst with USAA Investment Management, which owns shares
in Dell.
Dell has begun selling switches overseas and has large corporate customers
Goodman declined to identify.
Ultimately, Round Rock, Texas-based Dell's success will be determined by
its
commitment to research investment or whether it partners with companies that
have strong research, J.P. Morgan analyst Ehud Gelblum said. "Whether Dell
will be a major force is totally up to Dell."
|
