Dell affirms commitment on networking

CHICAGO: 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 that 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 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."

© Reuters