IBM, Compaq and Sun's move into networking is a threat to the three biggest practitioners. When three of the world's biggest networking companies agree to share a platform to address customers, you get the feeling that they must be feeling a little insecure.
By all estimates the networking market will explode between now and 2000, but for most people the world of hubs, routers and switches is still a black art. The reason it is a black art, and therefore a potentially lucrative source of business, is that networking suppliers are looking to make most of their money from 'network management'.
At a recent seminar none of the manufacturers - Cisco, 3Com and Bay Networks - disagreed when a representative of reseller Simmons Magee said the three were following the path of evolution, not revolution. Unfortunately, they may soon have no other choice than to become revolutionary. After 10 years of having a clear run at the market, these dedicated networking manufacturers no longer simply compete against each other, they must also tackle the not inconsiderable resources of IBM, Compaq and Sun Microsystems, which have started to target the market.
IBM has launched Neteam, its effort to recruit resellers to shift its networking products on a pyramid model, with thousands of dealers selling adaptor cards and a few selling high-end switches. Compaq has set up its IPG product group which is busily discussing terms with distributors such as Azlan, which traditionally depended on Bay or 3Com for their networking products. Sun says it is operating at the business end of the Internet, in intranets, and said that one of the fastest-growing sectors of its business is in network servers.
The traditional network firms scoff at the idea of a company like Compaq taking their business. They say there are few volume networking products and that it is all about service - something Compaq knows nothing about. But judging by the investments Compaq has made in Thomas Conrad and Networth, it is planning a long game.
The PC manufacturer, which wants to grow up into a computer company, is also appealing directly to users by attacking the margins being made by the long-standing network manufacturers. Compaq claims that Cisco, 3Com and Bay are making 55 per cent margins; its gross margin is about 23 per cent. Bay and the others try to say that their costs are such because of the time involved in setting up networks and the level of service needed to maintain them. But even they accept that the time has come to drive costs down while increasing their quality of service. This will not be easy as the the main cost of running a network is transmission. Figures from the established network providers state that costs are: hardware, eight per cent; software, 2.7 per cent; maintenance, 1.5 per cent; and transmission 87.8 per cent. The biggest winners in the rise of networking will be the PTTs and their competitors. Dealers, of course, need margin, so they should beware of the bargain basement approach.
The technology will determine the industry. Everyone accepts that asynchronous transfer mode is coming, but no one is prepared to say when. It is expensive and will remain so for the foreseeable future, but if users want any kind of multimedia over their networks then they will want to move as quickly as possible. Cisco accepts that Ethernet will be around for a long time yet because it is cheap, but also accepts that any prediction of the future of networking is at best a swag - a scientific wild ass guess.
What is definite is the growth in the use of mobile access to networks. This is the hunting ground for the immediate future as more people want to build networks for their customers and suppliers, giving plenty of scope for growth in virtual networks.
So what is the future for the traditional networking vendors? Given that the industry's history has been one of merger and acquisition there is no reason to suppose the future will be any different. Bay was born out of the merger of Synoptics and Wellfleet and has since bought Centillion, Xylogics, Armon and Performance Technology and does not discount more acquisitions. The problem is that consolidation comes to all start-up industries and this process is only likely to be accelerated by outside competition.
Each of the big networking firms has a turnover of about $2 billion.
In the wider IT world this makes each of them a small to medium-sized player. If Compaq is successful and IBM follows through on its promise to become a major networking player, it may be that the only hope of survival for the trio of big networking firms is a merger.
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