3Com: It's a Palm, Palm world

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But Benhamou says the public network, where huge switches route voice and data transmissions across vast distances, is where 3Com's business abruptly halts.

"We have never really focused on the core carrier infrastructure," Benhamou said. "All of the consolidation that has taken place over the past couple of years--and there's been some pretty big ones--have focused on the core carrier infrastructure. I understand why they are taking place: Because there are big bucks there.

"When people say, 'Oh yeah, but you can't compete against Nortel and Lucent and so on.' Well, it's the wrong question to ask," Benhamou noted. "There's presumption that we want to compete against these people and we do not."

In the Palm of 3Com's hand
Though 3Com's Palm focus may throw off some of its traditional advocates, some view the business--and its associated perks--as another example of the rapid change the Internet has wrought.

Because PalmPilots have dominated the handheld market, analysts believe 3Com stands a good chance at succeeding. A recent study by Research firm Computer Economics said 3Com's market share will grow from 54 percent in 1999 to 60 percent in 2003, while the Microsoft Windows CE platform will grow from 8 percent to 18 percent during the same period.

Analyst Esmeralda Silva, an analyst with market researcher International Data Corporation, believes Palm-related revenue, which currently accounts for 10 percent of 3Com's more than $6 billion in annual sales, can increase to 30 percent. But 3Com executives believe the Palm strategy won't impact overall revenue for at least a year or two.

The question is whether that's soon enough for Wall Street.

Gruntal & Co analyst David Takata thinks investors will show patience, as long as 3Com's revenue continues to grow during the transition, he said.

"As long as they can show growth, the Street will show interest. Why is Amazon.com or Yahoo trading at ungodly multiples? Because people are saying at these growth rates, earnings will be there in a few years," he said. "Investors are smart enough that if the Palm becomes ubiquitous and captures the platform sales, then there's upgrade cycles and all that over time."

But analyst Scott Heritage of Warburg Dillon Read doesn't foresee good revenue growth in the short term. Until Palm sales and 3Com's other new efforts in IP telephony, broadband access, and home networking products become a bigger chunk of 3Com's overall revenue, the company will have a tough time financially, he said.

"Palm's a big part of 3Com's future, but the company will have a rough time for the next six months to a year," Heritage said. "Revenue growth is not going to look stellar."

For the Palm strategy to succeed, Takata said 3Com has to be more aggressive in licensing Palm to clonemakers, such as Ericsson and Nokia, to make it more ubiquitous. So far, 3Com has licensed Palm technology to a handful of vendors, including IBM and Qualcomm, which is building a smart phone with Palm capabilities.

The executive says 3Com will need time to extricate itself out of its current plight and align a strategy that makes sense to the industry and Wall Street. "It will probably take us more than a year and less than two to have the right mix of businesses between high-growth businesses, existing growth businesses, and mature businesses," Benhamou said.

"If we just let Darwinism take its course, it will probably take us two to three years," the chief executive said. "The faster we do this, the quicker we'll get back up.

"Two years ago, when we first got in the Palm business, you could ask, "Well, what is it doing here?" Today there is no question. Palm is a networking play."