July 26, 2001 5:00 AM PDT

Dell turns to networking as PC sales slump

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Dell Computer hopes to use its clout in the computer hardware market to battle the likes of 3Com and Cisco Systems in the networking business, but it follows other PC makers that have had only moderate success with similar strategies.

Dell, the world's largest PC maker, announced last week its attempt to crack the network-equipment market with low-end devices that connect PCs and servers together in small and midsized businesses.

With the move, Dell takes on entrenched networking players that target the small and midsized markets, such as 3Com and Nortel Networks spinoff Netgear, but also lesser-known companies and those not usually associated with the networking business, such as Intel, Hewlett-Packard, Linksys and D-Link. Dell also pits itself against Cisco, although the networking giant focuses mainly on higher-end equipment.

"This is a good move for Dell because they sell a lot of servers," said analyst Tracey Vanik, of analyst firm RHK. "Now their customers can have a Dell switch to manage their servers."

The company's plan is simple: Entice its large base of customers from small and medium-sized businesses to buy its forthcoming low-end "switches," devices that connect office PCs and servers together, so they can swap data.

Dell's foray into networking will help it add revenue during a sharp downturn in PC sales. Some analyst firms, such as Gartner, believe the company has the potential to capture as much as 10 percent of the estimated $5 billion low-end switch market by 2002.

"If Dell were just entering the market blindly, they would not have much of a shot," Vanik said. "But because they can leverage their existing customer base, they have a chance to take market share here."

Other analysts are more skeptical. Compaq Computer and IBM have entered and then exited the networking business in past years, while HP, the only other PC maker with networking products, has had modest success, they say. Because of that history for PC makers in the networking business, analyst Martin Pyykkonen, of investment bank C.E. Unterberg Towbin, said he doesn't expect Dell to make a big impact.

"Dell will add more convenience with packaged sales (of PCs, servers and switches). They can capture a few bundled sales, but it will come up short so that it will not matter a whole lot in the industry," Pyykkonen said.

Wrestling with challenges
Dell executives, however, argue that the company can duplicate its success in the PC market. In that area, it has eked out profits using its cheaper manufacturing process, in which it doesn't build products until they are ordered and then sells directly to customers through its Web site.

The company polled its customers, asking if they'd be willing to buy Dell networking products, and they responded favorably, said Kim Crawford, vice president and general manager of Dell's networking business.

In fact, Dell already bundles its PC and server sales with networking products from the likes of 3Com, Cisco and Extreme Networks. About 20 percent of its customers who buy PCs and servers through the Dell Web store end up buying networking equipment at the same time, said analyst Brooks Gray, of analyst firm Technology Business Research.

Although Dell plans to continue selling its competitors' networking gear alongside its own, some analysts believe the company can compete because of lower prices.

"Price clearly matters for the small and medium-sized business customer. It mattered in the PC hardware level, and it has to matter for switches," Gray said. "Dell likes to put the pressure on. Their strategy is to go in and underprice the competition, ramp up the volume, gain market share, and establish their brand."

Analysts believe Dell's success will largely stem from businesses with fewer than 100 people. The PC maker's biggest challenge, analysts say, is that it doesn't have as many partners as its competitors in offering consulting services to connect networking equipment with PCs and servers.

Dell's other challenge, according to analysts, will be convincing bigger companies to trust their networking needs to a company that has not proven it has the expertise. Because of that, Dell can do well with simple-to-use products aimed at small businesses, but not necessarily with larger companies, Gray said.

"It's the experience. The viability of the vendor comes into play," he said. "These larger companies--medium-sized businesses--can't afford to have their networks go down."

Dell's Crawford said the company has long-term goals in the networking business. If successful with smaller companies, the company will expand its product line with higher-end switches for larger corporations, where it would compete more directly with Cisco, she said.

Dell is interested in entering any market that becomes hugely popular. For example, the company would enter the market for Internet-based phone systems if the market were to take off, Crawford said. Net-based phone systems are touted as cheaper and easier to manage than traditional phone systems.

Dell is hiring other companies to build its networking equipment. The PC giant has already entered the fast-growing wireless market, reselling Agere Systems' equipment under the Dell brand name. Dell also has hired Digital Networks out of Taiwan to build its low-end switches, but under the engineering blueprints set forth by Dell, a company spokeswoman said.

Because of Dell's market sway, the company educates smaller companies that don't have networks and lures them to buy networking equipment, said IDC analyst Katrina Dahlquist.

"Dell has a good understanding of their customers," Dahlquist said. "It's a big market and will grow strongly in the next five years. It's too soon to know if Dell is a market-share stealer, but it may help bring new (customers) into the market."

 

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