Making an Investment

By eweek  |  Posted 2003-04-16 Print this article Print

eWEEK: Having filled those gaps, what else is left to be done? Claflin: Were going to invest in our service, marketing, sales and support—the customer-facing activities. We will also invest in higher value-add channels than we have typically been in.
Global systems integrators told us about their relationship with Cisco. They said it was love-hate. They said Cisco wants to have account control and so do they. They said they hate that they [Cisco] have 20 percent of their revenues coming from services and they try to displace our service offering. They said they hate the margin pressure; they dont like their [Ciscos] arrogance.
But they said that selling Cisco equipment, they dont have to fight a battle with the customer. They also said Cisco had a complete product line and you guys [3Com] dont. So were now going back to them saying, Voila, we have a full line of products, and voila, we have no intent to have account control. We tell people were going to become a tier one network provider. Some companies have a good price structure and some companies are tier one, but we dont know of any other company that is trying to do both. eWEEK: Most everyone assumes that Cisco will survive, and yet, theyve had very hard times as well. Claflin: Im not going to say that Cisco is in imminent peril. Having said that, theyre a dripping roast. Just imagine a big, fat dripping roast that you just cant wait to sink your knife in. Its like when IBM came out with the 360 and the 370 architecture. Who took a big chunk out of IBM? Gene Amdahl. He leveraged 360 and 370 software, using technology to give a better price and function point at every level. It ran standard code, and his gross margins were 20 percent less than IBM. This is where Cisco is exposed. eWEEK: This is Dells argument. Claflin: Well get back to Dell in a minute. Regarding Cisco, heres a company that had their stock at 80 a share and now its trading at about 12, so its taken a big whack. It still has a P/E ratio of 25 to 30, which means it has to have extraordinary returns to justify $12 per share. What happens if someone puts pressure on and they cant sustain those gross margins? Theyd have to gut the company: massive reductions, real estate sales. The price goes from $12 to $2. Is it likely in the near term? No, but is that a real risk for them? You bet. If a company can come along and demonstrate products as capable as if not more so than theirs, supported by world-class partners, and can price it far lower—thats where I see the dripping roast. It happened in mainframes, it happened in PCs, and its happening in storage.


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