Online Video Beneficiaries: 3Com?

On the sixth anniversary of 9/11, we are reminded that travel has become a nightmare, and online video conferencing is a booming trend, and the increasing video traffic is fattening the networking equipment players. In my earlier posts on Online Video Beneficiaries, I have covered Polycom and Cisco. In this post, I will look at 3Com’s standing as an online video beneficiary.

3Com Corporation (NASDAQ: COMS) is a leading provider of secure, converged voice, and data networking solutions for enterprises. 3Com has a great history of innovation and has more than 1,400 U.S. and 100 Chinese issued patents that cover a wide range of networking technologies. Readers can check out my previous post on 3Com’s opportunity to leverage its patents.

At one point in late 1990s, 3Com was close on the heels of Cisco. However, today with revenue of $1.26 billion compared to Cisco’s $34.9 billion in 2007, it is a mere shadow of its former self. My interview with Eric Benhamou analyzes what went wrong at 3Com. 3com’s exiting the high-end enterprise business turned out to be a suicidal mistake.

Today, 3Com’s business is organized in two segments: the Secure, Converged Networking (SCN) segment, comprising its security, networking, and voice product offerings, and the Huawei-3Com Co., Ltd. (H-3C) segment. It offers advanced convergence applications including 3Com® VCX™ and NBX® IP telephony platforms for call recording, unified voice mail and media-rich conferencing. Its award-winning 3Com Convergence Center Client provides a user-friendly interface that can support desktop videoconferencing and secure presence (with Instant Messenger), as well as audio conferencing and file sharing. It has recently announced its Open Services Networking (OSN) strategic initiative which would provide enterprises and service providers open intelligent switches and routers, to deliver converged voice, video and security services.

On the financial front, 3Com reported revenue of $1.26 billion in fiscal 2007, an increase of 58.4% over revenue of $795 million in 2006. Net loss was $88.56 million compared to $100.67 million in 2006.

In 2007, 3Com acquired 100 percent ownership of its former China-based joint venture, H3C Technologies Co., Limited (H3C) and in dramatic contrast to its prior strategy of innovation-driven leadership, has made a clear intent to go after its main rival Cisco with a low-cost strategy.

In January 2005, 3com acquired TippingPoint and it helped 3Com become the leading provider of network-based intrusion prevention systems. However, with its SCN segment still losing money and limited Tipping point integration, 3Com has announced plans to spin TippingPoint out and take it public. It doesn’t seem like 3Com has been getting much valuation credit due to Tipping Point, and in fact, being inside 3Com makes it difficult for Tipping Point to sell to Cisco customers, where bulk of its success has been. The SCN segment, however, will continue its R&D efforts in Intelligent Networking, judging by its recent partnership with Tilera, a 64-core processor startup led by MIT professor Anant Agarwal.

H3C on the other hand is an important element of 3Com’s low-cost strategy. In my Cisco’s Slim Down Program piece, I articulated my concern about Cisco’s bloated cost structure. 3Com has a golden opportunity ahead to eat market share away from Cisco, especially in Small Medium Enterprises (SME) and Emerging Markets, where cost is a major factor.

Can Edgar Masri execute on this opportunity and nurse 3Com back to health? Masri is a veteran 3Com executive, although a first time CEO. The jury is out at this point, but analysts should ask Edgar for specific reporting on 3Com’s SME and Emerging Market
strategy and performance, as well as something else that has not been touched much: 3Com’s IP strategy, and plans for leveraging that precious patent portfolio.

3Com’s market cap is $1.57 billion and its stock is hovering around $4. Brave enough investors could bet on a turnaround, but if you are a hedge fund, have a conversation with Edgar first, on the above. The market opportunity, buoyed by the online video momentum, certainly exists. Can 3Com execute?

This segment is a part in the series : Online Video Beneficiaries