HP and 3Com: A good fit, but not without overlap

Outside of core and aggregation Ethernet switches, product overlap considerable

HP and 3Com fit remarkably well together when considering the target markets that drove them together in this week's blockbuster $2.7 billion deal: core Ethernet switching and China. But most of the rest – low-end, SMB and edge switching, plus wireless networking – faces considerable overlap.

For the big game they're trying to bag – the $350 billion data center infrastructure and services market – HP and 3Com fit together remarkably well.

But the companies, soon to be united via HP's $2.7 billion buyout of 3Com announced earlier this week, face considerable overlap across much of the rest of their network gear, including low-end, SMB and edge switching, plus wireless networking.

The real attraction for HP in the 3Com acquisition are core Ethernet switching and immersion in China, both of which should strengthen HP's charge vs. Cisco and its partners, including EMC and VMware. HP says 3Com owns 32% of the networking market in China and boasts a monster of a core enterprise and data center switch in the H3C S 12500 (512 10G Ethernet ports) as well as the formidable S 5800 aggregation switch (24 to 192 10G Ethernet ports).

"[Networking in China] is actually a bigger market than the server market and bigger than the storage market," says Marius Haas, HP's senior vice president and general manager of HP's ProCurve Networking business, referring to two markets where HP has decades of experience and/or success.

Chart of HP and 3Com products

Both 3Com data center switches are distinguished by price/performance, energy efficiency and widespread deployment in some of China's largest networks, including three of the world's top five banks, Haas says. 3Com claims the S 12500 doubles the performance and density of Cisco's Nexus 7000 while consuming half the power.

Up to now, HP could not address high-density aggregation and core switching applications in data centers. But with these 3Com products, HP can better attack next-generation data centers, where unified switching fabrics, virtualization and consolidated compute/storage and networking operations will drive spending for the next decade.

3Com also brings enterprise edge and core routing to HP.

"It gives us an edge-to-core [story] that we didn't have before," Haas says. It also gives them 8% of the $19 billion global market for Ethernet switching, a solid No. 2 but still well below Cisco's 71%, according to Dell'Oro Group.

Once the 3Com deal closes next year, HP will own scores of next generation data centers in China, where HP operations are already strong – the $120 billion company just posted a fourth quarter hike in revenue and profit thanks largely to business in China. HP will then set its sights globally to fend off Cisco and its Unified Computing System (UCS), which threatens to encroach on HP's blade server turf. It is this, plus 2,400 networking engineers in China that drove the marriage with the $1.3 billion 3Com.

"HP will be building a credible alternative to UCS, which is where a lot of the action is in data centers right now," says Rob Whiteley of Forrester Research. "The gloves are off and these two will make great competitors in the long run."

"We've got a lot of work to do so we're going to be focused on execution, but we really like our position here," Haas says. "Looking at the reaction from our competitors, we clearly caught them off guard. We're excited."

Do HP, 3Com value claims trump Cisco? 

HP and 3Com personnel further from the data center action will have to be forgiven if they don't share Haas's excitement. Both companies are hallmarks in low-end and small-to-midsize business networking where product elimination will likely be most significant.

HP's low-end Ethernet switch line-up is virtually identical to 3Com's: a variable mix of stackable and standalone, fixed-configuration and modular, Layer 2 and 3, 10/100/1000/10000Mbps Ethernet, managed and unmanaged, Power over Ethernet and non-PoE switches for practically any edge or campus application. Both companies have been competing fiercely in this market based on low price, simple features, ease-of-use and lifetime warranties.

HP will have to base its decisions about which gear to keep on which product lines are newer and more feature-laden, analysts say.

"Whoever has newer/faster/better/more will get the nod," says Steve Schuchart of Current Analysis.

That will be a tall task given the rapid pace of enhancements and extensions HP and 3Com have been unveiling on their low-end switches over the last several years, such as Gigabit Ethernet and POE Plus.

Specifically, will there be a fit for both HP's ProCurve 8212 and 5400 series switches, and 3Com's S7500E and S7900E? How about the ProCurve 2910 and 3500 vs. 3Com's 4500G and 4800G, which all support comparable port densities and price?

Would HP really be willing to part with any of its ProCurve line?

"It will be interesting to see what HP keeps because the 3Com portfolio has been developed over the last 18 months, it's more recent," says Zeus Kerravala, an analyst at the Yankee Group. "I expect to see most of the 3Com portfolio live."

HP says the integration issue will be an easy one due to standards compliance and what it views as little to no overlap.

"These are open products that can interoperate with any other product that is already available in someone's network," said David Donatelli, HP's executive vice president and general manager of Enterprise Servers and Networking, during a conference call this week on the acquisition. "And again, due to the fact that there is very little overlap, these products complement themselves very well. So we are ready to go to market day one with the portfolio."

"There's less [overlap] than you think," Haas adds. "There might be some gray areas in between, but what we're seeing is this is a nice zipper effect inside of our environment because they really complement each other well."

Another area of direct HP/3Com overlap is in wireless LANs. That product rationalization should be much easier, however.

3Com has an OEM arrangement with Trapeze Networks but HP bought Colubris last year. Naturally, HP is expected to continue on with the Colubris product line.

"You can make your own conclusions pretty quickly," Haas says about the WLAN overlap.

But there are also product synergies in addition to core switching and edge routing. HP inherits a VoIP product line in the 3Com NBX and VCX IP PBX and handset portfolio.

3Com has less than .5% share of the total $16 billion enterprise telephony market however, according to Dell'Oro Group; but that's still more than the 0% attributed to HP, which up to now addressed the market through partnerships with Avaya and Microsoft, among others.

"I think they'll continue to partner with Microsoft and Avaya, but I think they should keep [the 3Com VoIP products] and refresh them," Kerravala says.

Haas would not comment on future product road maps.

3Com's TippingPoint business, meanwhile, gives HP the sort of security products it either had to partner to obtain or could not offer customers at all. TippingPoint's product line consists of threat management and intrusion prevention appliances installed in 30% of the Fortune 1000.

"This is huge for HP, it gives them legitimate network security," Current Analysis' Schuchart says.

The enterprise edge routers HP obtains from 3Com are those in the MSR line. MSRs feature a Linux-based server blade for running open source applications such as IP PBX, security and WAN optimization, much like Cisco's wildly successful ISR series platforms.

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