IBM reinvents net unit . . . again

By Marc Songini
Network World, 05/31/99

RESEARCH TRIANGLE PARK, N.C. - Just a year after its last major overhaul, IBM's Networking Hardware Division (NHD) is going through yet another disconcerting round of changes.

IBM says it is restructuring NHD's work force - a move that will affect some 150 employees - and is once again shifting product strategies and changing NHD's role in the company and the marketplace.

To NHD's credit, the division has delivered on a promised family of Ethenet switching products and has landed a few big telco service provider contracts - with Sprint and MCI WorldCom.

On the Ethernet front, it's unclear if those new products have made inroads against well-established players, such as 3Com and Cisco, and the division has a long way to go before it would be considered an important player in that market (see graphics).

IBM had only a 1.3% of Ethernet port shipments in the first three quarters of 1998, as compared with Cisco's 38%, say researchers at International Data Corp. in Framingham, Mass. IBM claims its low share is due to its late entry into the market. According to the Dell'Oro Group consultancy, IBM ranks No. 7 in shared hub and LAN switching, but did see a 19% growth in switch sales in the fourth quarter of 1998.

A shift in strategy

Last week, the division's third leader in the past 12 months, Michel Mayer, further muddled the division's direction by saying that NHD will no longer try to become a significant supplier of network equipment to telecommunications vendors.

IBM had promised to ship a high-end switch aimed at telcos by the end of last year. That product, code-named Flagship, will be formally announced next month, but IBM says Flagship will be targeted for use at the edge of carrier nets not the core.

Meyer said NHD will focus on being a supplier of OEMtechnology. Indeed, IBM has already had some success in the OEM arena. Alcatel and Nortel employ IBM's Prizma ATM switching technology and Cisco resells some of IBM's S/390 mainframe Web server technology. The OEM direction is part of an overall move by IBM Technology Group (of which NHD is a part) to become a major supplier to other vendors, such as Dell.

But the NHD strategy appears a far cry from the company's visions of last year. NHD was aiming to win back the hearts and minds of former customers with robust TCP/IP products, and intended to position the company as a major supplier of equipment to ISP, telco and remote access markets. NHD sources claim, however, that the division is not sacrificing its IP or Ethernet strategies for its OEM plans - for instance, IBM plans to continue developing home-grown Ethernet gear.

NHD turnaround or runaround?

IBM does not disclose revenue for NHD, but sources put it in the same ballpark as IBM partnercompetitor 3Com, at about $6 billion. Detractors say the figure is closer to about $3 billion. While NHD executives claim that the unit is profitable and is on a turnaround course, the latest signs seem ominous and raise questions as to whether NHD is hitting its goals or stagnating.

Some critics say NHD is floundering and now engaging for change for change's sake.

NHD's other market statistics vary. In ATM port shipments, IBM had 10.7% of the market for the first three quarters of 1998 - with Cisco at 25.3%.

IBM sources note that much of the division's revenue still comes from token-ring and other legacy product sales. According to a report by Giga Information Group, IBM actually has succeeded in building a well-rounded switching product family - it just hasn't succeeded in getting the message out.

That conclusion about IBM's marketing is echoed by a recent report from The Yankee Group in Boston. Only 11% of small businesses considering a network purchase even think about IBM, says Eric Klein, analyst at Yankee.

This is opposed to 3Com, which small businesses consider 22% of the time. "IBM is on the chart, but it's lower than we expected," Klein says.

And when IBM does make the sale in this market, its profitability isn't clear, as the gear is highly discounted.

However, IBM recently launched a small-business Web site and, in the mid-size segment of the market, will show much better results in an upcoming Yankee Group survey, yet to be released, Klein says.

For at least one user, IBM's net gyrations haven't had much impact.

"We've always been happy with IBM here," says Dave Walsh, head of an ITproject at the state Senate of New York in Albany. Walsh's group is embarking on a major network project using an NHDdesign Walsh is very happy with.