Tough times for small and medium switch manufacturers

Tough times for small and medium switch manufacturers

It is getting harder and harder to be a middle-tier switching company these days. The overall switch market has cooled off in the past few months, the stock market is in turmoil, and products from the Big Four LAN companies - Cisco Systems, 3Com, Bay Networks and Cabletron Systems - are getting less and less expensive.

As a result, the smaller switch players are showing signs of struggle. Examples include:

Olicom closed down its US research and development division and laid off 50 people.

Xylan stock continues to languish despite what some see as strong company fundamentals.

Madge, Asante and Plaintree have all had declining revenue.

An Infonetics Research survey called "User Plans for High Performance LANs 1998" showed that users worldwide plan to buy significantly more LAN switches from Cisco, 3Com, Bay and Cabletron when they make their next purchases.

Part of the reason the mid-tier companies are struggling is that they can't survive on individual products, and yet they don't have the marketing muscle to make their end-to-end stories heard, says Paul Zagaeski, senior industry analyst at Giga Information Group in Massachusetts.

"Even a small to mid-size company no longer thinks about products in isolation. They think, 'I've got to build an enterprise network'," Zagaeski says.

Solution segments

He suggests that the mid-tier players focus their attention on "solution segments", such as token ring, ATM or Internet commerce.

Olicom is already focused on token ring but still had to downsize.

The company recently announced that it's ending its US-based research and development efforts, laying off 50 people at its Massachusetts plant, and consolidating operations in Denmark and Poland.

The move came less than two weeks after Olicom beat IBM in shipping the first High-Speed Token Ring network interface cards and uplink modules. Olicom's stock lost 14 per cent of its value after the news.

Xylan's stock seems to be in an irrational free fall, having been hit harder by competition and market drops than many other technology stocks. To stop the plummet, they will again buy back its own common shares, this time one million of them.

In January, when Xylan's stock was also spiralling downward, the company bought back two million shares, which helped stabilise the stock for several months.

Xylan vice president Douglas Hill attributes the decline to the market instability and to the curious fact that Xylan continues to have one of the biggest short positions in the IT industry, despite four profitable quarters.

In other words, the company is making money, but short sellers - traders who bet that the stock will go down - continue to reap benefits from the decline.

Analysts agree that Xylan's stock problem isn't indicative of problems with the company's products, product lines, sales, alliances or strategies.

Things were not always so difficult for these companies. Today's middle-tier vendors started out in a climate where technology drove the market. Today, sales and marketing drive growth, says John Armstrong, director and principal analyst at Dataquest.

Large vendors are succeeding by focusing on sales and buying new technology in the form of start-ups as they need it. The smaller guys can't match that approach.

Armstrong suggests that the best the mid-tier companies can do is form partnerships or OEM their products to others.

Madge is another company feeling the squeeze. For instance, Madge ran into problems in 1996 after it lost a deal to OEM product to Cisco - a deal won by Olicom, Armstrong says.

Though the company was profitable in the first half of this year, it agreed two months ago to sell its Lannet Ethernet division to Lucent, for what it called a "nominal" price of $US117 million.

Madge's revenue for the past two fiscal quarters was $177.9 million, down from $209.5 million in the same period the year before.

Asante started out attacking the Apple Computer network market but found itself just one of the pack when it moved into the PC space, Armstrong says.

The figures tell the tale: Asante's revenue for the past two fiscal quarters was at $19.4 million, down from $43.8 million in the same quarters last year.

Plaintree faces a similar differentiation problem, and it hasn't been able to compete with the big guys' marketing. Armstrong's advice to Asante and Plaintree is to form partnerships with the voice equipment vendors getting into data networking.

In its most recent quarter, Plaintree posted a net loss of $5 million on revenue of $3.7 million.

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