Dell continues network battle

Two years ago, Jim Barry was scratching his head over Dell Inc.’s decision to enter the switching market. Today, the CIO at OneUnited Bank in Boston has deployed a number of Dell switches to complement the Dell servers and storage arrays he has had in place for about four years.

Barry started buying the switches in January after getting some trial switches thrown in for free with a server purchase.

“They performed well and have proven to be a low-cost and reliable solution,” Barry says. “We will look to them for our future needs. This is in part due to (Dell’s) competitive pricing and feature set, and then also due to our desire to work with a single source.”

It’s this type of customer thinking that is helping Dell, better known for its servers and PCs, make inroads in a market Cisco Systems Inc. has long dominated. Dell is targeting small and midsize businesses (SMB) and aims to be a one-stop shop for these customers when it comes to servers, PCs, storage and network gear, says Rick Froehlich, director of PowerConnect for Dell.

Analysts note that larger companies also are starting to look to Dell for low-cost, standards-based switches primarily for edge deployments in workgroup and branch-office environments. But customers who want advanced features such as VoIP or heavy-duty reliability for backbone switching won’t be looking at Dell.

“Dell has moved in this market as expected,” says David Willis, an analyst at Meta Group Inc. “The impact for larger vendors really is secondary. … Dell drives the commodity perception and pricing goes down. That ultimately hurts the larger vendors like Cisco. Cisco tries to fight the perception that networks have commoditized. It’s harder to sell at a price premium if customers think their gear is like everybody else’s.”

Dell has no illusions about where it’s best positioned. It is making efforts to move deeper into the network, but is careful to enter markets where standardization has happened or is well underway. For example, earlier this year it expanded its line of switches with the 6000 series, its first managed Layer 3 switch geared for the core of small networks and branch offices or to act as an aggregator in wiring closets for larger companies. Froehlich wouldn’t say whether a Layer 4-7 switch is coming and if Dell plans to integrate features such as VoIP into its switches.

“We’re going to stick to our knitting a bit here,” Froehlich says. “We have a lot of runway left in these markets, and my feeling is we’ve got plenty of other SMB opportunities around the world we need to penetrate. I see tons of opportunity for us to continue to aggressively grow without getting outside the bounds of what we think is standardized and standardizing right now.”

It’s this commitment to stick to commodity markets that is helping Dell make inroads with its switch business, which uses the same direct sales, low-pricing approach that has brought it success in other areas.

While falling into the “other” category in terms of market share two years ago, the firm now has about three per cent of the per-port LAN switching market, according to the latest report from Synergy Research Group.

When revenue is considered, however, Dell’s market share drops to less than one per cent, not surprising because Dell’s strength has always been its ability to undercut pricing. When it entered the market in fall of 2001, it introduced switches priced as low as US$100 per gigabit Ethernet port, about half of the average US$219 per port pricing at that time.

Today, Dell has dropped per-port pricing to as low as US$20 for managed Fast Ethernet switches. Its managed Layer 3 switch, the PowerConnect 6024, starts at US$210 per gigabit Ethernet port. By contrast, Cisco’s Catalyst 3750 was priced starting at about US$250 per 10/100/1000Mbps port when it was introduced last year.

The good news for Dell is that it is one of a handful of companies that saw its LAN switching revenue grow last year, expanding 38 percent over 2002, according to Synergy Research.

Dell doesn’t break out revenue for its network group, but the company that ranked fourth on the NW200 with US$41 billion in revenue in 2003 brought in about US$84 million in LAN switching revenue in 2003, up from US$61 million in 2002, according to Synergy.

Analysts expect Dell to continue its steady growth in the SMB markets and even with workgroup and branch-office deployments in large corporations. But if Dell aims to expand its network business — and it seems to given its move into managed Layer 3 switching — it needs to continue to add advanced management capabilities and begin looking at other areas such as firewalls, routers and IP telephony, analysts say.

“While the vendor is currently swimming with the bottom feeders, it clearly has its sights set on gaining market share from these first-tier vendors (such as Hewlett-Packard Co. and Cisco),” Stan Schatt, an analyst at Forrester Research Inc., wrote in a report on the SMB switching market earlier this year. “To break the bonds of a mere commodity status, however, there are still some key areas Dell needs to address.”

Those areas include support for VoIP; integration of wireless LAN technology including Power over Ethernet; enhanced network management features; and more-sophisticated security capabilities such as support for IEEE 802.1x or user-identity-based profiles, Schatt says.

Dave Bobzien, regional technology manager at commercial real estate firm Colliers International in Seattle, says he is happy with the switching capabilities he gets from Dell. After having problems with a larger vendor, Bobzien, who also uses desktops, notebooks and servers from Dell, opted to give the new Dell switches a try in 2002.

Today, Bobzien has transitioned nearly all his region’s 12 offices to Dell switches and expects to complete the migration in the next few months. He says by moving to Dell he has cut his switching costs nearly in half.

“When all was said and done, for the same number of ports and uplink and everything else, the other vendor was US$1,700, and that was with 90 days telephone support,” he says. “The Dell switch was slightly under US$1,000 at the time — and they’ve dropped in price since then — and that was with 24×7 support for three years,” he says.

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