Meet 3Com's new boss -- not the same old boss
- 30 January, 2007 13:56
When 3Com CEO Scott Murray stepped down abruptly in August 2006, after just seven months on the job, 3Com veteran Edgar Masri was called in to take over his old company. Masri led successful enterprise, carrier and network access business units at 3Com in the 1990s. When the company shed these businesses in an ill-fated transformation attempt in 2000, Masri left the firm and became a venture capitalist at Matrix Partners, and later COO at WiMax firm Redline Communications.
As the boss at 3Com since August, Masri oversaw the acquisition of the company's joint venture with China's Huawei Technologies, known as the H3C. This week, 3Com launched a new strategy around its H3C-based routers, incorporating open-source technology and application partnerships.
Masri spoke recently to Network World senior editor Phil Hochmuth about why he came back to 3Com, the challenges ahead for the company, and what changes to expect.
What made you decide to come back to 3Com as CEO, after you served in various leadership positions at the company until 2000?
It came down to three key points. I had been studying and was very interested in China and the rise of China for over two years before rejoining 3Com. As a venture capitalist, I went to China three times. I saw a great interest on the venture capital side. I started to study the language. So the rise of China, the ability to do business with China, and leverage that, was a very intriguing opportunity. I was not looking for a job, because I had joined Redline as a chief operating officer. That company was going public, and did go public just a few months ago.
One thing you notice in venture capital is the entrepreneurial sprit of very small, dedicated, focused teams. I had heard great things about the TippingPoint team and the TippingPoint acquisition. And I felt 3Com was trying to build a lot of centers of expertise to reinvent itself. So that was another very encouraging thing.
The third factor was, as a person, I had a genuine attachment to 3Com. The business that I ran when I was here before is the only business that is left at the company. [So] being able to run it as a CEO was a very attractive proposition.
Obviously a lot has changed at 3Com since then. What are your thoughts on 3Com now, vs. the one you worked at previously?
Coming on board, I noticed a lot of things have changed. Primarily, the market has changed, in that 3Com is no longer a network interface card company. That business is no more and is integrated into computer motherboards. The infrastructure business had opportunities for improvement in many areas. There were some interesting ideas, but the momentum needed to be rebuilt. I was very pleased with what I saw at TippingPoint. It matched very much with my expectations and the opportunity of the market.
I felt, though, that the main asset out there was the joint venture, and the best way to unlock the whole value was to acquire this asset. Huawei has proven to be a great partner, but with any joint venture, you end up hearing from both parents. And at some point, it's important to have one message. Huawei delivered a lot of support and help and infrastructure, but now is the time for that team to become a material part of 3Com.
What will change for 3Com's U.S. enterprise customers, now that the company has full ownership of H3C?
What customers are getting is state-of-the-art technology at a very cost-effective price and value. Customers will see more leveraging of the infrastructure of China, and the size. In China, you have a lot of component providers. These component vendors now are looking at the combined H3C and 3Com as a larger entity. This will allow us to obtain better terms, and we also could make that benefit customers through a more cost-effective solution.
There are other things I like to highlight that are being worked on in China by the team at H3C. They are developing platforms to add a lot of [new] applications. One of them is video surveillance. Another is IP storage. A third one will be carrier-grade Ethernet capabilities. We will not necessarily bring all of those to the U.S. market. But the U.S. market should start getting exposure to some of those solutions, primarily in the area of video. We will have a head-start over our competition [in these new areas] because the team in China has already built some of those solutions.
When will these video, storage or carrier Ethernet technologies come to the U.S. market?
We are excited about those solutions, and generating revenue in China from them. There is work that needs to take place to determine which ones are positioned to bring to the U.S. It's not the technology; the good news is we have the technology. It's the go-to-market. It's different between China and the U.S. I would not go as far to say all these technologies will be brought to the U.S.
3Com paid US$882 million to buy out the H3C. What is the core value there?
The core expertise we greatly benefit from is the pedigree of the people coming from Huawei. Huawei built carrier-grade routers and switches. When we started moving [back] into the enterprise [with the joint venture], what you started seeing was very high-quality, high-end products that were built for the carrier market. I can't think of any company in the U.S. that has approached the enterprise this way. Clearly, companies that have been in routing, like Cisco, started early on with large systems for carriers, but then honed their skills on enterprise first.
The second advantage of owning the joint-venture team is that, by definition of being in China, you have a five-to-one, or six-to-one advantage in terms of labor costs. Some of the people may not be as experienced as the U.S. teams. But that gap is eroding. China has proven to have a great surplus of engineering talent ... [Also], this is a culture that is determined to improve its standard of living. The ambition and focus is leading a lot of those people towards very long hours. They spend sometimes one Saturday a month -- the team at H3C -- at the facility, ensuring that the month closes effectively. [3Com has] a lot of great talent here in the U.S. and Europe. We have very dedicated people. But the Chinese team is taking it one notch above that.
Some say there is still a perception in the U.S. that network products from low-cost manufactures in Asia are inferior to gear designed by vendors such as Cisco, Juniper or Nortel. I assume you disagree?
Here's an anecdote: Every time I look at China, I stop and visit customers across the world. I stopped in France two months ago and met with customers and partners. One partner, who distributed both 3Com and our competitor's products, was very positive about the quality coming from the H3C. From the standpoint of the number of bugs he saw from H3C products vs. competitors', on a weekly basis, H3C had the lowest rate. That speaks to the dedication and quality of what they do.
In buying out the H3C, does 3Com own the router and switch code, or is that licensed from Huawei?
The question comes up very often. The code base that was started and used at the inception of the joint venture has now grown by five-fold. Five-sixths of that is homegrown, owed by H3C, and now owned by 3Com. We have a full, perpetual license to the original piece of code [developed originally by Huawei]. And the 200 to 300 engineers who started at the H3C now have mushroomed close to 3,000. These are people hired by the H3C, who have an H3C culture and mentality, and will now be part of 3Com.
Page BreakSubtracting H3C revenue from 3Com's most recent earnings, the company was operating at a loss. What is your plan to improve performance in 3Com's TippingPoint, voice, and mid-market switching businesses?
I don't want to understate what teams have done in the Secure, Converged Network [or SCN, which includes TippingPoint, 3Com VoIP and SMB switching] segment. We've shown two quarters in a row of lower operating loss. And I'm determined to bring this combined SCN entity to profitability. 3Com as a whole had the largest operating-income profitable quarter in over six years. If you look more granularly, SCN showed its best quarter on the bottom line over that same time.
Three elements will bring SCN to profitability. First, we'll increase our top line. Leveraging faster development will allow us to bring solutions to market faster than others. We're already seeing it in areas such as Gigabit Ethernet. We'll start seeing it in further areas such as routing. And we'll see it eventually in next-generation solutions.
The second part is in what I call the midline, gross margin. The strength of the combined organization gives us better advantages and discounts in securing equipment and components. But it also will give us great opportunity to consolidate a lot of activities that are spread out. We have multiple hubs throughout the world. China could prove to be a more interesting place to consolidate one or two of those hubs, which are now in more expensive parts of the world. Secondly, we are using multiple databases [and business applications and systems throughout the company]. This is a good opportunity to look at next-generation, instead of having to rebuild something from scratch
Third, on the IT front, we have data centers that are spread throughout the world. China has low-cost real estate. But more importantly, we have personnel on the ground in Shanghai or Beijing, where we could quickly and easily host some of our capabilities. Those are all being considered.
Page BreakThe TippingPoint group has been 3Com's focus over the last few years, in terms of company identity and technology focus. Will that change?
It's true that for the last few years, we've leveraged a key area of strength for us, which is security and TippingPoint technology. We are very committed to our architecture, which has been well defined and developed by [TippingPoint CTO, and 3Com CTO] Marc Willebeek-LeMair and his team. And we lead invariably with it in many of our customer engagements. However, we are a much bigger company now, especially with the integration of H3C. And now with our new Open Network Services (ONS) architecture.
Our success will hinge on leveraging, to the maximum, the infrastructure in China and Asia across the board -- R&D, IT, supply chain, customer services and support. The second one is to provide customers with best-of-breed solutions through an open architecture and an open networking platform.
Cisco was the leader in a competitive enterprise market when you were at 3Com in the 1990s. Now it dominates routing and switching. How do you plan to challenge them?
It's true you have Cisco as the 800-pound gorilla. Then you have several [other] companies vying to be number two. I look to a third set of companies. These companies are young, TippingPoint-like start-ups that support valuations and growth rates that are phenomenally strong. You've seen some of these WAN optimization companies that have recently gone public, as well as storage and content distribution and security companies. There is clearly now a bigger gap between Cisco and the second tier of vendors. [Instead of competing as the Cisco-alternative] we want to leverage the niche players in the market who will continue to grow. We want to be the vehicle through which you can embed a lot of those technologies.
What type of niche companies are you talking about in your partnering strategy?
The initial phase of the solution you'll see from partners will still be security. It will be beyond IPS. You'll see partnerships with best of breed -- start-ups who have been very successful in their niche, who are building to an open-source Linux platform, who can easily plug into what we have because of the middleware and SDKs we've provided. You will also see a second wave that will be more communications-services oriented. The third wave will be applications and [technology related to] WAN optimization ... We're going to reference, sell and co-market with anyone who has an open platform, using Linux or other open operating systems, and can easily integrate with our technology.
Besides partnering, does acquisition fit into your strategy?
If we were to acquire, the strategy you would see is small, very targeted acquisitions in the US$10 million to the US$30 million area, that fill a specific gap and play into certain areas -- security and application networking. This is more of a strategy as opposed to an action plan -- that we'll acquire companies A, B and C. You will more likely see us take a look at smaller companies and determine if partnership makes sense, and in an exceptional case, an acquisition.