Foundry forges ahead of the competition - Vendor

Rethink IT, Nov, 2003 by Caroline Gabriel

Having the audacity to challenge a hugely dominant supplier on its home turf requires--apart from courage verging on recklessness--the ability to stay always a step ahead, either on functionality or price. In the enterprise backbone market Cisco reigns supreme and, while it may be facing threats from big names coming in from the voice market, such as Nortel, it has managed to defend its marker share from direct data networking rivals while expanding into the newer worlds of wireless and voice over IP.

But there are healthy alternatives to Cisco. Some of these sell their wares on the basis of better pricing, notably 3Com and Dell, coming up from the departmental level, and more recently, China's Huawei. Others opt for the more difficult route of trying differentiate on performance and technology, picking off niches where cutting edge capabilities are essential. Extreme has gone some way down this road, and more aggressively, so has Foundry Networks.

FOUNDRY CHALLENGER

Founded in 1996, Foundry is one of the few direct challengers to Cisco left. It specializes in Layer2/3 Lan switches with the FastIron and EdgeIron ranges, Layer 3 backbone switches (BigIron), Layer 4-7 web switches (ServerIron) and metro routers (NetIron). It has also recently made its first move into wireless switches. Compared to Cisco, it is tiny, though it has been profitable on an annual basis since 1998 and has a healthy cash pile. Revenues for fiscal 2002 were $300.7m, which was a drop on 2001's 311.2m. However, the company had been targeting profits ahead of growth, and increased net income sevenfold to $22.5m. In the last fiscal quarter, Q2 of 2003, revenues climbed by 28% year-on-year to $95.7m and quadrupled net income to $16.8m.

REVENUE SOURCES

Foundry currently gets about 85% of its revenue from the enterprise--with government, financial service and education the biggest verticals--but the service provider market is starting to grow again, particularly in the Asia Pacific region. However, founder and CEO Bobby Johnson admits that both sectors have been tough since 2001, particularly the ISPs. This year, the US--which accounts for 60% of Foundry's sales--and Japan have started to pick up, he says, and the UK is stable, but Europe as a whole remains depressed.

Given its David and Goliath situation, Foundry needs to focus on uniqueness of technology on both the hardware side--this year, it has introduced its fourth generation Asic chipsets, the Terabit architecture, designed for the migration to 10Gbit Ethernet backbones--and software, where it claims leading edge network management facilities in its IronView Network Manager package and support for the sFlow standard for network traffic monitoring.

Perceived technology leadership is vital to its quest to convince companies to veer from the safe option of choosing Cisco. Market research from the Dell'Oro Group gives Foundry market leadership in three areas: Layer 3 10Gbit Ethernet switches, Layer 3 modular Gigabit Ethernet switching, and Layer 4 to 7 Web switching. This is in a market for Ethernet switches that the same research company estimates will increase in value from $11.3bn last year to $16bn in 2007. The areas where Foundry has chiefly focused on grasping the lead are seen as the highest value subsectors. "Our aim is to get first to market, to be an innovator and to give better price/performance," said Johnson.

Such a strong focus on leading edge markets is high risk however, requiring heavy R&D investments for a company of this size. R&D spend is between 10% and 12% of revenue depending where Foundry is on the design cycle, especially where Asics are concerned. Johnson says engineers are motivated by working on products that are at the cutting edge of the market and by feeling directly accountable for--and rewarded for--their success. On this basis, engineers are paid lower than average salaries but have generous stock options.

SMALL BUDGETS

"We have to achieve advanced technology but manage on a relatively small R&D budget compared to Cisco," says Johnson. "We only hire experienced people and they work long hours, but the experience levels mean we have faster decision making, less trial and error and therefore faster time to market than Cisco."

This particular corporate culture he has built is important to Johnson and he sees it as a key differentiator against Cisco, just like the products themselves. Balance is key--Foundry demands long hours and high levels of dedication without offering huge levels of perks, but it also rewards successful developments, not just with shares but also "time off for rejuvenation after a project". "We hire people who want an adventure not a job, and who love technology," Johnson says with feeling. "We appeal to people who find larger companies too slow and frustrating. We're more like the Wild West, run and gun, our review process is hours, not weeks or months."

Foundry will always come up against conservatism and the fact that it is seen as easier and safer for companies to stay with Cisco. Although there is a class of organization that is tired of the dominance of the giant and is pursuing an 'anything but Cisco' policy, it is far more common to take the safe route. "For every account out there that would like to move away from Cisco there are many that don't have the time or intestinal fortitude to do it," concedes Johnson. "But we do see a significant percentage that wants a second vendor--even if inertia prevents them moving completely."