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Chapter 12 - Networking: Market Order: LANs 1983-1986

12.13 State of Competition: 1985

What was it like being an executive in a Data Communication or Networking firm on the eve of 1985? Budgeting and strategic planning for 1985 would invariably be completed by yearend 1984. Hence market performance for 1984 could only be estimated. (Market research firms such as Dataquest - the firm whose data is being used for most of the analysis of this book – would take well into the first quarter to compile prior year data.) Then each executive had to make sense of the uncertain data available from both internal and external sources before deciding what products to develop and how best to market and position existing and new products. To reflect how fraught with risk to a firm’s very existence this process is, Exhibit 12.13.1 Product Category on the Eve of 1985 gives insight into their crystal balls and future consequences.

Exhibit 12.13.1 Product Category Analysis on Eve of 1985 ($ Millions)

Product Category 1983 Actual 1984 Actual 1984 Projections For 1988 1985 Actual 1986 Actual 1988 Actual
Modems 918 1,047 1,592 1,167 1,243 1,262
Statistical Multiplexers 245 289 919 303 319 194
Data PBXs 77 119 422 143 86 80
LANs 152 326 1,030 593 913 2,820

The executives of Data Communication firms, those selling modems and statistical multiplexers, expected the modem market to grow from roughly $1 billion in 1983 to $1.6 billion by 1988 and statistical multiplexers to grow from just under $300 million to over $900 million. Even if these were the only products to be concerned with, no wonder Codex and Micom executives were so interested in minding their existing markets. In addition, both Codex and Micom were participating in the equally attractive Networking market with data PBXs, forecasted to grow from $119 million to $422 million by 1988. So why venture into unfamiliar technologies, such as LANs, when there was ample market growth in the product categories they were already innovating? Only the future would not turn out to be as forecasted, and the sales of statistical multiplexers and data PBXs contracted by a third from those of 1984. Having made big investment bets on either or both categories turned out to be a big mistake.

LAN executives could expect their category sales to grow from $326 million to over $1 billion. Yet by 1988, the forecasts proved grossly wrong. LAN sales grew nearly nine times to $2.8 billion, while data PBXs, their once mighty competition, essentially died as a category.

But for the LAN firms that consisted of over two hundred firms and many hundreds of announced products in 1983 just as suddenly collapsed to an oligopoly in 1985 with eleven firms controlling 68% of the market. (See Exhibit 10.3 Top Eleven LAN Vendors 1985). (The difference of $16 million in the total size of the LAN market in 1985 - between $593 million and $577 million - in the two exhibits were MAP sales. In 1985, INI ($8 million in revenues) and Concord Data Systems ($3.5 million) controlled the MAP market.)

Exhibit 12.13.2 Top Eleven LAN Vendors 1985

Company Dollar Value ($Millions) Percent Market Share
DEC $84.10 14.6
3COM 48.3 8.4
Ungermann-Bass 39.9 6.9
IBM 36.3 6.3
Sytek 34.5 6
Network Systems Corporation 34.4 6
Excelan 27.3 4.7
Bridge Communications 25.2 4.4
Apollo Computer 24.3 4.2
Wang 19.8 3.4
Interlan 18 3.1
Others 184.6 32
TOTAL $576.7 100

Source: Dataquest December 1986, TCIS, pg. 101. Eleventh firm, Interlan added by the author.

The 1985 LAN market of $577 million was subdivided into four major segments (See LAN 10.4 Market Share By Market Segment 1985): terminal servers, personal computers, computer-to-computer, and engineering workstations. Given that the personal computer segment hardly existed in 1981, it was by far the fastest growing. From the same Dataquest report, 66% of all networks were baseband: the only reason broadband accounted for 34% of the market was the shipment of the PC LAN by IBM. Ethernet, a baseband network, equaled roughly 40% of all networks sold. It was estimated that less than 7% of all terminals and 5% of all personal computers were connected to networks.

Exhibit 12.13.3 LAN Market Share By Market Segment 1985

Market Dollar Value ($Millions) Percent Market Share
Terminal Servers 190.2 33
Personal Computer 181.7 31.5
Computer-to-computer 98.6 17.1
Engineering Workstations 67.3 11.6
Office Workstations 25.1 4.4
Other 13.8 2.4
TOTAL $576.70 100

Source: Dataquest December 1986 TCIS, pg. 23

The sales of data PBXs peaked in 1985 when sales reached $143 million. Market share data for 1986, after the unexpected drop to $85.6 million, speaks to the dominance of Micom and the rapid growth of Equinox.

Exhibit 12.13.4 Top Five Data PBX Vendors 1986

Market Dollar Value ($Millions) Percent Market Share
Micom 31.6 37
Gandalf 15 17.5
Equinox 10 11.7
Develcon 9 10.5
Infotron 6 7
Others 14 16.3
Total 85.6 100

Source: Dataquest October 1987 TCIS, pg. 23

Given this overview, how prepared were the firms of focus in this history on the eve of 1985-1986? Micom faced severe tests given the coming collapse of both the statistical multiplexer and data PBX markets. Codex seemed interested in LANs but proved ineffective. Ungermann-Bass made a huge bet on MAP that was consuming resources and earning no return. 3Com was riding the success of the personal computer. Sytek, hoping to go public, depended on IBM selling the PC LAN over its token ring products. Interlan was seeking a merger partner. Bridge Communications had jumped technologically ahead of Ungermann-Bass. Concord Data Systems suffered from the slowness of MAP sales as well as the burden of riding out-dated technology. Excelan, CMC and others chased the computer-to-computer segment that comprised only 12% of the market in 1985. The big firms, DEC and IBM, were beginning to make their presences known. Not surprisingly, for at the end of 1986, there will be an estimated 100,000 computer networks.