Chapter 12 - Networking: Market Order: LANs 1983-1986
1983 began hopefully for 3Com. In 1982, when management decided to abandon their existing channels of distribution in favor of selling their new personal computer LAN (EtherSeries) through computer retail stores, they knew their success depended on a rapid growth in the number of computer stores. In January 1983, a new venture capital backed start-up, Businessland, announced plans to launch a chain of computer retail stores. Fortuitously, Robert Metcalfe knew one of the board members, Enzo Torresi, from his days of consulting to Olivetti. Torresi arranged a meeting between Metcalfe and Dave Norman, the President. Businessland quickly became an important reseller of EtherSeries.
Sales for fiscal year ending May 1983 soared 162% to $4.7 million. 3Com earned a small profit of $15,000. In June, management strengthened its balance sheet by raising $3.6 million of venture capital, with a post-money valuation of $41 million.
In the summer of 1983, two propitious events in the economic history of LAN protocols occurred with scarcely any public notice. Xerox announced it would not release any more of the higher-layer, or higher-level, protocols of XNS. Yogen Dalal, who had managed XNS into existence when he worked for Xerox PARC and had left Xerox with David Liddle to form a new company, Metaphor, remembers that Xerox was:
hesitant to send out the filing protocol, the printing protocol, the name look-up protocol, the electronic mail protocol; all the protocols that you really needed to do something. Again, I think they felt the lower-level protocols were ok to send out so that the Bridge’s and the Ungermann-Bass’s could build connectivity hardware, but nobody could really build servers that would compete with Star or the filing systems that Xerox was producing.
3Com had embedded XNS in EtherSeries and had certainly hoped the higher-level protocols would become available. Time would show, however, that 3Com had the expertise to overcome this potential problem and even transform it into an advantage.
A second LAN protocol announcement, in August, would prove even more far reaching. The University of California, Berkeley released version 4.2BSD of the UNIX operating system. This version incorporated the TCP/IP code optimized by Bill Joy under contract from DARPA. Code rewritten with Ethernet in mind. Within eighteen months, over 1,000 licenses had been signed. Companies that licensed 4.2BSD received the source code for TCP/IP. No longer did firms need to start from scratch to create TCP/IP for their products.
Again 3Com had an advantage. They had been shipping TCP products from inception and, although they had decided to stop innovating their TCP bus-based products in favor of EtherSeries, they retained considerable TCP/IP competence and know-how. So much so that a joint development agreement was executed in the fall of 1983 with Bridge Communications. 3Com would OEM their Multibus/TCP product to Bridge for use in a terminal server. Krause remembers:
We licensed Multibus and TCP for their terminal servers. So they became another OEM of ours, and we did some technology sharing.
In the fall of 1983, 3Com executed an OEM agreement with Texas Instruments. Although called an OEM agreement, it was really a sale of 3Com EtherSeries products for Texas Instrument’s internal use. Soon agreements were signed with Entre Computer Centers, Computercraft and even a service agreement with Xerox.6
In October 1983, Businessweek ran a cover story: Personal Computers: and the Winner is IBM.7 The article quoted a respected market analyst, Michele Preston of L.F. Rothschild, Unterberg, Tobin: “The biggest surprise is how quickly, and to what extent, IBM has become so dominant.” Over 150 companies had entered the fast growing market. Sales for personal computers doubled in 1982 to $2.6 billion and were expected to rise to $4.3 billion in 1983. The article claimed IBM was buying enough parts to build 2 million personal computers for the following year.
Clearly the decision by 3Com’s management to focus on personal computer Ethernet LANs and, specifically those for the IBM PC, had turned into more than a hoped for success. Yet the growth in the PC market also brought competition, not only for network adaptors, such as dozens of Ethernet competitors, but also for new ideas as to how to make LAN-connected PCs more functional. The firm that would cause the most trouble for 3Com would be Novell, a company that focused on selling not LAN adapters or servers, but a LAN operating system that made LANs more functional and easier to use. Soon the value of LANs would be more than the cost-savings of sharing printers and disks, but applications like email and network applications.
By November 1983, the success of 3Com’s EtherSeries product family could be read in their financials. Sales for the six months ended November 1983 were $6.2 million, a 234% increase over 1982. Net income leaped to $910 thousand, up from only $72 thousand. Sales of EtherSeries network adaptors and software accounted for 44% of sales. OEM sales to Sun Microsystems, however, remained a meaningful 12% of sales.
On March 21, 1984, the financial success of 3Com led to their Initial Public Offering (IPO). While not the first of the LAN companies to go public - that honor would go to Ungermann-Bass - 3Com would raise $12.8 million of needed capital with a post-money valuation of $80 million. Their rapid sales growth continued, with sales for the six months November 1984 totaling $22.1 million, a 251% increase over 1983.
3Com invested money raised from their IPO into developing new network adaptor products, a new EtherShare network server based on an IBM PC, and software giving their networks advantages over those supplied by competitors. Their evolving strategy had roots not only in the original vision of Metcalfe and his experiences at Xerox PARC, but also the success of SUN Microsystems, a customer riding the need for high-performance network servers, especially for engineering applications. 3Com followed their lead but focused on personal computer LANs, especially IBM-compatible PC LANs.