However, Cisco, the world's largest maker of equipment that directs Internet traffic, still faces challenges from weak demand and a struggling economy, analyst Alex Henderson wrote in a note to clients after Dell chief operating officer Kevin Rollins met with another Salomon analyst on Tuesday.
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Analysts view personal computer maker Dell as a small but significant rival in the market for inexpensive switches, which direct traffic on a network. They have said Dell's low-cost approach will eventually hurt Cisco's strong gross profit margins.
However, Henderson said Rollins indicated Dell is changing its switch strategy, including classifying them as a "tier 2" opportunity and backing away from its goal of making it a $2 billion business in three to five years.
Dell also is not going to aggressively target the switch market through direct marketing, but will let sales grow gradually, Henderson said. The company still intends to move up the switch lineup, adding more products, but does not expect to invest as much in research and development, he said.
"We think this is a significant departure from Dell's previous strategy, but we don't want to overplay this as a positive for Cisco," Henderson said, adding that Cisco still faces threats from numerous other competitors. He has an "outperform" rating on the stock.
"However, without Dell leading the charge against Cisco, it's unlikely you'll get the same penetration," Henderson said. "We think the challenge to Cisco is much less daunting if Dell isn't full behind the attack."
A Dell spokeswoman said Rollins' comments are in line with past comments and switches remain an expansion opportunity.
"This isn't a retraction of any sort for us because we've never provided any market share projections," Dell spokeswoman Mary Fad said.
"There may be a reprioritisation, but I do still think that switches are going to remain important to us," she added. "They're still going to complement our core business."
Henderson said Cisco still faces soft demand for its products, with February demand looking weak and the July outlook likely to be pressured.
Cisco's stock was up 7 cents at $13.70, while Dell's was up 25 cents at $26.38, in late morning trading on the Nasdaq.