Cisco aims to own used-gear market

Cisco is quietly rallying its sales force to push its refurbished equipment – at 25% to 30% savings over new products – in order to keep customers from defecting to gray-market vendors of Cisco or rival products.

Cisco  is quietly rallying its sales force to push its refurbished equipment – at 25% to 30% savings over new products – in order to keep customers from defecting to gray-market vendors of Cisco or rival products.

Cisco says its re-marketed gear not only costs less but is easier to license and support because the company does not honor warranties, IOS software licenses or support contracts for gear purchased from second-hand dealers or at auctions.

But while Cisco is peddling its own used gear more aggressively, many users still prefer the 50% to 75% markdowns offered by second-hand dealers outside of Cisco’s authorized channels. At those prices, some say, it’s worth jumping over the hurdles Cisco puts up for used-gear licensing and support.

Cisco last month touted its Authorized Remarketing Program as a way for its resellers to counter gray-marketers and other vendors offering low-ball deals. Although Cisco started its refurbishment program in 2000, it was not intended to be an alternative to the used market or a tool for competing with lower-cost vendors, according to Cisco. While the company does not break out sales through its Authorized Remarketing Program, a Cisco spokesman says the program has experienced year-over-year growth.

Economic conditions are forcing Cisco customers to look to the used Cisco market and seek lower-cost alternatives, said Doug Karmin, manager of business development and global re-marketing at Cisco, in a recent teleconference with channel partners. Another rising challenge for Cisco is third-party resellers aggressively calling Cisco’s existing customers to offer inexpensive refurbished products.

“We’re starting to see a lot of competition from different categories,” Karmin said. In addition to used equipment makers, there are vendors such as Dell and Huawei Technologies “coming at [Cisco] less on functionality and more on price.”

Karmin mentioned an unnamed federal government agency that balked at Cisco’s pricing for new Catalyst 6509 switches on a large RFP, and looked into Foundry Networks, which offered deep discounts. “When we came back with [refurbished] Catalyst 6000s, we got the deal,” worth more than $1 million, he said.

He also said companies that buy used Cisco gear from authorized channels have an easier time getting software licensing and support because they are included with the sale of a Cisco Authorized Refurbished Equipment product.

“If I go out and buy a box off of eBay, not only am I ineligible for a Cisco warranty, I have to buy a software license and pay for a Cisco inspection to make sure the box is in working order,” before support can be purchased, Karmin said.

Cisco wouldn’t disclose costs for performing the inspections.

As for firms that are in the business of reselling used gear, he added, “there aren’t two or three 800-pound gorillas in this market. It’s a lot of little guys.”

Searching on Google for “used Cisco routers” brings up hundreds of options. Among the leaders in the sub-industry is Network Hardware Resale (NHR), which buys network equipment from companies, carriers and leasing firms, then reconditions it for resale to corporate customers and carriers. NHR offers 90-day warranties on its refurbished units, as well as licensing for IOS software. Users also can buy Cisco’s SmartNet support contracts through NHR. The 4-year-old firm, which says it had $50 million in revenue last year, specializes in enterprise products, selling 95% of its gear to businesses.

Chuck Sheldon, NHR founder and president, says his company’s relationship with Cisco is “touchy.”

“Cisco is doing anything they can to put roadblocks in front of customers who are considering buying equipment from vendors like us,” he says, regarding Cisco’s requirement that used gear be re-licensed and inspected by Cisco technicians before warranties and support can be obtained.

While Cisco categorizes firms like NHR as gray market and warns customers against using them, Sheldon says his firm is good for Cisco and users. “We’re giving [users] products at good prices, and keeping them on as Cisco customers. How is that bad for Cisco?” he says. “We’re not out there selling Nortel or 3Com.”

Just the right medicine

St. Joseph’s Health System in Orange, Calif., is one NHR user. Through an IT management outsourcer, the hospital has purchased production and spare Catalyst 6500s, 7500 routers and 2900 switches.

“We’ve been able to do many network upgrades despite budget constraints,” by purchasing through NHR, says Robert Van Vuren, a senior network architect for Perot Systems, which manages all of the hospital’s IT duties from purchasing to operations. “It allows us to do more with less.”

Chris Lukas, CTO of emerging technologies for online brokerage firm Hold Brothers, also buys used equipment.

“The numerous pieces of used gear I have bought have been flawless and in some cases come in factory-sealed boxes,” he says. “I heartily recommend it, and if not for production, then for other uses, like spares or testing.”

Lukas questions the lack of Cisco licensing and support for used gear. He’d like to see the transfer of IOS licenses and support on second-hand gear. He sees this as punitive toward customers.

“Why doesn’t Cisco take the Mercedes/Lexus viewpoint and try to keep resale values high?” he says. “Cisco seems to want resale values to be zero so there is no competition between new and used gear. If the residual value is zero, what was the gear really worth in the first place?”

Not everyone’s sold

While Gartner does not track used equipment sales for specific products, the research firm estimates the overall market for a variety of used equipment – including routers, switches and telecom gear – will grow from about $1.6 billion this year to $1.7 billion next year.

“We’re not seeing a concerted effort by larger corporations to go out and embrace the used-equipment market,” says Lawrence Orans, principal analyst with Gartner. “But if the stars line up and the inventory is there, many midsize businesses are getting what they need at a lower price” through used channels.

Some still prefer new Cisco equipment, viewing second-hand gear as a possible risk.

“We shy away from anything except original equipment,” says Jim Olson, CIO for Waterbury Hospital in Connecticut. With Waterbury Hospital network running most equipment – from ultrasound machines, to radiology and even phones – over its Cisco LAN, used gear is not worth the risk, he says. “If something has already been in service and it’s put into service again, there is a certain mean time to failure, and you’re getting closer to that mean time to failure than when it was new.”

Managing Editor Jim Duffy contributed to this report.