Low prices for used networking equipment can make small and midsize businesses salivate. But counterfeit products, tech support issues, and Frankenstein engineering persist. Could industry endorsement of used-gear vendors make a difference?
Is it better to buy used or new equipment? That has been a question that medium and small businesses have had to answer for decades when evaluating their computers, especially expensive, high-end servers.
Recently, companies have begun asking that question in regard to their network devices. At this juncture, however, the market for those products is not as mature as it is for computer hardware. While refurbished network products have become more common, they still carry a dubious reputation, one that will probably remain until Cisco Systems more broadly embraces this channel.
Used-equipment pricing can be appealing to small and midsize businesses under pressure to cut operating costs as much as possible. Companies sometimes see devices that are packed with unwanted features that push up costs. The refurbished market offers them potential price breaks. Because new network equipment pricing varies dramatically -- does anyone pay list price anymore? -- the savings vary from 10% on the low end to as much as 95% at the high end. One site, usedrouter.com, recently advertised a Cisco 7500 series router for $595, compared to a list price of $9,995.
In some cases, the secondary market may be the only place that a needed device can be found. Network equipment vendors establish set lifecycles for their products and stop making them at certain points. "A company may have to add a router or two for new branch offices to its network," explained Eric Goodness, research VP covering outsourcing and IT services at Gartner. "Rather than upgrade the entire network, they may buy a few used routers."
Resellers pushing second-hand equipment tout time-to-market as another perk. Because network equipment vendors focus on just-in-time (JIT) manufacturing, which leaves little extra inventory in the supply chain, they sometimes can't deliver their wares as quickly as customers desire.
Such a requirement drove one Texas competitive local exchange carrier (CLEC) to buy used network equipment from Network Hardware Resale NHR. "We had a customer who needed to be up ASAP, and none of the typical suppliers could deliver the products in time for us," said the network manager at the company, which serves large cities in Texas but didn't want to be identified.
While there can be benefits to buying used equipment, such decisions raise new issues, starting with a limited number of choices. "Items such as wireless routers don't cost enough to justify development of a secondary channel; switches and routers represent the bulk of the sales in the refurbished network equipment market," said Mike Sheldon, CEO of Network Hardware Resale.
The predominant supplier of network equipment is Cisco, which has had a refurbishing program in place since 2001, about the time of the dotcom bust. The company buys second-hand equipment from customers, tests and retools the products with the latest software upgrades, and then markets them through its value-added resellers.
The vendor holds a tight reign on these products as well as on those that sell them. "Unlike hardware, which is based on open standards that can be replicated, network equipment specifications are proprietary, so we only feel confident that refurbishing is done properly when we do it ourselves," said Benson Chan, senior manager at Cisco Capital Remarketing.
Others think the company has ulterior motives. "By tightly controlling the secondary market, Cisco is able to maintain high margins on its products," said Gartner's Goodness. There are complaints that the charges, which range from a few hundred to several thousand dollars per component, are so high that it doesn't make any sense for a user to buy these products. Cisco counters that refurbished equipment sells for 25% to 75% off of list prices.
Partly because of Cisco's tight control, a cottage industry of resellers that buy second-hand equipment and refurbish it themselves has emerged. In fact, Sheldon is president of the board of UNEDA, an ad hoc used-network equipment consortium that was formed in 2006 and has 300 members. "We don't have as good a relationship with Cisco as we would like," he said.
This disconnect can create problems for medium and small businesses that buy from these firms. If an organization purchases a refurbished router from a UNEDA member, the customer has no access to Cisco's technical support and can't make software upgrades or download security patches.
That's because, Cisco, unlike other vendors, doesn't let customers transfer their software licenses. NHR's Sheldon claims that his company's technical support is sufficient to overcome such issues. The Texas CLEC worked with a second refurbisher, but found that its technical support wasn't as good as that from NHR, which has supplied about 45 switches and routers to the CLEC.
Another reason why Cisco is leery of dealing with used-equipment vendors is the possibility of counterfeit products entering the supply line. Peter Hlavnicka, treasurer for the Alliance for Gray Market and Counterfeit Abatement (AGMA), said counterfeit products arise in four ways.
- Hot goods. Organized crime has turned to high tech in recent years, and there are instances where they steal network devices and then sell them either directly or via the Internet.
- Market saturation. A vendor's OEM partner may also produce extra devices and resell them. This problem is more prevalent in underdeveloped markets such as Eastern Europe and Asia than in the United States and Western Europe.
- Bogus packaging. Counterfeiting can also entail taking a device made for another market, say Asia, repackaging it (the level of changes can run from small to substantial), and reselling it abroad, say in the United States.
- Frankenstein engineering. This could occur from pulling a few components out of one router and putting them into a second. The danger here is the company putting the items together lacks the experience needed to make sure that the device will function in proper manner.
UNEDA has tried to help address the counterfeiting issue by having its members sign a code of ethics, but the impact of such steps is unclear because the amount of counterfeit network goods isn't known.
Despite having the counterfeiting shadow hovering over them, UNEDA members have been gaining market traction. NHR's Sheldon pegs the volume of refurbished equipment sold at a few billion dollars. NHR, which started off refurbishing IBM computers in 1986 and moved into network equipment in 1990s, has grown from $80 million in 2004 to $175 million in 2007.
What would help more would be Cisco's seal of approval for UNEDA members. The vendor's reluctance to take that step shouldn't be surprising. As the used computer hardware market evolved, vendors such as IBM and Sun were slow to embrace it but were eventually forced to.
If and when Cisco will change its position is unclear, but what is certain is that its current policy will give certain medium and small businesses pause as they think about buying used network equipment from companies like NHR.
Paul Korzeniowski is a freelance writer who specializes in networking issues. He's based in Sudbury, Mass.
