The Circle of (Net) Life

The author, founder of one of the largest used equipment marketplaces on the Internet, shows how reselling used equipment keeps ISPs alive and nourishes young companies.

by Robert Davie [April 17, 2002]

As Founder of ITParade.com, Robert Davie has more than 14 years invested in the computer remarketing industry, successfully facilitating the sale of networking and computer hardware for companies disposing of surplus IT assets. Serving as the principal driver of the company, Davie has initiated the aggregation of inventories from leading remarketers into a single exchange. In a brief period at IBM (1993-1995), Davie joined the marketing division where he was responsible for Internet Channel Sales for IBM's Power PC product line. Recognizing the need for a centralized marketplace for the purchase and disposition of high-end refurbished computer equipment, Davie established ITParade.com, Inc. in January 1996. At present, ITParade.com has in excess of one billion dollars of equipment posted daily.

For the past two years, bright spots have been hard to find in the IT industry. When dot-com bubble burst, it did more damage than sinking a few unrealistic online ventures. Lacking real sales to go with their extravagant plans, the dots-coms failed, and when they closed, internet service providers found their usage down and revenues stricken. Many have folded as a result. Survivors of the dot-com debacle face decreased revenues, tighter budgets, and stiffer competition.

From the ashes of the late nineties Internet boom, the remarketing sector has blossomed. An enormous panoply of pre-owned hardware has become available, ranging from well-used to new-in-box equipment ordered during the waning days of the boom but never put to use. This supply of equipment is a considerable asset to existing companies trying to stretch their IT budgets and re-establish their competitive edge.

The secondary market has become so flush that prices have fallen to 20 percent or 30 percent of the original Manufacturer's Suggested Retail Price (MSRP). Bargains of this stature are so widely available, they're starting to cut into sales of new hardware. The market for pre-owned networking equipment is especially rich. Buyers have their pick of Cisco, Nortel, and Lucent systems and components at highly attractive prices.

A few hot items and sample prices (averaged from several sources):

• 2 port multichannel T3 port adapter, $5775
• Cisco 7206VXR with NPE-400, I/O controller, 2 FE/E ports, $8700
• Cisco Catalyst 4000 chassis, six slot, 2 AC PS, fans, $7000
• Cisco Catalyst 4000 gigabit ethernet module, 6 ports, $2000
• Cisco Catalyst 6000 Supervisor Engine 1-A, 2GE, plus PFC, $3600
• PIX 515UP bundle, 2 Fast Ethernet ports, $4800
• Unrestricted PIX Firewall 520, 2 10/100 Ethernet NUCs, $6000

Where is this hardware coming from? Some from places you might expect—big headline bankruptcies, like Enron, Global Crossing Ltd., EToys, and Covad—the rest from still-operating companies seeking to tighten their belts.

Williams Communications Group, who spent $5.7 billion in the past four years on their fiber optic network, announced in February they were disposing of hardware now surplus to their needs. Most of this equipment will likely be routers and data switches from two of Williams' biggest suppliers, Nortel and Cisco.

The impact of high quality networking equipment on the market will lead to still lower prices (good news for buyers) and make it tougher for manufacturers to sell new hardware. Camilla Jensen, telecom consultant with the BIA Financial Network, said recently that the average asset recovery gained by selling surplus hardware has gone down from about 40 cents to 25 cents on the dollar. Most of the equipment is bought by remarketing dealers, many of whom refurbish what they buy. A customer shopping for networking hardware can therefore often find quite high-powered equipment in optimum condition for astonishingly low prices. Even adding the remarketer's mark-up, you're still talking about a 70 percent savings over new. Think of a $10,000 router selling for $3,000.

Lemon spread
The manufacturers are fighting this tide of remarketed competition, and not just through special financing and systems packaging. It's widely reported, usually on the QT, that manufacturers are working hard to stifle the remarketing trend. Tactics range from refusing to honor warranties or service contracts on pre-owned systems, to requiring expensive new software licenses from new owners of used equipment. Sales reps have been accused of using "FUD" tactics, spreading Fear, Uncertainty, and Doubt about pre-owned hardware. It's kind of like your mother trying to keep you from eating too much Halloween candy by warning, "you don't know where it's been!"

Street-smart buyers balk at such ploys. If Cisco or Nortel worries a buyer by implying a remarketed switch or router might fail at a critical time (because it lacks the manufacturer's certification and maintenance), some buyers respond by buying a second piece of hardware as a redundant backup. After all, in the case of our theoretical $10,000 router, you could buy three if you wanted and still be saving money.

Another way to scare the buyer is to raise the lemon flag. There are always unscrupulous types who seek to make a quick profit by dumping cheap, defective, or out of spec goods on the market. The best methods for avoiding such people are the same for IT as they are for any other consumer product: know your dealer. Seek a remarketer through a reputable business association, get a recommendation, or try an established finder service.

The high end of the secondary market is trying to answer doubts about service and maintenance. Some refurbishers have come to terms with manufacturers, using the premise that customers who buy used Cisco, Lucent, Nortel, IBM, et. al., may still want company service and updates. Service contracts are cash-cows for every manufacturer, and in some areas manufacturers have accepted remarketing as a fait accompli, and settle for a slice of the fat maintenance pie.

Interestingly enough, some hardware makers are becoming their own remarketers. IBM has long dealt in their own refurbished systems, and Sun has followed suit. If the swell of surplus networking equipment continues to grow (and market analysts say it will, probably until 2004), we may yet see more manufacturers becoming remarketers.

—End