OT--USED EQUIPMENT MARKET:
(how does this affect MRVC?)
<<<Cisco's Worst Nightmare (and Sun's and IBM's and Nortel's and...)
Tech's big guns are waging war with a new foe: used-equipment sellers.
FORTUNE
Monday, February 4, 2002
By Julie Creswell
fortune.com
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The deal had hit a snag--a big snag called Cisco. Late last summer John Lynch's company, Asset Recovery Center, in Eatontown, N.J., was on the verge of selling 59 used Cisco routers to New York brokerage firm Credit Suisse First Boston for $1.3 million. Then Cisco got wind of the deal. "Cisco threw up tons of roadblocks to try to stop the sale," says Lynch. The router maker's sales representatives told CSFB that the used equipment wouldn't work, and even if it did, CSFB would be unable to get service contracts for it and would be left hanging if it broke later on. Only after convincing CSFB that the equipment was in perfect condition did Lynch land the deal. "Cisco probably lost out on a $4 million order," says Lynch. "Better yet," he adds, chuckling, "I got the equipment certified as new. If CSFB plugs the routers in and they blow up, Cisco has to go in and fix them."
Lynch is a denizen of high-tech's gray market, a realm of fast-talking smoothies who buy leftover routers, servers, and other networking gear for pennies on the dollar and resell them at a profit. On the surface, a company like Asset Recovery, which expects to have only around $30 million in sales this year, would seem no more than a blip on the radar screen of an equipment-making giant like Cisco, which, according to analysts, will have revenues of about $19 billion for the fiscal year ending in July. But 2,000 scavengers just like Asset Recovery--twice as many as a decade ago--are out there feasting on equipment from dead or ailing corporate customers that no longer need it. With businesses cutting capital spending and a glut of nearly new equipment for sale, the market for used IT gear has swelled to $20 billion a year. Cisco and competitors like Sun, IBM, and Nortel are feeling the squeeze on their prices and profit margins, and watching their chances of recovery recede into the future.
Just as troubling as the size of the gray market is the sort of customer shopping there now. Not long ago the typical transaction would be a mom-and-pop business buying a server on eBay from a busted dot-com. These days, more and more of the buyers are Fortune 500 companies discovering that last year's model of a Cisco router or a Sun server at 70% off list price suits their needs just fine. The used-gear business is better financed now too. Asset Recovery, for example, may soon hire a brokerage firm to raise money from private investors for more equipment purchases.
That's grim news for the big gearmakers. As CIBC World Markets analyst Steve Kamman says, "For those who are looking for a rapid turnaround, the tremendous overhang in excess equipment is just another reason for this to be a depressed year."
In a chilly warehouse about an hour south of New York City, Lynch moves past row after row of shelves piled 30-feet high with boxes bearing names like Nortel, Sun, IBM, and Compaq. Tightening a wool scarf around his neck, he takes a right turn and spies a quartet of four-foot-tall StorageTek data-storage units. He runs his hands over their gray metal surface. "AT&T gave these to us. It cost us about $2,200 to truck them out of the facility they were in," says Lynch with a satisfied smile. "I'm going to get $25,000 apiece for them.
Lynch is the new economy's used-car dealer, spinning tales of how cheap this server or that router was and how much someone is going to pay for it. His partner, company founder Mark Magee, is a lanky, soft-spoken lawyer who ran AT&T Capital's used-gear operations until 1996, when the unit was shut down. Magee founded Asset Recovery just before the tech boom of the late 1990s. The gray market was pretty anemic then, as corporate America spent gobs of money on new equipment to get ready for both Y2K and the expected boom in broadband demand. After Y2K passed and broadband fizzled, business in the secondary market picked up sharply, Asset Recovery took off, and Lynch signed on.
Combative and fast talking, Lynch, 46, is the perfect foil to his tweedy colleague. "He digs them up, and I stab them," Lynch says, as his cell phone rings for the umpteenth time with yet another bargain hunter on the line. He's not above using gamesmanship to make a sale. When he goes to meet clients Lynch leaves his $100,000 Mercedes SL 500 at home, driving a beat-up Ford Bronco truck instead. And though he's really the CEO, his business cards identify him as a marketing director. "It makes me seem like I'm the low man on the totem pole and have to get any deal okayed by my boss," says Lynch, laughing. (Of course, that trick may be played out now.) >>>
Namaste!
Jim |
