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Technology Stocks : Cisco Systems, Inc. (CSCO) -- Ignore unavailable to you. Want to Upgrade?

To: Jorj X Mckie who wrote (57047)	2/5/2002 1:55:18 AM
From: Stock Farmer	Read Replies (2) \| Respond to of 77397

Jorj, I think you are somewhat correct in the assumptions, but not in the conclusion. There are a lot of folks buying in the secondary market now that never would have thought of it in other times. And the discovery is that it ain't so painful as the theoreticians would have us believe. And you would be surprised at the names of folks that buy on the grey market. Big names. I'd be tellin' tales out of school to take it much farther than that. If the folks who are running 7x24 blue-chip lifeline networks are installing grey-market equipment (and they are), you can bet your bottom dollar that it's good enough for the rest. As to your recollection of Cisco and their service... well, if you're recollecting some third-hand gossip, it's rather irrelevant. From first hand experience you might recall that the service gets done. It's not like there isn't an entire industry out there for servicing Cisco stuff. Can get "Cisco certified" support without ever talking to a Cisco employee. And I think I mentioned it before but they make a lot of noise about not servicing their stuff... but broken stuff with their name on it makes for bad marketing, regardless of how it got in the network in the first place. If you actually make the purchase decisions for a network and speak from experience, then perhaps I'd be willing to listen. But hearsay that counteracts first hand experience doesn't hold much water with me. 'Cause both me and my buddies have got first hand experience running networks with used stuff in them. Not just in the dirt-scrabbling startup space. Also got first hand experience on the service side of networks too workin' with some of the biggest names, and believe me it's never been a big deal where the stuff came from so much as it has been that it's up to date with revs and mods & patches. Oh, we knew they had installed pirate stuff, and it was breaking just the same as the as-new stuff... but it's not like you take a big customer out behind the woodshed and beat 'em. Besides they point to the logo on the box. "You service that stuff"? they ask... kinda impossible to give a valid reason why not. Doesn't matter to the techs how many hands touched the box before it was opened and the frame was bolted to the floor. Their interest is the "cha-ching" of the service call. Service gets done and any haggling (if ever) happens later. Invariably the support happens. And life goes on. That's how things go in the real world. Ok, these are all facts. On the other side of the coin I agree with you that the relative size of the market actually being serviced by this cut-price supply is small. But the thing I was mentioning is that it doesn't have to be large to have a disproportionate corrosive effect. I personally know folks buying stuff at a steeper discount off list because they can go get the used stuff cheaper. They know it and the rep knows it. So the rep takes a haircut and seals the deal. Both parties are happy and once again no "secondary market" stuff actually got sold. But did it impact the margin? You betcha! So the end result is that gross margins overall are affected, not only by the direct loss-of-sale aspect (which I agree is small), but by the actions of salespeople to avoid the threat. Folks who measure the direct impact are correct. It's small. But it's the indirect impact that hurts. Finally, if used Cisco equipment is more of a competitive concern for lower priced players... then they drop their prices which are in competition with Cisco and this forces Cisco's response. It's a huge web of network effects. And it bugs me to hear the misconceptions of armchair experts whose closest approach to an actual running network is on the other side of the glass. I wet finger the direct lost opportunity in the hundreds of millions of dollars range annually. Simply based on the number of players and approximate inventory valuations. Small, on the order of ten billions in GM annually... but not so small considering the size of this quarters earnings. I bet. And that's the direct impact. Indirect impact is the effect on competitors' pricing, on price response by Cisco, on accellerated "innovate or die" reponses and so on and so on. Impossible to quantify. But I bet it's bigger than the direct effect (it's across the entire product line and has non-transient effects). I could very well be wrong in all of this. Maybe I see a totally warped view of the world. We'll see in 12-18 months. If gross margins are back up to the 64% range once again then we'll know that mindmeld's right and that it was merely structural pricing issues that hammered gross margin. But my bet is that it never gets back. And that even as competitor after competitor is being positioned as "irrelevant", pricing control does not return. John