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

To: Jorj X Mckie who wrote (57049)	2/5/2002 9:21:06 AM
From: Stock Farmer	Read Replies (2) \| Respond to of 77397

A good balanced POV Jorj, as usual. Yes, Cisco policy is one thing, but the rule-making policies of yesterday have been broken. And that's the point of the article actually. There are top-line effects (lost sales), gross margin effects (pricing power erosion) and bottom line effects (spend to innovate or die). A focus on the primary effect of lost sales going elsewhere misses the leverage that low-priced stuff merely existing has on negotiating power of pricing managers and the cost profile of the business. Once a rep loses the "you can buy it from me or nobody" line, well they have to haggle to close the sale and margins erode to. Sales 101: Exclusivity (territorial or otherwise) is key to sustainable profitability and pricing power. Extraterritorial competition sucks when it comes to making scads of money. Even small competitors on the fringes. And the rise of a healthy secondary market in one's own goods is pretty darn good competition. And as more of the "off warranty" stuff finds its way into the market, more "off warranty" service industry crops up to service the demand. As this grows large enough legs it becomes a viable substitute for Cisco's service... further eroding the "buy from us or else" value proposition. The evil part about the secondary market is that it is a kind of competition that breeds more of itself. And because it starts with a lower cost base than the manufacturer (asset disposition is never at a premium to cost), it has a natural sustainable competitive advantage! Got to treat it like any other competitor. Whether or not one competitor or another is the cause of erosion in margins (and only a fool would argue this case) is academic at best. Important to recognize one more to add to the pile that wasn't there before. We can only know for sure that the secondary market is meaningless if GMs go back up to 64% (or higher) as they were back when Cisco had some relevant competition. If they don't, then either the competition is healthier (check Juniper), or Cisco has lost pricing power along the way for some other reason. We'll never know what that some other reason is. Time was when they could set the price. Times have changed. For good, I think. For many reasons. All of which we might want to dismiss. Each explainable as being "small". Except that the net effect is hard to explain away. John.