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Our Channel Explained series provides targeted articles that flesh out detail on channel terminology but avoid information overload. This week we examine the question, What is the secondary market?
By Stephen J. Bigelow, Features Writer
The adage that a new car loses 20% of its value the minute it's driven off the dealer's lot has long been held as a reason for car shoppers to consider used vehicles. The theory is that the first owner will see a big depreciation in the value of the car, while the second owner pays a much lower price but still gets useful life out of it. That same principle is being applied to tech equipment, where the secondary market is becoming a big business for a significant number of resellers.
Like new car dealers, technology original equipment manufacturers (OEMs) rely on regular sales of brand-new equipment and then charge a premium for service and maintenance contracts. But many IT organizations won't (or can't) sustain the endless treadmill of shiny new gadgets that are sometimes shipped late -- delaying their users' important new projects. These IT consumers are increasingly turning to secondary-market resellers for quick delivery of old (and new) tech equipment, knowledgeable installation, responsive service and support, and convenient disposition of existing equipment.
For tech resellers involved in the secondary market, there are a number of advantages, but also some big disadvantages. And they face risks inherent to selling equipment not acquired from a manufacturer. If you're a reseller considering entering the secondary market yourself, or if you just want to know what business models you're competing against, read on.
Defining the tech secondary market
The secondary market (sometimes dubbed the "IT aftermarket") actually constitutes a complex ecosystem of tech resellers and active consumers that are buying and selling IT equipment outside of the channel endorsed by manufacturers. Secondary-market resellers are perhaps best known for providing used, refurbished tech equipment at a fraction of the cost available from manufacturers.
But it's also important to note that not all IT equipment on the secondary market is old equipment -- many secondary-market resellers also provide a quantity of new tech equipment acquired from manufacturers' overstock, corporate bankruptcies, cancelled IT projects and changing business needs that prevented the intended end user from ever deploying the equipment. The impact is profound for IT organizations that prefer to expand and support their existing IT infrastructure rather than shoulder the expense of new vendor products every year or two.
Resellers typically acquire used equipment from IT organizations that are upgrading or shifting technologies. Reputable resellers, such as UNEDA (United Network Equipment Dealer Association) members, then test and refurbish the equipment thoroughly before making it available for resale.
Resellers can also interact cooperatively with one another within the secondary market, allowing those without stock on certain tech items to acquire and provide those items from other resellers within the market. Thus, secondary-market players not only sell to end users, but also sell to one another to some extent. This creates a unique symbiosis between secondary-market resellers.
"[Resellers] are my best customers, my best vendors and my biggest competition," said John Stafford, chief operating officer and wholesale sales director of secondary-market reseller Network Liquidators, headquartered in Tampa, Fla.
Like traditional vendors, secondary-market resellers also deal in tech service and support, often providing installation of purchased equipment, removal of existing equipment, and warranty service that frequently includes 24/7 technical support. Since secondary-market resellers are vendor-agnostic, technical staffs are often familiar with a greater range of devices and can offer broader advice and technical knowledge than a manufacturer. Support staff often carry numerous vendor certifications such as CCNA, CCIE, CCNP and so on.
Benefits and drawbacks
Resellers cite numerous benefits in the secondary market -- starting with the value proposition. "The most you'll pay for a decent piece of equipment from a decent secondary-market reseller would compare favorably to the very best price that you could get it for new, and likely be much cheaper," said Mike Sheldon, president and CEO of Network Hardware Resale (NHR), headquartered in Santa Barbara, Calif. Because of the relatively lower price for secondary-market equipment, some companies may even purchase tech devices from the secondary market as "cold spares," stocking the equipment themselves pre-emptively so that a replacement is always on hand in the event of trouble.
A second benefit is product availability. Manufacturers generally refresh their product line every 12 to 24 months, typically liquidating older products. But networking hardware can often see service lives of five years or more, and resellers such as NHR might carry products that are upwards of a decade old.
End users that employ a particular product may find it much easier and cheaper to add/replace an older device rather than endure the cost, business disruptions and knowledge gap that occur when upgrading to new products. When newer products are adopted, the used equipment is inevitably sold back to the reseller, creating a robust marketplace. "The secondary market buys as much equipment as it sells," Sheldon said. "Everything we sell we have to buy from someone."
Secondary-market resellers can ship available tech products in 24 to 72 hours, compared with three- to five-week waits (or longer) for a manufacturer's built-to-order product. Warranties are also provided for used equipment, often starting at 90 days and extending to longer terms such as one-year, three-year or five-year. Some resellers may also tout lifetime warranties for their products.
Warranty protection is rarely a problem for most network equipment, since most products follow the traditional "bathtub curve" for reliability. "Once the equipment is deployed … it's going to fail then and there, or it's going to keep on going for a good long time," regardless of whether the device is new or used, said Gillian Canty-Ross, owner of Subspace Communications, a reseller in Atlanta.
But there are also some potential disadvantages to consider. The tech secondary market operates outside of the manufacturer's established IT channel, so secondary-market resellers typically don't have any kind of formal relationship with the manufacturer. While this does not prohibit direct support from the manufacturer, the support can be problematic at best. "It's no secret that Cisco, for example, is no friend to the secondary market," Sheldon said.
The IT secondary market also cannot be counted on to provide software updates that normally come with tech manufacturer maintenance. Most secondary-market resellers can obtain software updates from the manufacturer and will gladly quote new software purchases. Smaller resellers may avoid the software issue entirely, directing the client to another reseller that can assist with the purchase.
The IT secondary market is vast and diverse, making it virtually impossible to estimate its total size across all IT areas, but it is unquestionably significant. The UNEDA representatives estimate the networking equipment portion of the secondary market at about $2 billion worldwide in 2007. Estimates are often sketchy because most tech resellers are privately held and therefore don't make their sales data public.
Another difficulty in sizing the secondary market is the incredible diversity of players and sales avenues involved, but growth appears to be a common thread across the entire marketplace. "It's everything from the 'mom and pop' [resellers] that flip something on eBay to companies like Network Hardware Resale," Sheldon said, citing his staff of 250 people across multiple locations with revenue expected to exceed $200 million in 2008 (up about 30% from 2007). At Network Liquidators, Stafford noted that his company doubled in size from 2006 to 2007. As a single-person shop, Canty-Ross pointed to 20% growth at Subspace Communications during the same time.
Growth isn't just in sales. The entire complexion of the secondary market is maturing. Years ago, many resellers operated with little real stock from their home office or garage. Today it's easy to find resellers with millions of dollars in inventory available for immediate delivery. "Today's market, compared to 10 years ago, is a lot more professional, better financed and technical," Stafford said.
Players in the IT secondary market face three major challenges: growth, product quality and professional reputation. Insiders like Sheldon, Stafford and Canty-Ross all agree that resellers tend to reach a business plateau and stall -- often unable to grow past $10 million in annual sales.
Part of the problem is inadequate credit or funding, which inhibits investment needed to grow the business. Management is another problem, especially among smaller, privately held resellers. This kind of "founder's syndrome" can block a fresh infusion of new management ideas and lead to business stagnation.
Another important concern for resellers is product quality, ensuring that the condition of any equipment purchased meets strict standards of physical appearance and technical functionality. Resellers in the secondary market understand that they're only as good as the sources of the tech products that they actually buy, so the goal is to ship only products that are "like new." Ensuring quality demands a thorough review of vendors and sources, coupled with aggressive testing methodologies. "We've recently added line rate 10G[bps] testing, so the products that we bring in that use 10G we can now test at full wire speeds," Sheldon said.
Perhaps the most insidious problem faced by secondary-market resellers is the way they are perceived by tech manufacturers, OEMs and other participants of the authorized channel, which frequently categorize secondary resellers as the "gray market" -- a derogatory term that drew sharp response from insiders.
"There's nothing gray about what we're doing," Canty-Ross said. Stafford points to FUD (fear, uncertainty and doubt) tactics used to create a crisis of confidence, dissuading users from making purchases from the secondary market. Ultimately, the actions and reputation of secondary market resellers have a profound impact on the perceptions of end users and reflect upon all resellers.
Stolen and counterfeit equipment are two important issues that secondary-market resellers (and their clients) must contend with. In both cases, goods are introduced into the market by someone who knows they're stolen or counterfeit to someone who does not know. Stolen equipment is often an issue with newer high-end equipment and is normally called into question when the stolen equipment is made available at an unrealistically low price -- too new, too cheap. Counterfeit equipment is generally a more perplexing problem associated with lower-end equipment, where a manufacturer produces goods that look virtually identical to the manufacturer's goods -- even extending to the labeling, packaging and documentation.
An incident of stolen or counterfeit equipment sold to an unsuspecting end user can sully the entire marketplace. "When you sell [users] anything that might be counterfeit, you're done," Stafford said, noting that a deceived customer -- even when every precaution is taken by the reseller -- may abandon the secondary market entirely, resulting in lost sales and a tarnished reputation that is impossible to recover. Professional associations like UNEDA take these risks quite seriously, and impose stringent rules on their membership to avoid such problems. For example, a UNEDA member that violates the group's bylaws faces sanctions ranging from written warning to automatic expulsion.
Reputable secondary-market resellers take great pains to inspect the equipment they receive and ensure that it's genuine. This may include checking label colors, comparing internal and external serial numbers, inspecting solder points, and sometimes even comparing a product against a "known genuine" product bought from a manufacturer.
When a suspicious item is identified, the reseller will then work with law enforcement to identify and prosecute the source. "Should any product ever need to be recovered because it turns out to be stolen [or counterfeit], we'll certainly replace it at no expense to the customer immediately," Sheldon said, echoing the lifetime replacement policies of other resellers.