Any concerns that channel partners may have had about fierce competition from used networking equipment resellers were confirmed last week at Interop.
The United Network Equipment Dealer Association (UNEDA), an alliance of more than 300 used networking equipment resellers, set up shop on the Interop expo floor, receiving steady foot traffic from start to finish of the show.
In just 30 minutes of booth observation, at least five people requested business cards, and two were clearly potential leads. It's safe to say a number of neighboring vendors didn't have the same success.
But UNEDA didn't come to Interop solely seeking business leads.
"Coming to Interop was an experiment to see what the reaction would be," said Mike Sheldon, president and CEO of reseller Network Hardware Resale and current president of UNEDA. "We would like to combat the idea of the gray market."
The gray market refers to any alternative distribution channel where products have been intentionally removed from the authorized chain of distribution. Gray market resellers sell used products as new, or they sell counterfeit products as branded goods.
Yet many used equipment resellers sell legitimate goods. Some are even vendor authorized, but they still suffer the rap of the gray market. What's more, vendors like Cisco and major OEMs publicly warn customers away from these resellers, telling them the equipment could be faulty.
Used networking equipment market: Public Enemy No. 1:
So UNEDA is battling a bad public image and promoting best practices among members. The organization defines itself as a "safe trading space" of equipment among used resellers. It also fights against the sale of counterfeit products as a way to disprove the stereotypes.
"What do you do when your competitor sells your own product? You can't badmouth the product, so you badmouth the companies or you say their equipment won't work," Sheldon said of vendors' public attacks on used equipment resellers. "We're here to say we will be here in 20 years. Most of our members have been in business a decade or more, and we want to continue to stay in a good business." UNEDA leaders say they accept only a fraction of the group's applicants to avoid signing up shady members.
Still, companies like Cisco have reason to be wary. Last year, the FBI broke up a counterfeit distribution network, seizing more than $3 million in counterfeited Cisco components manufactured in China but meant for worldwide distribution. According to the FBI, the fake Cisco routers, switches and cards were sold to the U.S. Navy, U.S. Marine Corps, U.S. Air Force and the U.S. Federal Aviation Administration. Cisco did not return communications requesting comment about UNEDA.
Used networking equipment resellers posing competitive threats
But Cisco may be even more concerned about losing sales dollars to used goods competitors. Cisco partners have seen increased competition from used resellers since the start of the recession.
"We are coming up against used equipment. It's just the environment; everybody is looking for cheaper prices on everything," said Mont Phelps, president and CEO of NWN Corp., a Waltham, Mass.-based solution provider.
"Some of the stuff appears to be new and is at prices that are unbelievably low, but we don't know where it came from or what problems there may be," Phelps added.
Battling it out in the SMB market and beyond
In terms of competition, Phelps said used equipment resellers are more of a challenge in the small and medium-sized business (SMB) market, where companies don't rely so much on high-performance equipment.
"The more sophisticated buyers won't buy down unless they are already committed to a system that has a bunch of particular items and they want more of the same [older components]," Phelps said. "But in the SMB world, they don't need the performance, they need the lower prices."
According to UNEDA's 2009 membership survey, the majority of members do serve SMBs, but the number of respondents selling into larger companies has grown significantly since 2007. Sixty-three percent said they serve global organizations with worldwide presence. That number is up 13% from 2007. Survey results showed that 78% of members serve SMBs with fewer than 100 members, and 72% serve companies with fewer than 1,000 employees.
What's more, the size of used equipment resellers is growing. One quarter of the members reported revenues ranging from $6 million to $25 million, while another 10.6% reported revenues of $26 million to $75 million. The largest group has doubled since 2007.
"We're finding a lot of past potential customers are now contacting us and asking us for a quote. Now they are considering us, whereas beforehand they were too good. Our business is way up," said Hal Stevens, vice president of Maxis Technologies, an Oklahoma City-based reseller that sells both used and new equipment. In fact, he added, Maxis has seen double-digit growth over the past year.
Ultimately, the image of used resellers will have to improve, and the differentiation between resellers and those doing shady business in the gray market will become starker. As that happens, Stevens said, the vendors and OEMs will have to back down.