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Cisco and ProCurve channel partners squeezed in price war

Rumors continue to circulate that Cisco is attempting to engage HP ProCurve in a quiet price war. ProCurve and several channel partners report that Cisco is offering to slash its prices in certain situations where it is about to lose to ProCurve on price. This price war has channel partners nervous.

With lower prices, lifetime warranties and the full backing of its giant parent company, HP ProCurve is perhaps one of the biggest threats Cisco Systems has seen to its longtime dominance of the network infrastructure market. Cisco appears to be responding to this threat by telling some of its channel partners to match ProCurve prices on at least some deals where they are about to lose a customer on price.

Cisco did not respond to a request for an interview for this story, but ProCurve executives and several channel partners confirmed that the practice is taking place.

"They have a kind of policy that they don't want to lose anything on price [to ProCurve]," said the CEO of a value-added reseller (VAR) in the Northeast who sells both Cisco and ProCurve gear. "They view ProCurve as a threat."

The CEO, who asked for anonymity for fear of retaliation by Cisco, said he isn't aware of a formal program by Cisco on price-matching. He described it as more of a "guerrilla tactic." He said he hasn't had any deals receive this pricing attention from Cisco since he started hearing about the tactic. But he said Cisco has made it clear to some partners that they should come back to their Cisco contact in such situations so that Cisco can have the option of cutting its price to compete against ProCurve on certain deals.

The CEO said the price war is tough to deal with, especially when he's trying to compete against other Cisco partners on many deals. Going back and forth with Cisco when a ProCurve deal is on the table takes time, and time kills deals, he said.

"It's a painful process for both the vendor and the VAR in terms of time and resources," said Paul Myerson, senior channel analyst for Enterprise Strategy Group. "The vendor wants justification and the partner wants a fast and positive answer since time is the death of all sales."

And cutting prices ultimately hurts a partner's margins.

"Margins are getting clobbered in this market anyway, especially when you're competing against other Cisco partners," said the CEO. "There are just too many Cisco partners out there. When the prices go down, the margin yield -- what you actually get -- is less. If you cut the price by 20%, then the price and the margin decrease by the same percentage."

The CEO said a price war in the market isn't good for anybody, even the customers who take advantage of the lower costs.

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"At the end of the day, the people who are paying our bills are the customers, and we need to do the right thing for them and provide the right solution," he said. "It's not good to see Cisco and HP fight each other in the marketplace because it will result in lower prices and more competition and a lot of extra effort getting deals closed. In the short run, customers are going to get a lower price, but in the long run, when you start squeezing the yield down, that's going to show up somewhere else, in the form of a lower level of service."

"I think that ProCurve is a much more serious threat or contender than what Cisco has previously faced, simply because it's not just ProCurve anymore. It's HP and all the resources that HP can bring to the table. That's very different from Extreme or Foundry or some of the other players on the market," said the president of a West Coast VAR that sells both ProCurve and Cisco.

He said that a price war with ProCurve is a losing proposition for Cisco, since ProCurve hasn't even started to respond yet with its own price adjustments.

"The problem for Cisco is when you start at list prices, HP is 30% to 40% cheaper. When you get down to that 30% to 40% price, Cisco's just getting to ProCurve's list price."

In other words, ProCurve could easily lower its prices further to push back against Cisco's efforts. There is no evidence of that yet. For now, ProCurve is content simply to publicize the pricing issue and crow about the fact that Cisco actually sees the company as a threat.

"We want to make sure the IT buying world is aware of this," said Karl Soderlund, general manager and vice president for the Americas at ProCurve. "We've always prided ourselves as being the price-performance leader. Every company should be looking at ProCurve and Cisco at the same time, to know what we have to offer."

If the rumors of a below-the-radar price war are true, Cisco could be making a mistake. It might be better served by doing something more open and formal, Myerson said.

"If a vendor wants to make a statement in a space, make it easy on the channel," he said. "The channel is driven by profit and simplicity [when dealing with the vendors]. The vendor should put a specific program in place that describes the rules of engagement and sets expectations with the partners from a pricing and margin perspective."

Let us know what you think about the story; email: Shamus McGillicuddy, News Editor

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