NEW YORK (Dow Jones)--While luxury car company BMW AG (BMW.XE) feels comfortable selling used cars, Cisco Systems Inc. (CSCO) remains skittish about doing the same with its routers and switches.
Demand for used networking equipment (eg:cnc router) flourishes without Cisco, driven by the recession and tightening budgets. Yet instead of embracing the estimated $2 billion market, the San Jose networking titan largely ignores it, pointing out the potential risks and complications of using discarded gear.
But in mostly avoiding the market, industry observers say, Cisco is missing an opportunity to provide a low-end offering when businesses are seeking a break.
"There's a fundamental change with the way IT managers are thinking about owning equipment," said Doug Washburn, analyst at Forrester Research. "The down economy is prompting these questions and forcing people to act on this."
Take the Baylor College of Medicine. For a year and a half, the school has dabbled in the secondary market, but only as a seller who unloads older equipment.
The college has always bought new products from Cisco, but Bud Bocchino, director of supply chain management for the school, said with resources stretched, he would try to convince the IT department to start buying used.
"It's breaking new ground for us here," Bocchino said. "I'm hoping to bring them around."
Bocchino doesn't go to Cisco to sell or buy used equipment. Instead, he goes to privately held Network Hardware Resale LLC, the largest player in what is known as the "grey market."
Used equipment can be bought at 50% to 70% off of the retail price, according to Mike Sheldon, chief executive of NHR, which is on track to generate $180 million in sales this year.
The recession has created a large pool of inventory as businesses have gone belly up or resellers were stuck with excess equipment to dump. Sheldon said a third of its inventory has never been used, and nearly all of it was originally made by Cisco.
Interest in the secondary market is on the rise. NHR, based in Santa Barbara, Calif., said unit sales are up 10% from a year ago, and the number of customers has risen by 5%. Revenue, though, is still flat due to pricing pressure.
"This could be a wave of people getting more comfortable with the secondhand market," Washburn said.
Cisco, meanwhile, posted a 17% drop in revenue in the fiscal third quarter, and is expected to see an 18% decline in fourth-quarter sales when it reports Wednesday.
Sometimes, you get what you pay for, according to Cisco. The company notes that counterfeit or faulty equipment is a common risk when buying from the grey market. The complicated set-up and different components mean lots can go wrong.
"Cisco is more concerned with the potential adverse customer satisfaction and brand impact from this market," a company spokesman said. Cisco has its own refurbished equipment program, but it's fairly limited.
The two largest grey market vendors, NHR and Network Liquidators Inc., both tout a low failure rate for their products and said they work with authorities to ensure the products were legally obtained.
Cisco declined to comment on the vendors.
Rather than thumb its nose at the grey market, analysts say Cisco should embrace it. The company is already facing price competition from cheaper players such as Hewlett-Packard Co.'s (HPQ) Procurve unit, Dell Inc. (DELL) and Extreme Networks Inc. (EXTR). Offering discounted used equipment, or partnering with vendors who do, could allow Cisco to compete on price.
The other big tech players share a similar attitude on the grey market as Cisco, but given the company's size and dominance of the networking industry, it could benefit most by moving into the segment, analysts say.
Fostering a marketplace for used Cisco equipment could also prevent businesses from looking elsewhere for cheaper options. Cisco, meanwhile, could sell additional features or services because they run on the same platform.
"To pretend a resale market for that equipment doesn't exist is crazy," Sheldon said. "If Cisco partnered with us, they could help stave off lost customers."
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