Equipment Prices Dropping, But Not Plummeting
By Ken Branson
from the June 4, 2001 issue of Broadband Week
The seemingly inexorable laws of economics, competition and technology development are converging into what might be called the Wal-Mart Effect: Telecommunications equipment prices are dropping.
Prices aren't falling evenly; the price of older technology is going down faster than the price of new technology. In addition, long-term purchase agreements act as a brake on the descent of equipment prices, and the greater software-dependence of newer technology means that some indirect costs actually have risen.
Finally, there are bargains to be had in the secondary market, but they may come with problems for the unwary purchaser.
But there is no denying the downward trend of equipment prices, ranging from sophisticated switching gear to fiber optic cable.
In recent weeks many carriers have announced demand cutbacks in the form of their projected capital expenditures--mostly between 3 percent and 10 percent, although 360networks has announced a 45 percent
capital expense spending cut. And Cisco Systems recently shocked investors with its decision to take a $2.25 billion charge on inventory--which is to say, it has $2.25 billion worth of parts it can't make into routers and other gear, because there is no demand for the stuff.
"On the TDM-based gear, the existing technology, it's definitely trending down," says Tony Thakur, vice president-technology at Time Warner Telecom. "Class 5 switches, though we don't buy them any more, are down. Old technology, less demand."
Lucent Technologies, Cisco, Nortel Networks, and several smaller equipment makers did not respond to requests for price ranges for their key products. But one CLEC executive who supervises buying, and who doesn't want himself of his company named, says a new Class 5 switch may be as much as 20 percent cheaper this year than last.
Many vendors have negotiated long-term purchase agreements with carriers in recent years. Integrated communications provider Allegiance Telecom, for example, agreed to make Lucent its preferred provider of certain telecom gear and to purchase $350 million in telecom equipment from Lucent over three years. Jim Synhorst, Allegiance's director of procurement, says his company has similar agreements with other vendors. However, he insists, these agreements don't commit Allegiance to pay above-market prices.
"I've got an agreement I have to live up to," Synhorst says. "Where my (preferred) vendor can be the most competitive (in price), I buy their equipment. But if I can show they're not, then I have outs in the contract."
The new boxes are cheaper this year than last, but their greater software dependency also means that there are new costs associated with them. Time Warner's Thakur says hardware is cheaper these days, but the software to run it and the professional services necessary to maintain it both are trending upwards. Thakur says dense wave division multiplexing equipment is 15 to 20 percent less expensive than it was a year ago, but that software and professional services associated with that gear is 15 to 20 percent more expensive than last year.
Time Warner Telecom deploys softswitches, all from the same vendor, which Thakur declines to name. The box is a Sun Microsystems server, and the price is a known and manageable quantity. The applications software, however, is not.
"Each application is X dollars, and if you add features, you have to pay for features," Thakur says. "In the past, when you bought a Class 5 (switch), you paid X millions, and the software included all the features. But the softswitch vendors are piecemealing features, a la carte. When a second supplier comes along ... boy, do we have all the questions."
Thakur and Synhorst both suspect service costs are rising because the salaries of skilled technicians have not gone down with the price of the boxes they service. But it's the software that frustrates Thakur most. The software license might cost anywhere from $2,000 to $500,000 for the same kind of equipment, covering anything from one box, to one node, to an entire city. "Each vendor is different," Thakur says. "I wish it were exact, like the price of hardware--120 grand and so many interfaces."
There are bargains to be had these days in the secondary market. Cisco's difficulties, for example, have made a windfall possible for bargain-hunting carriers in some categories of equipment.
"Cisco has a lot of low end or medium routers that are available in large supplies in the market, and based on that, if you're ready to accept refurbished equipment, you could score some big savings," Synhorst says.
"Refurbished" is a tech euphemism for "used", just as "pre-owned" is a euphemism for "used" in the car business. But problems may lurk.
"The issue is quality," Synhorst says. "Sometimes it's perfect, sometimes it's not. If it's brand new, in a box, on eBay, I don't think I'm going to buy it. It doesn't come with a warranty, and what about support? Some of my people say, 'Hey, I can buy this stuff cheap,' and I say, 'Well, fine, but you're responsible for the quality, and please don't page me in the middle of the night.'"
Some pieces of equipment are more used than others. Used equipment can still be in its factory crate, but it also might have done a lot of living in a now-defunct network. Equipment with that kind of history might end up in the warehouse of the Alpha Equipment Co., in Crossville, Tenn. Alpha, a small, privately-held company, got its start by providing used Bell operating company equipment to small independent ILECs, and later to CLECs. Don Roysden, a salesman at Alpha, says a Class 5 switch purchased from Alpha might cost half what it would cost from the manufacturer, and, while it no longer carries the manufacturer's warranty, Alpha offers customers its own warranty.
Still, things are not as rosy as Roysden and his colleagues could wish. Manufacturers are getting into the secondary market themselves and taking market share away from companies like Alpha. "We're making money, but not as much as we used to make," he says.
Roysden says Alpha Equipment is trying to pull five other equipment resellers into a syndicate to buy 20 Nortel DMS 500 switches, stranded in various places around the country, never used in a network. "That would be a pretty good little chunk of equipment," he says.
Synhorst says he's bought some used gear from resellers like Alpha as well as from the original manufacturers. "For instance, if Nortel has a big sale to a CLEC that's gone out of business, they reclaim the equipment," he says. "They can't sell it as new equipment, so they sell it as refurbished."
Synhorst says some vendors, knowing a key customer is about to upgrade its equipment, may buy that equipment back for close to the original price on the understanding that the customer will buy a certain amount of the vendor's latest equipment. Then the vendor will sell the repurchased equipment as "refurbished."
Prices also are dropping surprisingly for fiber-optic cable, until recently the object of industry shortages. Fiber is dropping from $6 to $7 per foot to $5 to $6 per foot, according to Tom Parks, manager of procurement at Bechtel Telecommunications, the network-building arm of construction giant Bechtel Corp. "All of a sudden, the worm has turned," Parks says, trying hard not to gloat. "Last year, I asked for bids from 18 manufacturers and got no bids. This year, I'm getting bids from everyone."
Parks says cable vendors last year were telling customers they'd have a year's wait for cable. "When they saw the demand, many of the manufacturers decided to build new production facilities, which take 18 months to come on line," Parks says. "A lot of them are just starting to come on line now. Now there's a compounded problem: Fiber production capacity is going up, but demand has started to fall off. Now the manufacturers are eager to sell some fiber and lock in some long-term deals."
Industry leader Corning Inc. isn't immune. Moody's Investors Service notes that changes in supply and demand factors are affecting both Corning's pricing and its expected sales volume.
Even demand for metropolitan fiber is slackening, Parks contends, because the demand from businesses for broadband services has slackened with the economy. "We're working for several metro loop builders, and they've put a number of rings in metro business districts, but as the market has turned down and share values are down, they are scaling back their plans," Parks says. "Short term, they're taking rings they've recently constructed and focusing on the laterals to the buildings, to hook up some customers and get some income."
Even as bids come in and prices drop, Parks is not tempted to break into song. He knows the worm will turn again. Still, isn't this a great time to be in purchasing?
"Yeah, it is," Synhorst says. "As long as you're fully funded."
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