After watching its core networking gear sales plummet in the first quarter, Cisco Systems is launching a stimulus package of its own: bounties in the form of padded margins and rebates of up to 15 percent of sale prices to solution providers who proactively sell switches and routers.
Cisco, which will announce its third-quarter earnings May 6, has previously reported sharp declines—by some estimates 20 percent or more—in sales of core switches and routers. Core infrastructure products make up one-half of Cisco’s overall revenue; advanced technologies, such as unified communications and telepresence, accounts for 26 percent of the company’s sales.
While Wall Street analysts are not expecting Cisco’s earnings to rebound, the networking giant is looking to use its cash-rich war chest to fund price cuts, sales incentives and rebates to solution providers who mine the existing install base of networking equipment for refresh opportunities. By Cisco’s estimates, more than $23 billion worth of switches and routers are at or beyond their five-year service life, making them ripe for refresh and upgrades.
“We want partners [to] go out and go after the install base,” says John Growdon, Cisco’s senior director of worldwide channels. “That’s where we believe there’s opportunity.”
Two problems stand in the way of attacking this potentially rich install base: low product margins and customer unwillingness to spend on capital investments.
Since the beginning of the year, end user organizations have been stretching the service life of commodity technologies such as desktops, notebooks, printers, switches and routers. Where desktops would be normally refreshed every three years, end users are pushing their service life to five years or more. Switches and routers are being pushed to five years or longer by businesses looking to avoid major capital expenses.
The other side of the equation is low margins and return on sales investment for solution providers. Cisco says at current prices and margins, it’s typically not worth solution providers’ time to actively push switches and routers.
To counter the margin and profitability challenges, Cisco collapsed its various OIP (opportunity incentive programs) into a single program for the United States and expanded its Core Accelerator Promotion, through which it’s lowering prices on certain switches and routers, making them more attractive to end users. Additionally, Cisco gold, silver and premier partners get 5 percent rebates on routers and 15 percent rebates on select switches.
“This is a realization that we needed a margin argument for the core products,” says Growdon. “If you are going to go after the core products, you’re not going to make money passing paper on these products.”
Cisco is enhancing the warranty of select switches and routers, providing limited lifetime warranties on 2000, 3000 and 4500 series Catalyst switches. Additionally, Cisco is expanding its SmartNet warranty service contracts, providing 24/7 support and next-day equipment replacement for customers in the highest tier.
Cisco believes the warranty enhancements provide customers with purchase security in their equipment, as well as consistency in their deployed devices. The warranty changes, Cisco believes, will help frame a compelling proposition for replacing and upgrading equipment.
While solution providers aren’t sold on the idea that rebates and lower average sales prices will equal net-new sales in the existing install base, the market trends continue to show scenarios where end users will be compelled to make equipment upgrades.
Joe Quaglia, senior vice president of U.S. marketing at distribution giant Tech Data, says advanced technologies continue to outpace core infrastructure product sales, but he says he doesn’t expect that to last. Even though customers are stretching the usefulness of their existing technologies to avoid expenses, he says he believes those investments will come soon.
“We all run on data, and there’s pent -p demand for technology. As vendors continue to innovate, they’ll come out with technologies that are more efficient. And companies will need those systems to get leaner and better productivity,” Quaglia says. “You can only delay infrastructure investments for so long; and you can only delay better service and access for customers for so long.”