High-Tech Gear Resellers Feast on Dot-Com Scrapheap
CDworld.com folded last month after six years in business. The company’s 11 workers have been let go and the small offices in a strip mall are nearly bare.
But the music, video and games e-tailer is still hoping to unload some valuable merchandise--namely, the nuts and bolts of the Web site itself: a Cisco Systems device that directs Internet traffic, a refrigerator-sized server by Sun Microsystems and smaller ones from Sun, Hewlett-Packard, IBM and Compaq.
“I’m sure we will sell it,” said Annette Martin, who ran CDworld.com with her husband, Bruce Pettyjohn. “We’ve got good equipment.”
It happens that Martin also is a psychic advisor who has appeared on television, but it doesn’t take a sixth sense to know that the used pieces of her Web site will find buyers.
Like ants swarming over remnants of a summer picnic, obscure equipment resellers all over the country are reaching out for the wealth of inventory becoming available from dismantled dot-coms. Almost all those parts can be sold again--to another start-up chasing a dot-com dream, perhaps, or an equipment-leasing company looking for a deal.
“There’s a lot of used equipment on the market right now,” said Ben Nelson, who handles online sales for UsedRouter.com, a 17-employee company in Las Lunas, N.M. The slowing economy has “encouraged companies to go out and search for used equipment,” he said.
The dot-com meltdown ripples through the rest of the high-tech economy. Hardware companies are moaning that demand for personal computers, telecommunications equipment and other goods has all but vanished, and the availability of tons of inexpensive used equipment makes it that much harder to dig out.
Secondhand equipment generally doesn’t appeal to large businesses that want custom-built networks, service contracts and warranties. But smaller companies or service providers with technical know-how can do well digging into the scrapheap. This isn’t like buying a used car--the switches and hubs that make up networks, for example, generally don’t suffer from wear and tear.
Gary Sapp, president and chief executive of Tangent Communications Inc., an electronic equipment reseller in Des Plaines, Ill., says a quarter of his inventory comes from dead dot-coms that defaulted on equipment leases or declared bankruptcy. The rest comes mostly from large companies that have scaled back or changed their technology.
Not surprisingly, economic conditions are lowering prices. For example, one Cisco router--which directs traffic on a network--that a year ago cost between $3,500 and $4,000 on the secondary market today goes for $2,500 to $3,000. New, it sold for $10,200.
“It’s definitely increasing the ability to buy inventory,” Sapp said. “We had some holes in our inventory--we filled those.”
Tangent isn’t immune to the high-tech demand slowdown, but Sapp said that when the economy revives, he will be waiting with some good deals. Another Cisco router that sold new for $2,495 can be had used from Tangent’s site for $595.
“It’s just a matter of time before there will be demand, and there probably will be pent-up demand,” Sapp said. “It could pay dividends nine to 12 months from now.”
At Excess Solutions, a seven-employee electronic parts broker working out of a ramshackle white building in a San Jose industrial zone, owner Mike Giordano is buying up as much as he can while prices are low.
The strategy isn’t guaranteed to work, especially if manufacturers come out with significantly better products by the time the economy turns around. “I’m afraid when the market does turn back, the technology will be so far past what’s sitting on the shelf,” he said.
Cisco spokesman Tom Galvin said dot-coms have accounted for only a fraction of sales, so his company won’t be hurt by the hand-me-downs. “This phenomenon is more interesting than impactful to Cisco,” he said.
Cisco will probably be safe because most of its sales are to high-end network infrastructure providers, said Seth Spalding, an analyst at Epoch Partners. Companies such as 3Com Corp. that sell easier-to-use network gear for small businesses are more likely to get pinched. “It will eat up some of the revenue base,” Spalding said. “It’s part of anticipated demand that’s just not going to be there.”
When asked about the resale market recently, 3Com Chief Executive Bruce Claflin did not address the subject directly, though he acknowledged that the dot-com collapse and overall high-tech slowdown are causing serious inventory problems.
“I think what we have in the industry is over-hype that led to over-investment that led to overcapacity . . . too many people building too many things chasing a diminishing demand,” he said. “I do think the industry has to work through these problems, and I believe we are not at bottom yet.”
Hewlett-Packard’s server division is “seeing this issue to only a slight degree,” said Mark Hudson, HP’s marketing manager for business-critical computing.
Even so, real problems could arise if the resale inventory helps keep some big high-tech companies from raising prices, said Paul Sagawa, an analyst at Sanford Bernstein and Co. “I think it’s something for them to worry about,” he said. “It might not be something that’s affecting them now, but it may be something that could make the recovery more difficult to accomplish.”
