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September 1999


Robert Vahid Hashemian Those Crazy Routers And Switches.   Their Prices Are Insane!

BY ROBERT VAHID HASHEMIAN


Call me cynical, but I have accepted the fact that there is a conspiracy going on in the world of routers and switches, and the goal is to squeeze every cent out of the consumer. Forever. Sure, that’s called business. The vendors are only trying to maximize their revenues while enjoying lofty gross margins. But something about this business doesn’t make sense to me.

I concede that any new technology on the market can demand a premium price. There are usually two reasons for this:

  1. The new product has a novelty, freshness, and rarity about it — attracting the few who would pay premium prices to attain it. Some will really use it, and some just want to show off. Whatever the case, they want it, and they will pay for it.
  2. There are no or very few competitors out there, allowing the vendor to enjoy the beautiful landscape of monopoly, at least for a while.

But we all know what usually happens next. Soon the novelty wears off, competitors crowd in like vultures on a carcass, and prices plummet. Consumers certainly benefit — and sometimes they win big. Take a scanner as an example. Five years ago, I paid $400 for a Logitech Scanman. Flatbeds’ going prices were pushing $600. Now, you can get a good flatbed scanner for a mere $90 and you don’t even have to say “please.” The same sort of destiny befell Atari video games (remember PACMAN?), microwaves, the Mazda Miata, and oh yes, PCs. All of these products commanded a small fortune when they were new, but as time went on, their prices eroded and became more affordable to the general public. Many of them have become commodities that can be had for nominal prices, and secondary markets have formed, in which these products are bought and sold under the “used” (or should I say “pre-owned”) category.

THE BOX REMAINS THE SAME
But now let’s take a look at the router and switch market. While Network Interface Cards (NICs) and hubs have been undergoing their own little price shake, routers and switches seem to have held onto their high prices through it all. Take a simple Cisco 2501 Ethernet router as an example: One AUI, two serial interfaces, and a console port. The basic function and features of this box haven’t changed in years. It was a router, and it still is a router. Sure, some of these features are now more advanced, support more protocols, and may even be more optimized, but the basic functionality remains the same — routing. Three years ago, TMC bought one for about $2,000 for our frame-relay connection, and today it still goes for about the same price. I know this because I just bought one — the same box, the same network interfaces, and the same text-based operating system (called IOS) to configure the box with. Even the color was the same.

And I am not just picking on Cisco either. While Cisco is certainly the routing behemoth, other vendors such as 3Com, Ascend (now part of Lucent), and Bay Networks (now part of Nortel Networks) have held their switch and router prices sky-high. And this is why I am perplexed. According to my judgment, once a product has been on the market for a while (which the router certainly has), and there is healthy competition (which Cisco seems to have), prices should have nowhere to go but down. So why aren’t the laws of price gravity correctly applied to routers and switches? I can only offer a hunch, but in my estimation, Cisco hasn’t really had much competition when it comes to these magical boxes.

COMPETITION? WHAT COMPETITION?
We’ve heard the story before. It was the late 70s, a couple of guys were trying to connect two computers through a box, and Cisco was born. Then the Internet came along and just like rocket fuel, propelled this company into the stratosphere. When Cisco commercials claim that more than 85 percent of Internet traffic travels on their systems, I believe it. After all, when I wanted to get connected, I asked for a Cisco box too. And the word “Cisco” has pretty much become synonymous with router — like Kleenex is for tissue, Coke is for soft drink, and Tide is for laundry detergent. With that kind of marketing power, Cisco has become a monopoly in the networking market, pushing all other vendors to the fringes. The company enjoys the best of both worlds: It commands a Herculean market share in the networking industry, while using the other players as an alibi to ward off any claims of monopoly. And with most of them getting absorbed into bigger companies, there is even less possibility of making the monopoly claim stick. Who’s going to say, “poor Lucent,” or “poor Nortel?”

Another company with a similar situation is Intel. Except that Intel has real competition, and it’s spelled AMD. Using its marketing tactics, Intel has been able to stifle competition from Cyrix, part of National Semiconductor Corporation) to RISC processors. But AMD has hung on, forcing Intel to cut prices across the board on its processors and introduce the Celeron processor. And the consumer has reaped the benefits to some degree, if PC prices are an indication. With Cisco comfortably ahead of the pack (if there is a pack), I don’t see any indication that router prices will be dropping significantly any time soon. I still wonder why none of the competitors have bothered getting into a price war with Cisco, or why no Taiwanese company has been able to offer similar boxes at much lower prices (just like they did with PCs)? I know it’s high-tech, but it can’t be impossible.

To be fair, I’d also like to mention what I admire about Cisco boxes. They are like tanks. Once configured, they continue working through thick and thin. Power outages, network topology changes, and network operating system changes seem to have no effect on them. They don’t crash, and don’t take forever to boot up. And I bet if you had consoles attached to them at all times, the consoles would never experience a blue screen with a GPF error. Like the Energizer bunny, they keep going and going. So well, in fact, that at times we totally forget about the poor old box sitting on the floor of the wiring closet, routing silently while dust balls make a fine blanket on top of it. And I am thankful for that.

CALLING ALL ENTREPRENEURS
So why complain about the high prices when I have quality products I can possibly use for years to come? Because Cisco and other networking companies are merging with the telecommunications world through the power of Internet telephony. The boxes are no longer just for data networking, but ever increasingly used to transmit packets of voice, video, and fax. Affordability is an essential element for any technology if it is to thrive and gain popularity. Internet telephony is no exception. How can we see Internet telephony attain its full potential, when the prices of its building blocks are beyond users’ means? It can’t and it won’t — not effectively at least — unless we start getting some relief in prices of all the products that make Internet telephony tick. These include telephony cards, software programs, and routers and switches that transmit the packets. Any hungry entrepreneurs out there itching to get into the networking business and take on the giants? This is your future calling.

Do you have another theory why router and switch prices don’t drop? Send me an e-mail — which will undoubtedly cross one or two Cisco boxes.

Robert Vahid Hashemian provides us with a healthy dose of reality each month in his Reality Check column. Robert currently holds the position of Webmaster for TMCnet.com — your online resource for CTI, Internet telephony, and call center solutions. He can be reached at rhashemian@tmcnet.com.







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