Network hardware prices drop due to increased vendor competition

Competition in the enterprise routing and switching market is intensifying, which is driving down network hardware prices.

This Content Component encountered an error

Network hardware prices are dropping as switching and routing vendors engage in unprecedented bitter competition, particularly between Cisco Systems and HP Networking.

In its latest quarterly analysis of the enterprise switching and routing market, Infonetics Research revealed that revenue is flat despite an increase in total port shipments. Ethernet switch sales earned $4.4 billion worldwide in the second quarter of 2011, down 3% year over year. This revenue decline came despite an 11% increase in ports shipped. In other words, vendors are charging less for their switches.

“The high-level picture is mid-single digit price decreases quarter on quarter for most categories,” said Matthias Machowinski, directing analyst at Infonetics. “If you extrapolate that over the course of the year, you get a 10 to 20% drop in prices. Part of that is to be expected because prices are always falling in the switching market, but we’re seeing an acceleration in price declines.”

Rumors of the ongoing price war between Cisco and HP have been circulating for a couple years, and channel partners say they’ve been feeling squeezed because of it. Those rumors were reinforced last month when reports surfaced that Cisco had offered a 76% discount on Nexus 7000 switches to Purdue University, which was seeking bids from network hardware vendors for a new high-performance computing cluster. Declining profit margins reported by Cisco have also been cited as evidence that prices are dropping.

HP and Cisco’s rivalry appears to be affecting the entire market, leading to declining network hardware prices among almost all vendors, Machowinski said. “There will be some exceptions, but as a third party you can’t stand there and say this is between Cisco and HP. They are all market participants.”

Keeping Cisco honest on network hardware prices

For years the lack of robust competition in the networking market prompted many network managers to believe that Cisco was their only viable, long-term option for network hardware. It also let Cisco call its own pricing shots.

 However, with vendors like HP and Juniper emerging in the last couple years, an IT organization can shop around for a better price.

“People just expected Cisco to be expensive,” said Aaron Paxson, a technology blogger and a global network operations manager with an American manufacturing firm. “You bought Cisco just because. You knew it was expensive, but that’s what everybody else did. Even if Cisco had a discount available, you wouldn’t ask for it. People didn’t know about it, until two or three years ago when HP and Juniper came along.”

Paxson has historically managed an all-Cisco network, but now he engages with other vendors as a tactic to get Cisco to offer more competitive network hardware prices. 

“A lot of people, myself included, don’t necessarily want to move [from Cisco] to these other vendors, but we are using Juniper and HP to keep Cisco honest,” Paxson said. “We’ll say, ‘We’re looking at this comparable product over here,’ and Cisco will, without batting an eye, immediately shave money off the price without talking to you about why you need their product.”

But that tactic actually led to a switch in vendors recently when he needed to refresh some access switches. He was looking at Cisco’s Catalyst 3750, but then he investigated Juniper’s E 42700. When his Cisco reseller learned about that, it immediately dropped the asking price for the 3750s. Ultimately, Paxson decided to buy the Juniper switches because he was impressed by the feature set despite the discounts offered on the Cisco gear.

Meanwhile, not every company is seeing evidence of this competition on network hardware prices. W. Kelly Reed, a network engineer with an American shipping and transportation company, said he recently evaluated Cisco and HP for a data center network refresh. Ultimately his company went with Cisco’s Nexus line, after Cisco addressed some buggy code. He did not see HP and Cisco try to compete significantly on price in the deal.

“I have not seen a big reduction in price due to the competition,” Reed said. “The Nexus line is anything but cheap, but with the increased capacity it more than pays at a per-port level.”

Big picture: Network hardware prices just a fraction of the TCO pie

Network managers who make switching and routing buying decisions based on network hardware prices might be doing themselves, and their employers, a disservice, Reed said. Rival vendors might be able to beat each other on the up-front deal, but a vendor’s service organization and the costs associated with it need to be on every network manager’s mind. For instance, HP historically offered a total cost of ownership (TCO) sweetener by including lifetime warranties on all of its ProCurve gear. When it acquired 3Com and its enterprise-class H3C networking portfolio, HP did not extend its lifetime warranty to many of those products. Support for the H3C-based gear is consequently more expensive.

“When you are talking true Fortune 500 enterprise, can you really afford to not count service as a major requirement?” Reed asked. “It will not benefit Cisco to get in a price war because companies will only start spending more money on support with HP. So save a little today and pay a lot tomorrow. In today’s high-availability network, that isn’t going to fly for long.”

Is the price war the new normal?

Competition is particularly tough now because for the first time, Cisco is facing a rival that owns a significant share of the market. HP controls about 10% of the market at this point. But it's likely that the pricing war will bottom out and prices will begin to rise again.

“Vendors can’t start giving products away for free,” Machowinski said. “And all it takes is continued innovation in the market and things can go the other way. Cisco is driving this end-to-end compute, storage and networking story, and HP is getting into it too. I don’t want to dismiss this end-to-end approach, but once a customer gets into it, it will be harder to mix and match products. You have less choice and that leads to rising prices.”

 

Let us know what you think about the story; email: Shamus McGillicuddy, News Director

Dig deeper on Network Hardware

Pro+

Features

Enjoy the benefits of Pro+ membership, learn more and join.

0 comments

Oldest 

Forgot Password?

No problem! Submit your e-mail address below. We'll send you an email containing your password.

Your password has been sent to:

-ADS BY GOOGLE

SearchSDN

SearchEnterpriseWAN

SearchUnifiedCommunications

SearchMobileComputing

SearchDataCenter

SearchITChannel

Close