Cisco Defends Pricing, Puts Focus on Networking TCO

Vendor claims total cost of using its products has dropped sharply

SANTA CLARA, Calif.—Cisco Systems Inc. last week defended itself against the widely held view that its networking products are the highest-priced on the market, claiming that the total cost of ownership (TCO) of its products has declined dramatically over the past four years.

"TCO is what counts, not just price per port," said Charlie Giancarlo, senior vice president of product development at Cisco, during a series of briefings for financial analysts. For example, Giancarlo cited figures showing that the average cost of using Cisco's chassis-based switches has dropped by more than 90% since 1998 (see chart).

The upfront cost of buying a networking device typically accounts for only 5% to 15% of TCO, Giancarlo said. The bulk of the spending involves IT operations expenses and "opportunity costs" for upgrading switch installations, he added. "In a network environment, TCO is far beyond the equipment you use," Giancarlo said.

Valuable Support

Cisco officials have conceded in the past that the company has a reputation for being the high-priced alternative among networking vendors. But they claim that Cisco provides customer support services that make its prices worthwhile.

Fastenal Co., a Winona, Minn.-based retailer of construction supplies, has spent millions of dollars on Cisco routers and switches over the past five years. Matt Loos, communications services team leader at Fastenal, agreed that Cisco's prices can be on the high side, but he said its support is worth the price.

"Would I want them to be more aggressive on pricing? Of course," Loos said. "But I wouldn't want them to lower pricing and then lose their support." Cisco has been so helpful in solving network problems that Fastenal doesn't even get formal bids from rival vendors anymore, he added.

But John Haltom, network director at Erlanger Health System in Chattanooga, Tenn., said he recently bought $2.5 million worth of networking equipment from Nortel Networks Ltd. instead of Cisco partly because of cost issues. In a TCO review of competitive bids for a complete network upgrade, "Cisco had a much higher maintenance rate, a source of major concern," Haltom said.

Several analysts who attended the event here noted that Cisco is feeling pressure from lower-cost rivals. The competition and penny-pinching by corporate users in the sluggish economy were probably Cisco's rationale for focusing on TCO, the analysts said.

"Cisco makes a strong argument with the TCO numbers," said Timm Bechter, a financial analyst at Legg Mason Wood Walker Inc. in Baltimore. "But their ability to attract customers will be more difficult in coming years."

Bechter said he expects Cisco to face heightened competition from Dell Computer Corp., which entered the networking market last year. Other vendors that could pose a threat to Cisco include San Jose-based Foundry Networks Inc., Santa Clara, Calif.-based Extreme Networks Inc. and 3Com Corp., also based in Santa Clara.

Mark Fabbi, an analyst at Gartner Inc. in Stamford, Conn., said Cisco products can cost as much as 50% to 70% more than those of its competitors.

For example, he said, a networking manager at a U.S.-based utility company told him that Cisco bid $50 million for a complete network replacement, compared with about $20 million by another vendor. Cisco was asked to make a better bid and went as low as $25 million, "but the manager said he was so upset at Cisco that he went with the competitor," Fabbi said.


Cost Switch

Average TCO cited by Cisco for its switch products, based on the cost of processing 1 million packets per second.

Chassis-Based Switches

'98 $23,000
'02 $1,600

Stackable Switches

'98 $807
'02 $283

Source: Cisco Systems Inc.

Copyright © 2002 IDG Communications, Inc.

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