Dead Dot-Coms Can Still Cause Havoc

A fire sale of their gear threatens big equipment makers

Before they turned out the lights at ZipLink Inc. on Feb. 20, the Lowell (Mass.)-based wholesaler of Internet hosting services held an auction of its high-tech equipment. The booty, which included Internet servers and computer-networking equipment from name-brand outfits such as Nortel Networks (NT ) and Cisco Systems (CSCO ), was worth more than $30 million when new. Some of it was less than a year old and still in original shipping crates. But under the auctioneer's gavel, much of it sold for pennies on the dollar. For example, a Cisco 7500 series router that usually retails for $150,000 and resells refurbished for $11,000 went for just $1,850.

DIRT CHEAP. Already struggling to reduce inventories and cope with evaporating customer demand, some high-tech equipment makers and their distributors are under attack from a third front. Thanks to the rising number of bankruptcies and delinquencies among dot-coms, plenty of equipment, from used to nearly untouched, for networking, computing, and telecommunications, is proliferating at dirt-cheap prices. In fact, auctions of these products now account for about a third of sales at auctioneer DoveBid Inc., up from just 5% two years ago. "We used to be thought of as a last resort. Now we are another distribution channel," says DoveBid Chief Executive Ross M. Dove.

That's a problem likely to cause big headaches for Sun Microsystems (SUNW ), Compaq Computer (CPQ ), and Cisco. Although others like Nortel, Compaq Computer, and Lucent Technologies Inc. (LU ) have also seen some of their gear show up on the auction blocks, the two tech heavyweights earlier had much greater success selling to fast-growing Net companies.

Trouble is, a domino effect in the industry is about to make the used-equipment glut much bigger. Many dot-coms hosted their Web sites through application-service providers, companies that basically rented them software over the Net. But with the dot-coms now boarding up shop, the ASP market--which accounted for a fast-growing portion of Cisco and Sun's gear sales--is withering, too. Research firm AMR Research Inc. of Boston predicts about 500 of the mostly private 1,200 ASPs in the U.S. will survive 2001. Even worse, Wall Street brokerage Sanford C. Bernstein & Co. predicts another customer group, small telecom upstarts known as competitive local exchange carriers, could also begin defaulting en masse as financing dries up.

The problem is most severe in servers and routers, although tech equipment such as PCS is also flooding the market. During the past six months, hundreds of Sun servers have been sold at the auctions of failed dot-coms. When the ASPs that served the dot-coms begin to fail in big numbers this year, they will flood the market with equipment that routes Internet traffic or connects digital subscriber line customers to their service providers. That's especially troubling because much of the equipment is new, or just one generation older than what's now available.

In response, Cisco is encouraging its largest distributors, such as Ingram Micro Inc. and Tech Data Corp., to help smaller Cisco resellers sell recovered gear. It can then be sold as refurbished by those resellers, who account for more than 70% of Cisco's sales. "We're going to keep control of quality and pricing," says Cisco spokeswoman Claudia Ceniceros.

So far, Sun doesn't see a problem. "We haven't noticed anything yet," says spokeswoman Kasey Holman. It has had an agreement with eBay Inc. since December, 1999, that helps it unload excess and obsolete equipment. Nevertheless, it recently hired DoveBid to host monthly auctions of material it recovers from failed customers.

But all those efforts aren't likely to make a big dent in the growing used-gear market. Cisco underwrote less than 10% of customer purchases. That means the rights of either to repossess equipment from bankrupt outfits is severely limited. Instead, they'll have to spend a growing amount of energy trying to keep cheap, barely used equipment off the market.

By John Shinal in San Mateo, Calif.

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