The Upshot: EMC Hits the Auction Circuit to Buy Back Equipment

The recent flood of routers, switches and servers into the used equipment channel may be more of a problem than networking and Internet infrastructure companies want you to believe. It may be enough of a problem, in fact, to cause those firms to buy back their own used product when their failing customers start to liquidate.

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Case in point: The equipment auction held last Friday by Digital Broadband, the Massachusetts-based DSL-provider now under Chapter 11 bankruptcy protection. Storage systems company EMC (EMC) showed up there and bid $290,000 to buy back two high-end storage servers that it had originally sold Digital Broadband. The servers were worth as much as $3.5 million, according to investment research firm Fechtor Detwiler, one of whose analysts, Jack Whelan, attended the auction.

An EMC spokesman says buying used equipment at auction from customers is a mutually beneficial practice: For the customer, it's a safeguard against the possibility of "improperly handled systems" holding important and sometimes confidential data. Meanwhile, EMC gets to refurbish the system and sell it again.

The extremely low bid was accepted at auction, says Whelan. But an EMC spokesman says that it has since been rejected by the bankruptcy committee in charge of the auction. That probably means EMC's servers will end up back on the market through an outside broker, thus confounding what was surely one of the company's most important goals: taking off the market some extremely cheap competition to its own new storage hardware products.

EMC might not have been happy to find itself the high bidder at Friday's auction. In one sense, the burgeoning market for used equipment could provide manufacturers with chances to sign new service and software contracts on equipment that's already out the door. Warranties and software licenses are very profitable businesses for hardware manufacturers, and they typically aren't transferable when equipment changes hands. Whalen says the bankruptcy committee made a point of informing bidders that EMC would be happy to sell new software licenses to anyone who bought the used servers.

The trend is hardly over yet. "Most of the failures to date have been dot-com failures and CLEC [competitive local exchange carriers] failures," he says. "So most of the equipment coming up has been network infrastructure things like routers and switches. This stuff is more for an enterprise or an ASP [application service provider]. There's going to be another major wave of ASP failures on the same magnitude of the CLECs."

"This is the beginning of a very large supply of secondary equipment in the channel," says Whelan.

Other products sold at the auction include hundreds of Sony VAIO notebook computers and Dell (DELL) desktop PCs, according to a research note published Tuesday by Fechtor Detwiler. The note also said that a Cisco 7500 router sold for $26,000, while an ArrowPoint 800 switch, also known as a Cisco 11000 Series switch, sold for $4,750, more than $95,000 under its list price.

Unlike EMC, Cisco Systems (CSCO) wasn't at the auction bidding on its own equipment. But at least EMC received payment for its servers when it sold them to Digital Broadband new.

Not so with poor Cisco, which had lent $70 million to the now-bankrupt Digital Broadband so it could buy Cisco networking gear -- in essence, paying full price for its own products before others scooped them out of the bargain basement.

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