Ruthless people are rattling the networking business by rifling through its remains.

As bits and pieces of broken telecommunications companies wash ashore, shrewd outfits like

Qwest

(Q)

are combing the beaches for cheap used gear. As they do so, the tide is rushing out on floundering telecom equipment gear makers like

Cisco

(CSCO) - Get Report

,

Lucent

(LU)

and

Nortel

(NT)

.

These networkers now face a triple whammy, analysts say: Already battered by industrywide spending cuts and escalating price wars, they now find their new gear competing with nearly new, deeply discounted stuff. In a slowing economy in which everyone is pinching pennies, the presence of cheap, almost-as-good-as-new gear could add to a sizable telecommunications equipment glut by pressuring demand, say observers. That could again cut earnings and sales at a group of onetime highfliers whose expectations have been in free fall.

The Deluge

The continuing collapse of upstart phone and Internet service companies such as

ICG

,

Harvardnet

and

NorthPoint

that raised millions to build new networks is causing an avalanche in the used gear market. But until now, it has been hard to get a handle on just how large the impact has been. Though the networkers demur, evidence from Qwest suggests there are good deals aplenty out there.

"I don't want to say too much because my vendors get ticked off at me," says Qwest President Afshin Mohebbi. "But I will tell you there is stuff that we buy that someone bought three months ago and never opened up the box. I'm able to buy those boxes for pennies to the dollar."

Analyst Jack Whelan attends property auctions and monitors the used equipment market for Boston research shop

Fechtor Detwiler

. He says the growing abundance of up-to-the-minute tech in the used market is well-timed for the frugal shoppers.

"Budgets are tight and the VPs of finance are saying you've got to go save some money," says Whelan. "At the same time, used equipment brokers calling to say: 'Hey, I can get you that Cisco router for 30 cents on the dollar.'"

Fector Detwiler's Whelan says that typically, used gear is picked up by brokers for between 15% to 20% of the original list price and resold for about 30% of list price. He says Cisco's most popular router, the C2924, which lists for $4,900 new, is being purchased for $700 by brokers and resold for $1,100. And Cisco's beefier 6500 router, which lists for $101,000 new, is being picked up for $18,000 and resold for between $28,000 and $35,000.

The Fallout

"Selling problems are snowballing into extreme pricing and margin pressure," says one Boston-based hedge fund manager who has no positions in Cisco, Lucent or Nortel. He says the big bargain hunters in the telecom supermall are having the times of their lives right now. "This is even more evidence that the larger customers have all the leverage in the slowdown."

As some analysts point out, the dramatic slump in demand presents complications beyond the issue of price pressure. Also notable is the "backwash" of equipment that the suppliers are forced to reclaim when the payments stop.

"We definitely are hearing that there is a lot of used equipment coming back onto the market," says

CIBC World Markets'

analyst Steve Kamman. "What is unclear is where that equipment is going -- into inventories or back out into the channel." Kamman has a hold on Cisco and a buy on Lucent, and no rating on Nortel. CIBC is one of the underwriters for Lucent's

upcoming

Agere

IPO.

Analysts say the backwash could show up on suppliers' financial reports as rising inventory. That could eventually lead to charges against earnings as networkers move to empty their shelves to push new gear out the door. Other scenarios have repurchased gear being dumped quietly in overseas markets to avoid detection.

Being Sure

Of course Qwest, a profitable phone company looking to spend about $8 billion on equipment this year, is nothing if not a shrewd negotiator. Observers say there's little doubt that there is a surplus of used gear flowing into the market, but they question whether Qwest is buying it by the truckload or simply making noise about some pieces it has found to help beat down the price of new gear.

Other telcos including

Sprint

say they see bargains on nearly new gear, but they call it only one of the options they consider when making equipment-buying decisions. A Sprint spokeswoman says the company's preference is for the latest and greatest tech.

A Cisco spokesman said the company is aware of the burgeoning used market but terms it "more interesting than impactful."

Notably, Cisco's CEO John Chambers

said Tuesday that in addition to seeing a continued slowdown in his business, Cisco was watching margins -- the gross profit a company turns on its sales -- dropping.

Mountains of inventory, a pricing war and equipment buybacks could all contribute to that margin erosion, say analysts and investors.

Lucent declines to comment on the used equipment market other than to say it does a little reselling of its own. A Nortel spokeswoman says: "We are not seeing massive piles of equipment and we're not noticing a problem right now."

Datapoints

With bankruptcies increasing across many industries, tons of computer and communications gear is winding up in the resale market.

TheStreet.com

found a few choice morsels available with equipment repossession firm

Somera

(SMRA)

. There are also vast rosters of inventory listed on Web auction sites, including

DoveBid.com

. And a recent search on

eBay

(EBAY) - Get Report

under "Cisco router" returned 474 hits. Though some of the items were relatively new, most of the equipment looked to be a few rows back from the leading edge.

But as one former telecom executive pointed out, "The fact that you are seeing some of this stuff getting on eBay means the channels are flooded everywhere."

For Qwest and other service providers trying to manage costs in lean times, the firesale is fantastic.

Mohebbi says bankrupt companies have allowed Qwest to directly purchase buried fiber optic cable, empty cable conduits and varieties of "interesting equipment." Says Mohebbi: "You have an incentive in this market to manage your expenditures by being opportunistic." Mohebbi emphasizes that rather than acquiring the assets and liabilities of distressed companies outright, it's far more attractive to cherry-pick the good pieces on the cheap.

"A lot of people look at this as doom-and-gloom," says Mohebbi. "But we have always said great companies can come out of situations like this even greater. We look at the current situation not as a bad thing but as an opportunity to solidify our position."

But for the equipment sellers, this just intensifies the discomfort already felt from the cash squeeze in the sector.

"This is clearly going to be an issue as the

upstart telco shakeout continues," says CIBC's Kamman. "This is fundamentally a short-term problem, but it remains a reason to be cautious over the next few months."