Cisco Modules Pay Off – for Other Companies
It's well known that Cisco Systems Inc. (Nasdaq: CSCO) puts a hefty markup on optical modules, selling standardized parts at a Cisco-branded (i.e. pretty expensive) price.
That's turning optical modules into a healthy business -- not just for Cisco, but for the used-equipment vendors that can sell the same modules without the Cisco markup. Companies such as Network Hardware Resale (NHR) and OSI Hardware have been doing this for years, and the growth of the business has them thinking about publicizing it more overtly.
NHR is even going a step further. It's signed a deal to be a U.S. provider of certain modules from startup Menara Networks , Light Reading has learned.
That's a change, because until now, NHR and OSI have bought modules from the same vendors Cisco uses, such as Finisar Corp. (Nasdaq: FNSR). Now, NHR will have Cisco-compatible modules that it will claim are better than Cisco's. The gray market has gone legit.
The pluggable optical interfaces on a Cisco switch or router come in a standard size and shape and run at specified speeds. All these things are defined in multiservice agreements (MSAs), which means they should be interchangeable. Among other things, that keeps the prices down.
Sometime around 2003, Cisco started putting a "quality ID" into the modules' software, and Cisco's Internetwork Operating System (IOS) was programmed to flash a warning if that identifier wasn't found. In essence, Cisco started distinguishing between the modules it bought off-the-shelf and the modules someone else bought off-the-shelf.
Customers grumbled, and it wasn't long before NHR started selling used Cisco modules. A little more than five years ago, the company went to the next obvious step, buying the MSA modules from the same suppliers Cisco uses. One software tweak applied by the distributor, and bingo -- Cisco-compatible modules.
OSI, smaller and younger (four years old, with founders from NHR), likewise got into the modules business "as soon as we saw the demand was as high as it is," says President Jordan Quivey.
Both companies' prices beat Cisco's substantially, which of course is the whole point. NHR officials say it's common for their modules to go for half the price that Cisco demands. An OSI salesperson tells Light Reading he's sold $195 SFP+ modules that Cisco would sell for $1,050.
Back in 2006, two-thirds of readers in a Light Reading poll said they'd be willing to use cheap clones of Cisco optical modules. The real-world numbers haven't gotten to that point yet -- "I would be shocked if it was over 15 or 20 percent of this market," says Mike Lodato, NHR's senior vice president of sales and marketing -- but they've continued to grow.
Even with almost no marketing effort behind its modules, "we got close to $20 million last year on that business alone," Lodato says.
OSI operates on a smaller scale -- 500 to 1,000 modules per month, one sales representative says -- but it's recognizing the attention its module sales can bring. "We're finding some clients that are only using us for our optics," Quivey says.
What's the use?
Unpopular though the markups may be, Cisco has some justification for them. Here's what Cisco had to say when queried by Light Reading for this story:
In addition to our ongoing commitment to innovation, Cisco invests significant resources, including rigorous product and system level qualification. This ensures that our optical networking technologies perform to our customers' defined environment and specifications and meet NEBS, EMI/EMC and other relevant safety and compliance standards at a system level. The performance of so called Cisco-compatible technologies has been inconsistent and unpredictable, as they do not undergo the same system-level pre-production qualification and compliance testing on Cisco platforms. Our customers find tremendous value and peace of mind knowing that their networks are guaranteed by Cisco to maintain exceptional performance and reliability.
Lodato concedes Cisco's policy can improve quality. Namely, it can weed out some counterfeit modules that have Cisco's label slapped on them.
Counterfeiting of Cisco products has become a big business -- $76 million over the span of a few years, according to a report in 2008. In fact, that was one motivation for OSI to start putting its own label on Cisco-compatible modules. "We didn't want to sell Cisco-branded optics because of the chance of counterfeit," Quivey says.
NHR and OSI use their own labels; it's clear you're not buying a Cisco module, so the chances of counterfeit are lower. Both companies offer lifetime warranties on the modules, and they're well known enough that they're not likely to drive away under cover of night.
NHR's deal with Menara takes the concept even further. It's one thing to buy from Cisco's own suppliers and yet another to sell parts that Cisco doesn't offer at all.
It's certainly a break for Menara, which is essentially an engineering company and one that hasn't had a foothold into Cisco. Likewise, NHR isn't exactly an optical research powerhouse.
You'll recall that Menara won a Leading Lights award back in 2008 for being able to pack an OTN chip into its 10Gbit/s DWDM transceiver. As with IP-over-DWDM (a technology Cisco offers), this eliminates a transponder from the network. (See LR Names 2008 Leading Lights Winners.)
With the Menara deal, NHR plans to get aggressive about marketing its optical modules. So far, its model has been one of "would you like fries with that?" Lodato says, with customers getting some optics thrown in with their equipment. The hope was that they'd find out the NHR optics worked just fine and come back for more.
Now NHR is going to really test the market demand for Cisco-compatible optics reaches. "We're going to actually try this year," Lodato says.
Light Reading's past coverage of Cisco's optics.
- Cisco Fakes: A $76M Business
- Optical Raids!
- The Cisco Markup (results of a 2006 poll)
- Cisco's Secret Franchise
- Use Our Optics, or Else!
— Craig Matsumoto, Managing Editor, Light Reading