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The Cisco Premium

Since Cisco CEO John Chambers announced at a users' conference in June that the networking giant plans to "unbundle" its hardware and software -- i.e., charge separately for each -- many IT managers have asked themselves a question that recurs periodically: Is the Cisco Premium worth it?

Cisco has long charged prices significantly higher than its competitors -- 20 to 40 percent more for wireless LANs than its two chief rivals, Aruba Networks and Trapeze Networks, according to industry sources. It's a surcharge that many users are willing to pay, given Cisco's high marks for reliability, support, and innovative technology. "Nobody ever got fired for buying Cisco," goes the industry refrain.

"Cisco owns 55 percent of the LAN switching market by ports but a whopping 75 percent by revenue," wrote Zeus Kerravala, enterprise computing and networking vice president at the Yankee Group Research Inc. in a May report entitled "Is Cisco Worth the Premium?" He writes that this indicates "customers understand the value of Cisco goes beyond the initial acquisition price."

Kerravala points out that initial acquisition makes up only about 20 percent of the overall costs of running a network, a figure that is probably even lower when applied to wireless networks.

The premium is obviously not harming Cisco Systems Inc. (Nasdaq: CSCO)'s business: Its latest earning report, released last month, comfortably topped analyst estimates as the company posted record revenue, net income, and earnings per share.

Still, we at Unstrung hear regular grumbles about not only Cisco's pricing but its high-handed ways -- and charging separate (and likely higher) fees for software is not going to make that muttering go away.

More companies are installing wireless LANs, and the average size of deployments is going up. The average number of access points per deployment doubled in the last year, from 75 to 150, according to Forrester Research Inc. . As the market grows and the technology matures, IT pros should question authority by looking to upstarts like Aruba Networks Inc. (Nasdaq: ARUN) and Trapeze Networks Inc. as well as pressuring Cisco to keep costs low.

A Gartner Inc. report notes that: "Enterprises have started to pressure Cisco either by negotiating more aggressively or taking their business elsewhere."

IT managers, Gartner analysts Jay Pultz and Mark Fabbi advise, should "take advantage of these tough economic times by forcing vendors to compete for business. Enterprises can save up to 50 percent of capital costs for networking equipment by using open, competitive procurement processes."

Cisco, the Gartner analysts conclude, "has long charged a high premium for its offerings, but customers are beginning to question the validity of such pricing."

Oh yeah -- that report came out in April 2001.

— Richard Martin, Senior Editor, Unstrung

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