Buyer beware: IT equipment auctions

Amid the empty cubicles and deserted hallways of a failed Internet service provider (ISP) lies a potential hidden treasure: millions of dollars worth of barely used computing and networking gear, ready to be auctioned off at a fraction of its original cost.

In a hotel ballroom across town, the assets of Pilot Network Services Inc., a former ISP in Alameda, Calif. including a sizeable mix of Cisco routers, Sun servers and Dell and Compaq PCs are being sold in rapid-fire fashion to a packed house of IT professionals who are ready to pick over the bones of yet another dot-com carcass.

"Eight thousand here, US$8,500 to you. . . . Come on, chicken," the auctioneer quips, trying to run up the price on a Cisco 4000 Series router, a piece of equipment that might sell new for three times that price. "Eight thousand going once, twice sell it for $8,000," the auctioneer says, quickly moving on.

But even with the significant discounts, few Fortune 1,000 IT managers say they're willing to take advantage of the bargains available at auctions. That's because the upfront savings don't even begin to match the potential losses that could result from using equipment whose history may be a bit of a mystery, they say.

"If I buy a $20,000 no-name server vs. spending $50,000 for a Compaq, and then I lose $5 million in the first hour that server is down, it's hard to justify the savings on the hardware," explains one IT director at a large Midwestern bank who requested anonymity.

Still, the sheer amount of auctionable gear that's on the market which joins the backlog in manufacturers' warehouses has created a new distribution channel that some corporate buyers are tapping to find bargains for replacement and noncritical networking needs.

"I think that in the future, auctions will become more attractive," says Michael Sherwood, director of IT for the city of Oceanside, Calif.

Like other IT directors, Sherwood says that he wouldn't dream of putting used equipment into the most sensitive parts of his network even if some of that equipment were still under warranty.

"Our network runs the [city's] police and fire safety systems, and we're not going to use anything but new equipment there," Sherwood says. "If that part of the network goes down, there's potential for loss of life. The savings just aren't worth the risk."

Steve Nitenson, a former department head for global network planning at Visa International Inc., says any large company with high network-failure liability will steer clear of auctions, mainly because the potential transaction losses outweigh the savings by several orders of magnitude.

"Imagine that you're Visa, and you put some low-priced PC in an access point and it breaks," says Nitenson, who left Foster City, Calif.-based Visa earlier this year to pursue a doctorate. "The millions in lost transaction revenue will far exceed the money you saved buying the PC at auction," he says.

But none of the gear at the recent Pilot Network auction goes unpurchased, which means that somebody's going to use the preowned equipment. Though the majority of used equipment seems to be headed into reseller stockpiles or even to eBay Inc.'s Web auctions, Nuri Otus, CEO and lead auctioneer at Redwood City, Calif.-based Realm Connect Corp. (whose AuctioNet division handled the Pilot auction), says large corporate buyers are already big players at his company's events.

"There are corporate IT buyers at all our auctions," says Otus, who declines to reveal their identities. "At the Pilot event, a large biotech firm spent a quarter of a million bucks, and there was also a large legal firm and a large accounting firm there, buying equipment for their networks," Otus claims.

Wes Clanton, who was at the Pilot event buying equipment for reseller Network Hardware Resale Inc. in Santa Barbara, Calif., says his firm doesn't sell much to large enterprise accounts. "The Fortune 500 companies buy new stuff," he says. "They want the warranty."

Sherwood says he has purchased some used equipment for Oceanside through resellers, mainly for replacement-part purposes or noncritical networking needs. Most resellers offer some kind of limited warranties, making such purchases less of a risk, Sherwood adds.

"In one recent case, we bought four similar switches for $10,000 total, where one new one would have cost us $20,000," he says. Yet even for his simpler purchases, Sherwood says he's more comfortable going through a middleman than bidding online or in a crowded auditorium.

"I don't have the authority to go somewhere and start bidding with public money," he says. "At least with a reseller, we have someone to go back to."

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