Trends in the Midrange Equipment Marketplace

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Editor's Note: Companies have had to increasingly tighten their belts lately, and the IT department is one area where management seems to always want to decrease expenses. With that in mind, we thought it would be worthwhile to educate our readers about the prospect of buying used, rather than new, equipment. ITParade.com is a leader in the used equipment market. In this inteview with Vice President Robert Davie, we examine today's market.

MC Press: In the past six months, what has been the market trend in new midrange IT? Prices up, prices down?

Robert Davie: Prices always trend down, with exceptional spikes in individual systems due to supply and demand. Companies always want bigger, better, and faster systems. For example, a Wall Street firm purchases a new iSeries system from IBM as soon as it is announced, because their application requires more processing power. The latest and most powerful systems naturally carry the highest value in the secondary market. Right now, iSeries refurbished memory is at a six-month low. Relative to new pricing from IBM, you can purchase refurbished memory for up to 95% off. Also, whole system upgrades--where a box swap is required--are relatively inexpensive. A box swap is a situation in which an iSeries system has to be traded in for a different chassis and processor and memory. The same system unit cannot be upgraded on site.

MC: What is the value spread on remarketed midrange technology (RMT)? That is, how much does a used system sell for as compared to a new system with the same power/capabilities?

RD: For refurbished midrange systems, the used market value varies, primarily due to the age of the system, or the time since introduction by the manufacturer. The older the system, the less demand there is, and so the lower the value is. Most iSeries 170s are less than 10% of the original IBM price, since they were originally announced in February 1998. The 800 series are typically 20% to 50% of the original IBM price. Memory upgrades vary from 10% to 50%, depending on the size of the memory card, bigger cards commanding a higher price, of course.

MC: Is the supply of RMT adequate to the demand? Do supply and price vary in different parts of the country?

RD: Yes, supply and demand can vary widely within the U.S. because there are a limited number of systems in the secondary market as opposed to a virtually unlimited number of new systems from the manufacturer. The IBM iSeries minicomputer (in its 24-year history also variously known as i5, AS/400, and System/38) is the world's largest-selling computer family, if PC-type machines are excluded. It was the first successful 64-bit machine. It has been calculated that if the Rochester, Minnesota, facility that produces the machine were independent, it would be the third largest computer company in the world. There is a world market that is typically in sync with the U.S. market. If the price of refurbished systems in Europe rises, for example, then equipment from the U.S. will flow into the European market until equilibrium is established. Prices in Europe may vary from those in the U.S., but the price difference is not significant for very long, usually.

MC: What are the in-demand types of hardware? What things are languishing? What do you think will be in demand in the near future?

RD: The hottest items right now are the AS/400 800 series, the 820, 830, 840 systems. These systems are widely used and new enough that there is demand for memory upgrades as well as processor upgrades. The older series 170 and 700 have reached the bottom of the value scale and typically only have value as parts. It is important to purchase IBM memory and IBM parts with IBM serial numbers. Third-party memory is not supported by standard IBM maintenance contracts.

MC: Who sells RMT? What kind of companies routinely release quality hardware to the secondary market?

RD: Fortune 5000 companies, governments, and higher education institutions are all sellers of used IT systems. Organizations can be categorized into two categories, early adopters and late adopters. The early adopters are organizations that purchase systems as soon as they are introduced by the manufacturer or shortly thereafter. They purchase equipment as soon as it's available because their systems are near performance limits or because their systems are used as a competitive advantage. Early adopters are usually the sellers of used midrange systems that still have a long, useful life. Late adopters are typically buyers. Late adopters use the secondary market and its low pricing as a competitive advantage. Late adopters that standardize on certain models will typically purchase refurbished in order to maintain consistent systems across their enterprise. When late adopters sell equipment, it is typically beyond its useful life.

MC: What is the biggest single obstacle in the RMT market? That is, what factors inhibit sales most? How can this be overcome?

RD: The biggest obstacle might be called "new car syndrome." Some people only want new equipment. They want the latest and greatest, and "used" is a dirty word to them. Fortunately, this attitude is declining. Rising market prices and tight business margins make the "buy new" syndrome too expensive for most companies today. Buying quality RMT is simply more efficient.

MC: Describe a case where the purchase of RMT was a major success for the buyer and the seller. To maintain confidentiality, I guess you'd better not name names, but an example would be instructive.

RD: A West Coast bank specifies a configuration for disaster recovery purposes identical to an existing system in production. The West Coast bank requires an iSeries Model 270 with a 2243 processor, V5R2, MQ WebSphere 5.3, and other product IDs that came with license keys. Collecting offers from various vendors specializing in refurbished IBM iSeries, the bank accepts one of the offers, taking delivery one week later. Total transaction time, three weeks.

One of the primary reasons companies purchase refurbished over new is for contingency planning or disaster recovery purposes, since software can be used without additional licensing costs and since the system will be used for backup as opposed to real-time usage.

MC: What about warranties and maintenance?

RD: Placing refurbished systems under maintenance with IBM is a simple process. One phone call to IBM maintenance handles two types of situations. If a system has been "banded" by IBM, IBM will immediately place it under maintenance without question. Banded means IBM has actually tested the system and given it a clean bill of health. Without IBM banding, a machine must be in regular working condition for IBM to accept it for maintenance. If a problem develops in a refurbished system that has been banded by IBM, then IBM is responsible for the repair. If a system has not been banded by IBM, then a vendor or dealer is responsible for bringing the system to IBM maintenance standards and guaranteeing that it will work for IBM maintenance certification. Make sure and have a clear understanding and commitment from the responsible party, the vendor or IBM, prior to purchasing.

MC: How long does it usually take for new hardware to make its way into the RMT market?

RD: It typically takes two years before used equipment is available on the market. Many leases expire in two years. Often, manufacturer announcements of newer models generate upgrades and make systems available in a shorter period of time.

MC: What's the best general advice you can give to anyone seeking RMT on today’s market?

RD: The best advice that I can give is to seek competitive pricing from established, reputable resellers. Look to the Internet for new ways of getting competitive pricing, easily. Online RFQ mechanisms that bring multiple established resellers to bid are excellent ways to generate competitive pricing as well as guaranteed systems.

iSeries Peripherals
IBM Tape Drives
Description
Current Market Value (CMV)
3599-011-1020
20-Pack 3592 Data Cartridges IBM 3592 (new, labeled, and initialized)
$2,100
3592-J1A
IBM MAGSTAR Tape Drive
$13,200
3590-E1A
IBM MAGSTAR Tape Drive
$3,200
3590-H1A
IBM MAGSTAR Tape Drive
$10,500
3590-H11
IBM MAGSTAR Tape Drive
$13,000


Paul B. Thompson, a freelance writer since 1989, occasionally writes for Robert Davie on a work-for-hire basis. He has published 15 novels and two dozen magazine articles, ranging from military history to science and technology.

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