Gray market swells as economy swoons

The remnants of businesses crushed by the economic slump now sit in Liquid Technology's warehouse by the Hudson River in New York's Chelsea district.

Hundreds of servers, personal computers and routers — some shrink-wrapped, some on pallets, some tossed in a cardboard box to be made into scrap metal — fill the 11,000-square-foot warehouse of the company, which buys liquidated technology and sells it for pennies on the dollar.

"There's a lot of bad news driving the business," said Richard Greene, Liquid Technology's vice president of operations. "It's the first wave of the tidal wave."

The wave of secondhand technology may hurt sales of new systems from companies such as Cisco Systems and Dell. Already suffering amid the recession, now they're increasingly competing with sellers of their own used products.

The so-called gray market — supplied by equipment from failed businesses and shuttered offices — could account for 14 percent of technology sales next year, up from 8 percent, said Zeus Kerravala, an analyst at the Yankee Group. And the $25 billion market for servers and networking devices may be among the hardest hit, he said.

The credit crisis has spurred mergers, bankruptcies and mass layoffs, boosting the supply of old equipment. At the same time, technology buyers are looking for bargains, and used products often work just as well as new ones, Kerravala said. Liquidators typically discount their equipment as much as 90 percent off retail prices.

"With all the mergers and acquisitions going on, there's going to be a lot more equipment in the secondhand market," said the Boston-based analyst.

Sales at Network Liquidators, a company based in Oldsmar, Fla., will increase more than 20 percent to $50 million this year, said Chief Executive Barry Shevlin.

The amount of equipment offloaded by businesses has risen as much as threefold and much of it is relatively new, he said.

The number of businesses filing for bankruptcy climbed 42 percent to 33,822 in the year ended in June, according to U.S. federal courts. Bank failures and tightening credit prompted Congress to approve a $700 billion financial-rescue package in October.

"Companies were teetering, looking for the next round of financing," Greene said. "They were waiting to see if they could survive, and October pushed them over the edge."

Dot-com bust

When the Internet bubble burst in 2001, failed dot-com startups liquidated their assets, selling their equipment on the gray market and undercutting sales of technology companies.

Because this recession is broader-based, more established companies — with high-quality technology — are closing up shop, said Holly Wild, director of marketing for Spin Trade Exchange, which oversees a network of 10,000 equipment buyers. Some of the products are from call centers that only opened in 2005 or 2006.

"I'm seeing regular businesses that have been good-standing businesses with good names that are downsizing or closing," she said. "It's a little shocking when a company we're familiar with is calling and saying, 'I've got six or seven locations I need to liquidate.' "

New customers

The fire sales have drawn customers that don't normally buy used equipment, Wild said. They're finding they can still get brand-name equipment, such as computers from Dell and Hewlett-Packard or networking products from Cisco, at much lower prices.

Bob Kaufman, a spokesman for Round Rock, Texas-based Dell, declined to comment on the effect of the discounters, saying that the No. 2 personal-computer maker provides clients financing options, warranties, and service and support, in addition to hardware. Cisco's Kristin Carvell declined to comment, as did Mike Hockey of Hewlett-Packard, the top PC maker.

"Cisco is always a cherry product. It's something that we can turn over fairly quickly," Liquid Technology's Greene said.

Cutting into sales

The gray market could cut into technology makers' sales by as much as 15 percent as more customers turn to used products, Kerravala said.

Network Liquidators has seen a 50 percent rise in sales of products from San Jose, Calif.-based Cisco this quarter, Shevlin said.

Used equipment could account for 30 percent of the total PC market by the end of the year, up from 10 percent, said Rob Enderle, president of the research firm Enderle Group in San Jose.

"It's a real problem," he said. "In effect, they're competing against their own stuff at a discount."

Still, technology companies may gain customers from the secondhand market because it builds brand loyalty, said Abner Germanow, an analyst from Framingham, Mass.-based research firm IDC.

The companies also could add revenue by offering maintenance to those customers, Kerravala said.

"Sadly, it's been a good time for us," said Wild, who's based in Portland.

All sorts of customers are saying, "We're not going to go out and buy new," she said.