Purdue's hefty switch discounts 'unusual,' Cisco says

The steep discounts that Purdue University recently received on Cisco's Nexus 7000 switches are 'unusual' and based on factors that go beyond the purchase alone, Cisco says.

Cisco this week responded to blog reports that it offered Purdue an exclusive deal that includes a 76% discount off Nexus 7000 switches. Purdue is shopping for switches for its Hansen Cluster project, which is a "community cluster" for Purdue faculty and staff looking to cost-effectively acquire computational resources.

Hansen consists of Dell compute nodes with four 12-core AMD Opteron 6176 processors, 96GB, 192GB, or 512GB of memory, and 250GB of local disk, with 10-Gigabit Ethernet interconnects between nodes. Cisco's Nexus switches will provide those 10G interconnects and manage traffic via its FabricPath data center switching capability.

CUSTOMERS REACT: How is the Cisco 76% off Nexus sale going over with customers?

A discount of the size offered to Purdue is interesting in that Cisco is struggling to maintain profit margins in switching because of a product transition underway within the company from older Catalyst to newer Nexus switches, and heightened competition. Eroding profits in switching is a factor in Cisco's current reorganization, in which it is paring workforce and product lines in an effort to regain and maintain past margins.

Cisco officials this week would not discuss the impact a 76% discount would have on switch margins or on Cisco's effort to grow and maintain those margins. But in the company's fourth-quarter conference call with investors, CFO Frank Calderoni said fourth quarter "discounts and pricing were flat as compared to the third quarter," which, according to a Cisco spokesperson, indicates that the company's overall pricing and discounting strategy has not changed.

There is some speculation in the blog posts, though, that Cisco may be inflating the list price of its switches in order to make attractive margins while still discounting up to 76%.

Without discussing Purdue specifically, Cisco says a discount like the one offered to the university is unusual and determined by many factors, including the project for which the purchase is targeted; the number of products, or volume, to be purchased; follow-on sales opportunities; and the existing relationship with Cisco. Purdue is one of about a half dozen customers on Cisco's Global Customer Advisory Board, which provides feedback and guidance to Cisco on a regular basis.

"We evaluate every customer on a case-by-case basis," says Ram Velaga, vice president of product management in Cisco's Data Center Technology Group. "Projects, areas of interest, etc. There are arrangements for particular projects we are working on, and mutual investments. We don't ever want a big deal to fall through with a valued customer."

But the value of that customer is part of the negotiation process. While customers might demand a Purdue-sized discount from Cisco, it's rare they'll get it.

"It's the standard give-and-take, the dance," the Cisco spokesperson says. "That's where the evaluation comes in. Other customers do not get that level of discount. It's very unusual. We make a decision based on the value" of the account.

There's also the "bake-off" process in which a customer evaluates proposals and staged implementations from bidding vendors. In winning those evaluations, Cisco is rarely the lowest-priced solution, company officials say.

Other factors, such as vendor stability, service and support capabilities and product road map, also come into play, they say. Another is the total cost of ownership over the long-term implementation of the proposed solution, a variable that determines the "value leader" vs. the "price leader," Cisco says.

"We continue to win the majority of deals by not being the price leader," Velaga says.

Nonetheless, Cisco's preparing for customers to demand Purdue-sized discounts now that the Hansen Cluster deal's been made public.

"I wouldn't be surprised if people reached out at a sales level" to request such deep discounting, Velaga says. "They do anyway."

Read more about lan and wan in Network World's LAN & WAN section.

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