Tuesday, August 24, 2010

When a Standard Isn’t Exactly a Standard

by Lisa Huff

I’ve noted in a couple of posts now that equipment manufacturers charge a lot more for optical modules they sell to end users than what they actually pay for them from transceiver suppliers. Considering the pains OEMs go through to “qualify” their vendors, a healthy markup in the early stages of a new product adoption can be warranted. But, I’m not so sure keeping it at more than 5x the price five years down the road can be justified. And is it sustainable? Some transceiver manufacturers sell products at gross margins in the 20-percent range, while their biggest customers (OEMs) enjoy more like 40 percent.

And guess what, there’s not much the suppliers can do. It is well known that Cisco (CSCO), Brocade (BRCD) and others purchase modules, and now SFP+ direct-attach copper cables, from well-known suppliers and resell them at much higher prices. And if I’m an end user, I MUST buy these from OEM or their designate or my equipment won’t work. These devices have EEPROMs that can be programmed with what some call a “magic key” that only allow them to work with specific equipment. So the OEM now has a captive market for modules and copper cables going into their equipment, and so they can pretty much charge what they want to. If I try to use a “standard” module or cable assembly – one that is compliant to the specification – it will not work unless it has this “magic key.”

I’ve experienced this first hand. I had a brand new HP (HPQ) ProCurve Gigabit Ethernet switch that I wanted to use for some cable testing I was doing. I had dozens of SFP modules from all of the top transceiver manufacturers, but none of them would work in the switch. I called HP and they said, “You have to buy the HP mini-GBIC.” Well, I knew that wasn’t exactly true. I didn’t really want to pay the $400+ each for four more SFPs that I didn’t need so I tried to work through my contacts at HP to get a firmware patch so I could use my existing devices. Long story short, I never did get that patch and ended up doing my testing with SMC switches instead.

Prime example of when an open standard is not so open. Will data center managers be able to sustain this when they have to move equipment around and need different modules or cable assemblies? Are the OEMs thinking about the aftermarket and the fact that data center managers are used to going to distributors to get these items? And are OEMs going to continue to gouge end users and potentially cripple their suppliers?

One added note - there are at least two equipment manufacturers that I know of that support an open standard: Blade Networks and Extreme Networks (EXTR). While they will both supply the modules and cable assemblies, they don't lock out other standards-compliant parts that customers may want to use.

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