Jon Snyder, who helps run the computer network at Portland State University, knows he could save the Oregon school as much as US$75,000 by not shopping at Cisco Systems Inc for equipment he'll buy this year.
Hewlett-Packard Co, Foundry Networks Inc and Extreme Networks Inc charge less for similar products. Still, Snyder says he plans to spend US$100,000 to US$250,000 at Cisco, the biggest maker of networking gear, because he prefers the company's equipment and customer service.
"You get what you pay for," says Snyder. "One outage caused by a software bug that Cisco wouldn't have is worth the price difference."
Banking on that kind of brand loyalty, Cisco Chief Executive John Chambers has stuck with prices that are often 50 percent higher than what competitors charge. So, even as industrywide sales of network equipment fell to a four-year low last year, Cisco increased its gross margin in every quarter and boosted it to a company record 69.3 percent in the period ended Oct. 26.
And Chambers' strategy is still paying off. Later today, San Jose, California-based Cisco probably will say profit rose in its fiscal second quarter as sales dropped. A year earlier, the gross margin, or percentage of sales left after subtracting production costs, was 62 percent.
Cisco is expected to report profit of US$0.13 a share, excluding some expenses such as acquisition costs, up from 9 cents a year earlier, the average estimate in a Thomson First Call survey of analysts. Sales probably fell 1.7 percent to US$4.73 billion, according to First Call.
"They own the market and they can still afford to charge the premium for the nameplate," said Terrence Gerlich, who manages US$500 million at Freedom Capital Management LLC. Freedom held 423,090 Cisco shares as of Sept. 30.
Cisco had a 69 percent share of network-switch revenue in the third quarter, according to market researcher Dell'Oro Group.
Foundry's gross margin also rose every quarter last year, though fell short of Cisco's, ending last year at 54.7 percent.
Extreme's fell to 50.2 percent in its fiscal second quarter from 52.8 percent a year earlier, and the company's loss more than doubled to US$184 million for the year ended in June.
"Cisco still believes that price is still not the key issue in the marketplace," spokeswoman Abby Smith said.
Some customers disagree.
Last year, Bruce Arsenault of Connecticut's Naugatuck Valley Community College replaced Cisco equipment with 28 data switches from Hewlett-Packard. He says changing saved the school more than $80,000, or at least 40 percent over what Cisco would have charged.
As Hewlett-Packard and Dell Computer Corp expand into Cisco's markets and the sluggish US economy forces some customers to look for bargains, Chambers may have trouble.
"You're not going to be able to get the margins you had before," says Gerlich. "You're not going to get people to buy just because they're Cisco."
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