optics pricing (Re: Weird GigE Media Converter Behavior)

Sun Aug 29 13:58:32 UTC 2004

Mikael Abrahamsson <swmike at swm.pp.se> writes:

> Is there anyone who can justify this pricing with anything else than
> "because we can?"

To expand on what I said to you privately, let's follow the money:

Assume $200,000/board as the marginal cost of manufacturing one.

Assume a minimum of 65 points off for any customer who buys a CRS-1
(hint: large telcos do not pay list price...  and nobody, not even
certain well-known crazy people, is going to pay money for one to use
as a SOHO router).

So now we have a strawman marginal profit per board sold of $150,000.

Assume that Cisco actually has about a billion dollars into the HFR
project (offhand comment by a usually reliable source).

That means that ignoring the chassis sales side, we're looking at
about 6700 interface cards (> 26500) OC192 IR ports sold to get back
the initial engineering investment.  That's not figuring in the cost
of support for those 6700 cards out in the field; you're probably
looking at 8500 or more cards (> 34000 ports) sold in order to hit
break-even.

Now consider the size of the market.  You're not selling PAs for
people's 7200s here, and you're selling a card that replaces *four*
cards on a lesser platform.

Under the circumstances, I'm not sure that Cisco's list price is high
enough, but I'll defer judgement on that to the people who run the
numbers behind the scenes in San Jose.  They're the ones whose jobs
are on the line if this product turns out to be $1b bragging rights
exercise with no hope for payback.

If you find the prices staggering, it's likely that you and your
organization don't need this product.  Arguments about price gouging
on memory, GBICs, power cords, and other commodity items that your
organization actually *does* need are orthogonal to this discussion.

                                        ---Rob