Whitebox & Whitebrand network equipment has a lower purchase price than branded products. But why ? It’s about market economics and mechanics around commodity purchasing and manufacture.
1. Lower Investment
When developing new products, vendors must invest to develop those products before any revenue in generated. For the last 20 years, this means building teams to design silicon, develop software, design the physical chassis. As the process moves other costs for quality assurance, feature management and early production assessments.
A marketing team will incur substantial costs related to feature selection, product messaging and customer meetings. And finally, the big commitment to produce large volumes of product that goes into warehouses and support stock on a global basis.
A large part of the cost of product development may be replaced by using existing merchant silicon and open source software. This lower investment means that the sale price is reduced to remain competitive in the market or companies can choose to keep sale prices high to capture additional profit.
2. Shorter Development Cycles
The time to develop a product has a major impact on investment return. There are two key areas. Product development costs are broadly regarded as investments and carry interest charges so that more time a project takes the more interest costs the project incurs. The second cost is that long running products incur greater labour charges and secondary expenses.
And shorter development cycles have less risk. The technology market can change rapidly and long development cycle means that the product could be obsolete by the time it reaches the market. The design time for a silicon and software takes years – typically 3 to 5 years. Software development has major costs of project control and quality assurance
Using merchant silicon and open-source operating system dramatically reduces the time to market for big vendors and avoids risks around market transitions. This reduced risk means less budgeting for failure and reduces the cost of the project resulting in lower selling prices.
3. Larger Production Volumes
If a larger volume is manufactured, then the unit price of the goods will be cheaper. Whitebox hardware is already 20% of the total switch market by units shipped and manufacturing volumes are already at a size that per unit production costs are well-known.
Note: as before, vendors can choose to keep prices high and capture more profit. Cisco & EMC are great examples of achieving reductions in production costs through manufacturing scale while maintaining selling price through market dominance and strong marketing.
4. Lower Entry To Market and Product Innovation
Market pricing and profitability is often defined by the ability of competitors to enter a market. The availability of standardised products reduces the cost to enter the networking market.
For example, smaller companies like Plexxi and PICA8 would have needed hundreds of millions to enter the market, and yet they have raised tens of millions.
Equally, large companies may choose to enter (or re-enter) a market. The example here is HP Networks with a renewed efforts to grow market share now that risks and costs have been reduced.
The EtherealMind View
Big companies take longer due to their size making product development more expensive but are more efficient when it comes to production because of their volume that will reduce the cost of production per unit. Smaller companies are more focussed and more efficient in time to market but it is harder to scale up production.
But big companies also get substantial benefits from commodity silicon, reference hardware designs and open source software. I think that the best example is the Cisco Nexus 9000 product family which, according to rumours, took less than a year to develop and bring to market while using merchant silicon and open source software to reduce the product development costs and time.