By Steven Adams

I. Saving money by purchasing third party components

When outfitting a new network or upgrading existing infrastructure, savvy buyers know that they can save themselves or their companies a great deal of money by purchasing expensive equipment secondhand. Yet when consumers are presented with the opportunity to more significantly reduce cost by incorporating third party hardware in the configuration, they often find themselves perplexed. Despite the clear economic advantage of third party equipment- in many cases third party products are sold for more than 70% less than the Original Equipment Manufacturer (OEM) or equivalent “approved” hardware1- a fear prevails that such third party equipment is orphaned, unsupported or generally inferior to the manufacturer certified options, and might even void the warranty for the entire network.

II. The purpose of the Original Equipment Manufacturer designation

To better understand the problem and to put it in its proper perspective it is necessary to explore the circumstances by which a part comes to be approved by the manufacturer and designated as Original Equipment Manufacturer(OEM). As the name suggests, the part in question is either the only specifically constructed part or, much more commonly, one of a specific list of parts which have been selected by the manufacturer for inclusion in a more complex system. The name also implies that these parts are custom built for the given application or even produced as part of the manufacturing process, but in reality this is very rarely the case. Most, if not all, manufacturers of durable goods for the retail market simply do not have anyneed or desire to create dedicated facilities for the production of each and every component that they integrateinto the finished products. They are only interested in ensuring a uniformity of quality and effectiveness in the goods they intend to send to market carrying their brand, and to this end they choose the components which serve these needs with a maximum of dependability and cost efficiency. In order to facilitate uniformity in production and consistency for repairs and maintenance, the manufacturer compiles a list designating the parts and the vendors upon whom they rely to supply them. These happy designates are the approved or OEM equipment.

But is OEM necessarily better or more suitable? One must suppose that in a theoretically unlimited and free market vendors will always step forward to produce such valuable and useful goods at lower cost, and possibly even at superior quality. Indeed, the Illinois State Supreme Court seems to have determined that this is the case here. In litigation between a major automobile insurance company and its customers, this court found in 2005 that the insurance company did not act in breach of contract or in a fraudulent manner by arranging for the repair of damaged vehicles with non-OEM parts. (Avery v. State Farm Mut. Ins. Co.) Of course, there may be some unscrupulous suppliers who bring counterfeit and defective parts to market, compromising the valuable systems into which they are incorporated. There can be no doubt that consumers’ concerns might be allayed by the sight of the well regarded brand and the designated part which is clearly the correct component for the given application.

III. Manipulation of consumers to enrich manufacturers

Manufacturers obviously don’t create their approved OEM parts list solely out of altruistic concern for the welfare of their customers. By establishing a set catalog of parts and suppliers, they can leverage their vendors and bring down the costs associated with production. By ensuring that a given part is clearly specified and exclusively offered they also eliminate the guesswork in maintenance, which would ultimately complicate service issues and divert support resources. Most importantly, manufacturers of durable goods almost always set themselves up as the exclusive distributors of these OEM parts, effectively creating a monopoly2.

In the computer and networking industries, manipulation of the parts markets is more subtle and sophisticated. If only because of the proliferation of information effected by the growth of the internet, it has becomedifficult for manufacturers to entirely corner the market on components. Some have tried and have enjoyed limited success as a result of the power and reputation of their highly respected brands. In most cases third parties are allowed to distribute parts and are still designated as “approved” or OEM, which should not be surprising if one considers that almost none of the parts are anything other than third party to begin with. In fact, in many cases two identical parts, made by the same manufacturer, will be designated differently depending on whether or not they have been distributed through the agency of the manufacturer. What purpose, then, is served by the OEM appellation, and how does the manufacturer benefit? More importantly, when does a manufacturer of computer equipment or networking hardware cross the line that separates protection of the end user’s interests and predatory capitalism?

IV. Fear created among consumers that third party parts will void warranty

In order to answer these questions, it is necessary to more closely examine some of the specific tactics that might be employed by an avaricious manufacturer to compel customers to make use of only the parts explicitly endorsed. This creates an artificial shortage of products in the market, drives up prices, and restricts the avenues of distribution. In highly complicated and specialized arrays of equipment such as those found in electronic devices, especially network configurations, the manufacturer can exercise significant leverage by means of the conditional warranty. A warranty is a guarantee that a manufacturer makes to the end user that the manufactured product is free of defects, reliable, and serviceable in the event that trouble should arise. For consumers who rely heavily on their array of electronics, such a guarantee is absolutely critical to the operation of their computer networks and to their bottom lines. For a manufacturer to employ a vaguely worded or excessively restrictive warranty in a manner that coerces compliance with its particular interests is a very powerful tool. It is, in fact, so powerful that the United States Congress made it illegal to tie enduring warranty coverage to the ongoing purchase of designated goods or services. (Magnuson-Moss Warranty Act, 1975) The same act prohibited companies from explicitly offering warranty coverage and then failing to provide that coverage by creating conditions on the warranty to effectively nullify it.

Despite these legal restrictions on the means and extent to which a vendor can mortgage his warranty protection to forced compliance of a consumer, it is all too common for the sales representatives of large manufacturers to suggest that failure to employ an OEM part will invalidate the warranty. Because the law clearly and explicitly forbids such business practices, the representative and the company will almost never put such a threat in writing; even if they do, they will couch it with so much ambiguity that it will never hold up legally. Unfortunately, even the suggestion that warranty service could be forfeited by failure to purchase the manufacturer’s chosen goods is enough to influence a great many otherwise savvy consumers to pay greatly inflated prices for OEM parts, further enriching sales representatives and their employers. Whatever their individual merits, it is absolutely fallacious and unlawful to contend that a warranty or service agreement should be contingent upon integration of exclusively OEM parts in the system.

V. The advantages of buying from a reputable source

It is the right and the responsibility of all consumers to understand the products that they purchase and the component parts necessary to maintain or upgrade them. It is a happy byproduct of the free market that educated salespeople exist to help explain the relative merits of various solutions where the information is too complex or voluminous for a layperson to understand. These same salespeople, if they are reputable and honest, will be eager to stand behind the products that they are selling, and should be expected to back that confidence up with a warranty or service agreement. It should go without saying that the vendor for the part should be identifiable and established enough to make good on their guarantees and, accordingly, that they should be a fully incorporated and definable entity in a jurisdiction where consumers have recourse to protect their rights. Under such circumstances, it is perfectly reasonable for consumers to fall back upon their vendors’ assurances, even where the manufacturer can’t (or won’t) certify the product, and thus save themselves and their companies significant sums of “monopoly tax.” A good example of this type of reputable company is UsedCisco.com, which stocks both third party and approved products and offers a lifetime warranty.

Customers must use their better discretion in making expensive and mission-critical purchases, but they should be careful not to place themselves at the mercy of manufacturers who are inherently hostile to competition and insensitive to consumers’ best interests. Ultimately, the final determining factors in any significant purchase will be cost and reliability, and end users should rest assured that they can make these important determinations without the added complicationof potential ramifications for the warranty.

1. Some typical examples

2. This state of affairs in the automobile industry drove the Ford Motor Company’s chosen manufacturer of parts- Dodge Brothers- to start their own competing automobile company in 1916.