When comes the time to change your private car, many are tempted by the simplicity of a Trade-in deal offered by car dealers. There’s no doubt that trading in a car to purchase a new one is simple and convenient. But too often, the amount offered by dealerships is much less than the private party value.

Could the same be said about Trading-in a TV broadcast monitoring system? Could it be that the convenience of staying with the same vendor again and again is covering hidden costs that represent many dozens of thousands of Dollars?

We decided to investigate.

Nobody ever got fired for purchasing IBM

Recently, during the NAB trade show, we met the CTO of an American TV broadcaster, and proudly presented the latest version of our TV logger and clips creation platform. He really seemed to like the system and was kind enough to congratulate us on a superior product, better user interface, and better workflow.

The conversation then turned to commercials, and we both established that our system is less expensive to purchase (CAPEX), and less expensive to maintain (OPEX).

As most American broadcasters, this TV group was already heavily invested in a competing system, which is also considered of excellent quality and is a very well-known brand. As the visiting CTO put it, paraphrasing a very well-known saying about IBM, “nobody ever got fired for purchasing V.”, (V being Vendor V, the current competitor).

Over 5 years, 40% cost saving

Our system (and let’s call it the A system)  has several technical advantages compared to the V system. Its software is more modular, scalable, efficient, and it requires less hardware to perform the same tasks.

It is also much easier to use, and comes with a more robust software, with less bugs, and less technical failures.

This translates into three major commercial advantages, in summary:

  1. System A can encode the same number of channels with less servers, thus saving Hardware CAPEX.
  2. System A software is priced 20-30% lower than system V.
  3. And system A cost of maintenance is 12% per year instead of 15% with system V. And this lower percentage is applied to the (already lower) software price.
  4. And finally, the first year is free Warranty, unlike system V.

Let us compare, side by side, the cost, over 5 years, of these two systems.

Table-1, (presented at the end of this blog) shows that system A will cost $77,000 compared to $133,000 cost of system V.

Table 1: Comparison over 5 years

This difference is explained by:

  • $20K difference in software price
  • $5K difference in hardware price
  • $5K difference in annual maintenance cost
  • Vendor A provides free 1st year warranty, unlike vendor V.

Overall, a cost difference of 35-40% over 5 years.

Mistake #1 – Buying a system based on not getting fired

You should not have purchased a more expensive system in the first place. You will not get fired, but you are losing 35% over 5 years.

The Trade-in bonanza

“Oh well, never mind, there is always another opportunity to make a new choice when comes the End-of-Life of your current system, isn’t it ?”, I suggest.

“Yes”, replies the CTO, “we will definitely consider you in 2 to 3 years, however would you [vendor A] offer us a trade-in deal like vendor V does ?”

“Eh … no”, I respond (hesitantly)

“In that case, if we receive a good deal from vendor V, like 40% or even 50% discount, we will be better-off remaining with our current system, won’t we?”

“Eh… yes, I guess so”.

But is this really the case? Perhaps we should investigate the numbers more closely and avoid falling into the “Car dealer’s Trade-in-bonanza trap”.

Let’s analyze the costs over 10 years:

Table-2, (presented at the end of this blog) shows that if after 5 years you change from system-V to system-A then your total cost will be $205K compared to $240K if you take the trade-in and maintain system-V.

These $35K savings are despite a generous trade-in offer of 50% discount, where the system-V software only costs $26K now in year 6 (compared to $52K in year 1).

Table 2: Comparison Over 10 years

Mistake #2 – The Trade-in Bonanza

Don’t fall into the car salesman’s trade-in trap. Analyze the numbers. Often it is a better decision to change vendors and give up the generous trade-in

Let’s meet in 5 years

So that’s it. It seems that the CTO will just need to wait for the End-Of-Life, after maybe 5 years, and then they will compare the offers from various vendors and select the best bid.

Right ?, Not necessarily. Given the high annual cost (of maintenance), one should consider perhaps replacing their current system with system A earlier than at the end of the 5 years”

“No, this won’t be possible”,  says the CTO, “We have already paid for both hardware and software, I don’t think that it will make sense to purchase new ones before we have fully depreciated ours”.

“You are probably right”, but let’s look at the numbers again.

Ubiquitous hardware

I forgot to mention one of the other advantages of System A. The software will run on just any server, any brand, and any Windows O/S. This has obviously a nice advantage for customers who happen to have a special deal with HP, or Dell, or Supermicro, or anyone else.

But in our specific case this turns into an even more interesting advantage: It means that if needed, our software can be installed and will function perfectly on the current servers supplied by vendor V.

So now we don’t need to wait for the “End-of-Life” or “Full Depreciation” of the hardware, given that we just continue to use it.

Mid-Life changes

Let us have a new look at the numbers, under different scenari. One is that we change from V to A after 2 years, the other scenario is after 4 years, and the final scenario is after 6 years.

We assumed that every 5 years, the system reaches EOL (End of Life) and a new hardware needs to be installed, and also a new software license, at trade-in with 50% discount from vendor V.

Table-3, (presented at the end of this blog) shows us that if the customer changes the vendor at year 2, 4, or 6 after having installed the V system, then this results in an overall savings of respectively $60K, $50K or $40K over 10 years.

Table 3: Mid-Life changes

Quite surprisingly, the table indicates clearly that it is not a good idea to delay the change from system V to system A. In fact with every passing year the additional costs of system V are increasing by another $10K or so.

 

Mistake #3 – Don’t delay to End-of-Life

If you found a better system that is less expensive to operate, consider changing systems as soon as possible. Waiting for the End-of-Life of the old system does not present a real economic advantage.

ANNEX: Detailed tables

Table-1: Total Cost over 5 years

System Vendor

 

Vendor “A”

Vendor “V”

Year: 1

SW CAPEX

-$30,000

-$52,000

 

HW CAPEX

-$18,500

-$24,000

 

SLA OPEX

$0

-$11,400

Year: 2

SLA OPEX

-$5,820

-$11,400

Year: 3

SLA OPEX

-$5,820

-$11,400

Year: 4

SLA OPEX

-$5,820

-$11,400

Year: 5

SLA OPEX

-$5,820

-$11,400

over 5 years

 

-$77,600

-$133,000

 

Table-2: Total Cost over 10 years

System Vendor

 

Vendor “A”

Vendor “V”

Year: 1

SW CAPEX

 

-$52,000

 

HW CAPEX

 

-$24,000

 

SLA OPEX

 

-$11,400

Year: 2

SLA OPEX

 

-$11,400

Year: 3

SLA OPEX

 

-$11,400

Year: 4

SLA OPEX

 

-$11,400

Year: 5

SLA OPEX

 

-$11,400

Over 5 years

 

 

-$133,000

Year: 6

SW CAPEX

-$30,000

-$26,000 (50%)

 

HW CAPEX

-$18,500

-$24,000

 

SLA OPEX

$0

-$11,400

Year: 7

SLA OPEX

-$5,820

-$11,400

Year: 8

SLA OPEX

-$5,820

-$11,400

Year: 9

SLA OPEX

-$5,820

-$11,400

Year: 10

SLA OPEX

-$5,820

-$11,400

 

 

-$71,780

-$107,000

over 10 years

 

-$204,780

-$240,000

Table 3: Mid-Life changes

System Vendor

 

All “A”

Change

Year 2

Change

Year 4

Change

Year 6

All “V”

Year: 1

SW CAPEX

-$30,000

-$52,000

-$52,000

-$52,000

-$52,000

 

HW CAPEX

-$18,500

-$24,000

-$24,000

-$24,000

-$24,000

 

SLA OPEX

0%

-$11,400

-$11,400

-$11,400

-$11,400

Year: 2

SLA OPEX

-$5,820

-$5,820

-$11,400

-$11,400

-$11,400

Year: 3

SLA OPEX

-$5,820

-$5,820

-$11,400

-$11,400

-$11,400

Year: 4

SLA OPEX

-$5,820

-$5,820

-$5,820

-$11,400

-$11,400

Year: 5

SLA OPEX

-$5,820

-$5,820

-$5,820

-$11,400

-$11,400

Year: 6

SW CAPEX

-0

-$30,000

-$30,000

-$30,000

-$26,000

 

HW CAPEX

-$18,500

-$18,500

-$18,500

-$18,500

-$24,000

 

SLA OPEX

$0

$0

$0

$0

-$11,400

Year: 7

SLA OPEX

-$5,820

-$5,820

-$5,820

-$5,820

-$11,400

Year: 8

SLA OPEX

-$5,820

-$5,820

-$5,820

-$5,820

-$11,400

Year: 9

SLA OPEX

-$5,820

-$5,820

-$5,820

-$5,820

-$11,400

Year: 10

SLA OPEX

-$5,820

-$5,820

-$5,820

-$5,820

-$11,400

over 10 years

 

-$113,560

-$182,460

-$193,620

-$204,780

-$240,000

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