Jim K, here's street.com's take on the Server Wars. Enjoy.
Top Stories: Server Wars
By Eric Moskowitz
Staff Reporter
9/8/98 11:23 AM ET
For Eckhard Pfeiffer's sake! Just how can you make any money selling computers? The Compaq (CPQ:NYSE) chief is not alone wondering about that dilemma.
The PC pricing wars of the summer are still raging, and there is no end in sight to the Asian contagion. PC makers are grudgingly realizing that one day soon, personal computers will become a commodity, much like the television or the microwave. Just days ago, Micro Center, a small Midwestern computer store chain offered a PC for $399.
If the big computer makers are going to survive, they will have to focus on other revenue streams to maintain their gross profits. Enter the server market, which is fast becoming the next battleground for higher profits in the race for supremacy.
Compaq and IBM (IBM:NYSE) enjoy 30% to 35% gross margins on server sales as opposed to an anemic 8% for PC desktops, according to Amir Ahari, a senior analyst with International Data, a Framingham, Mass.-based research firm.
That may not last. The server market, especially on the entry level or low end, is coming under price pressure. This market -- entry-level servers can go for as high as $99,000 -- could very well resemble the competitive PC market before too long.
Big Five Server Makers and Dell
Company
1Q98 Worldwide Revenues ($)
Market Share (%)
Year-On-Year Growth (%)
IBM
2.9 billion
21.2
7
H-P
1.9 billion
13.5
23
Sun
1.2 billion
8.9
35
Compaq
914 million
6.6
(1)
Fujitsu
914 million
6.6
(29)
Dell
348 million
2.5
158
Source: IDC
"Just as the desktop machines have become commoditized, this is eventually going to happen with servers as well," says Lou Mazzucchelli, a PC analyst with Gerard Klauer Mattison.
For the record, a server is a powerful computer that provides services over a network to multiple simultaneous users and can range from simple, single-processor machines to massive ones containing hundreds of processors of gigabytes of random-access memory and huge amounts of storage.
Entry-level server gross margins are already falling to around 10%, and key players are now focusing on the midlevel ($100,000 to $1 million) and the high-end ($1 million and up) server markets, which offer customers multiservers or "clusters" that come with more memory and attached storage.
This is not an easy market to crack. Unisys (UIS:NYSE) and Digital Equipment were battered by the big mainframe machines of IBM; Hewlett-Packard (HWP:NYSE) and Sun (SUNW:Nasdaq) dominate the high-end server market; and Dell (DELL:Nasdaq) is quickly becoming a force on the low end.
But the one company that has been ahead of the pack is Compaq, which entered the market before anyone else almost a decade ago as its PC margins eroded. "There are no vendors or resellers in the server space as of yet -- Compaq was the first to realize this by creating servers out of Intel [INTC:Nasdaq] chips."
Having started on the low end, Compaq is now moving up to become a force in midrange servers. Seymour Merrin, who runs the high-tech consulting firm Merrin Information Services, adds that Compaq, by moving up this server "food chain" first, now has a solid foothold in the market. "Compaq is winning the [server] battle," Merrin notes. "And the DEC purchase only bolsters its leadership position."
Pfeiffer closed the DEC buyout last June, which came on top of the company's $3 billion purchase of Tandem Computers.
With the arrival of Microsoft's Windows NT 5.0 and the 64-bit Merced chip from Intel, Compaq can start climbing to the top of the server food chain.
Other PC makers are also jumping into the fray. Last year Gateway (GTW:NYSE) bought Advanced Logic Research, while Micron Electronics (MUEI:Nasdaq), acquired NetFrame Systems.
Although Compaq appears to have an overwhelming lead in terms of unit sales, Big Blue has the edge in earning better revenues from its high-end machines. "When IBM sells one server system, the company makes more money than when Compaq sells 100 systems," says International Data's Ahari.
On the horizon looms the threat of the wunderkind PC company from Texas. While Dell doesn't have the market share yet to compete with Compaq, H-P or IBM, it is quickly becoming a threat in entry-level servers, says Jerry Sheridan, director and principle analyst at Dataquest, a technology research firm. "It's amazing that Dell can compete with these guys at all, considering it doesn't even sell high-end servers," he says.
That may change. Dell is expected to present a high-end server system that will cluster 16 servers based on Intel's new line of Xeon chips. Dataquest forecasts that server unit shipments will grow at a 17% clip over the next five years.
Unfortunately for the larger PC makers, when they all focus on the same idea, it almost always leads to lower profits. "It's a cannibalistic business," says tech consultant Merrin. "These big companies have to stay in these market-share games no matter what."
In this deflationary tech world, oftentimes no one wins this game -- excepting Dell, of course.
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