Meathead - Any comments on this piece? I guess the high end to me is the stuff Sun and especially IBM sell. With unit growth strong but revenue growth weakening in the lower end server biz, I suppose you are thinking that Dell does okay by taking share in the same manner as they have in the box biz....
Regards,
John
Compaq losing ground on key server
revenue
By CNET News.com Staff
July 1, 1999, 2:30 p.m. PT
news analysis Pricing pressure in the server market is squeezing major
manufacturers' profits, indicating the glory days of rapid growth are over.
The differences between the first quarters of 1998 and 1999 reveal a market in transition:
Unit shipments of servers are up while revenue is down. For manufacturers selling servers
at the low end of the market, the forecast is chilling.
The unit growth/revenue squeeze is in many ways highlighted by the experience of
Compaq. Server sales, in terms of units, were up 53 percent in the first quarter of '99 for
Compaq, while revenues pushed up 38 percent. However, as in the PC market, the average
sale price declined. In the end, Compaq is selling more machines for less money.
By contrast, other companies that were able to attach services or other ancillary products
to server sales managed to pull in more revenue while simultaneously selling fewer severs.
Worldwide unit shipments rose 23 percent to 772,000 from
627,000 between the first quarter of '98 and the like period in
'99, but revenue declined a half percent, down to $13.8 billion
from $13.9 billion, according to International Data
Corporation.
At the same time, the average selling values declined 20
percent between the two quarters, and IDC predicted the
trend would continue. Because of continued market
consolidation, the top-five server manufacturers earned 66
percent of the revenue, up from 58 percent a year earlier.
But for many companies, revenue did not jibe with the
number of units shipped.
Compaq outdistanced competitors in terms of unit
shipments. The company shipped 223,000 servers, up from
146,000, an increase of 53 percent. But while Compaq
shipped more than twice as many servers as IBM, Big Blue
took in more than $1 billion more in revenue. IBM increased
server shipments by 39 percent, 108,000 from 78,000, Q1 to
Q1.
Comparing Sun, which sells only RISC-based systems, and
Compaq, which sold mostly PC servers during Q1 reveals the
kinds of price pressures manufacturers face at the low end of
the market. IDC reported the toughest pricing pressure for
servers below $200,000, while systems over $1 million
increased overall prices.
Compaq's ProLiant PC server accounted for 184,000 of the 223,000 servers it shipped in
the first quarter, up from 115,000 a year earlier. The server line generated $1.2 billion in
revenue, up from 867 million, a 38 percent increase over the first quarter of '98.
For Compaq, and also for Dell, the issue is margins, said Jim Williamson, research
director for IDC.
"Compaq's PC server business is obviously still very healthy. The question is, can they do
what Dell has done, which is maintain their prices? There have been some signs Dell is
beginning to lower its prices, but for the most part they've been able to keep them where
they have decent margins. Can Compaq do that?"
Compaq contends that, yes, there are price changes, but that they reflect changes in the
market.
"Instead of becoming more price competitive, I would say that the market is broadening
out," said Andrew Clark, director of marketing, planning and business operation for
Compaq's Industry Standard Server division. "The implication of declining prices means
there are price wars, reduced margins, and the business is becoming less healthy. That is
not the case."
Manufacturers offering larger systems and bundling services and solutions, such as IBM
and Sun, look better positioned to squeeze more margin out of their systems. The
difference in strength of margins at the high end can be seen by looking at Sun, which
sells only RISC-based servers.
Sun sold 340 of its high-end Ultra Enterprise 10000 servers during the first quarter,
generating $250 million in revenue. The company also earned $200 million in revenue on
the sale of 13,000 Enterprise 450 servers.
"If you look at the RISC-Unix market, Sun is eating everybody's lunch," Williamson said.
"What Sun has done, it's gone into the marketplace and sold a very convincing story
around a whole host of applications and markets. The Internet space has just done
wonders for them."
There is no question prices are competitive at the low-end of the market, but there
are a number of factors affecting prices. The average price of a Compaq PC server
sold through dealers in Q1 '99 was $4,488, down from $4,156 a year earlier,
according to PC Data. The average for comparable HP servers was $3,293, down
from $4,351. IBM's average PC server price rose to $3,406 from $3,193. PC Data
does not track Dell, because it sells direct.
IBM led in terms of revenue, $3.1 billion, up 29.4 percent from a year earlier.
Compaq followed with $1.9 billion in revenue, up 54 percent over the year-ago
quarter's $1.2 billion. But adjusting for the June 1998 acquisition of Digital
Equipment, Compaq gained less than 1 percent revenue year-to-year.
Hewlett-Packard followed closely behind Compaq with $1.9 in revenue and flat
growth.
Sun Microsystems' revenue grew 33 percent, $1.6 billion up from $1.2 billion a year
earlier. Fujitsu followed, with a 23 percent revenue decline, $670 million down from
$870 million. Dell pulled up the rear but posted the best growth, 73 percent, with
revenue of $590 million up from $341 million in Q1 '98.
Jim Gargan, IBM's director of product marketing for Netfinity server, disagreed with
IDC's conclusions about declining revenue at the low end of the market but
acknowledged there is no room for error.
"In the low-end of the server market, say under $2,000, if you're off by more than 10
percent of a particular price point, you could see a significant impact on what your
revenues would be."
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