Hi Drew! FYI, Leigh
Do One Thing, and Do It Well
Small, streamlined ``server appliances'' are quickly replacing complex all-purpose machines
Business Week: June 19, 2000
It was the early 1990s, and Network Appliance Inc.'s vision was simple: Create a computer devoted to storing massive amounts of data better and cheaper than the storage machines available at the time. ``We wanted to build a new market segment,'' says CEO Daniel Warmenhoven. A tall order, but there was a model: A decade earlier, Cisco Systems Inc. had revolutionized communications with the router, a specialized computer that moves data around networks. Says Warmenhoven: ``This is an instant replay of Cisco's business strategy.''
And, Warmenhoven hopes, a replay with similar results. Network Appliance, No. 13 on Business Week's IT 100 list, is a founder of a less-is-more movement in computing: the development of so-called server appliances. If traditional, general-purpose servers are the digital equivalent of a Swiss Army knife--handling dozens of tasks at once--server appliances are more like screwdrivers, built to perform one job quickly and simply. A server appliance designed for, say, Web hosting, won't crunch numbers as fast as a big general-purpose machine. But that streamlined Web-hosting server can dish out Web pages faster than traditional servers costing three times as much.
HEADACHE RELIEF. Other server appliances do just as well. Servers that just handle storage, for example, allow users anywhere on a network to store and retrieve files faster than traditional devices. And caching appliances keep popular Web pages in close proximity to Web servers, which can cut download times by 80%.
That's why the server-appliance market is poised for takeoff. The segment should grow more than 70% annually for the next five years--to $11.5 billion in 2004--vs. a 7% annual increase for all servers, according to International Data Corp. That makes appliances the fastest-growing enterprise-hardware segment. ``A year ago only Network Appliance and a few other small players were making appliances, but now the IBMs and the Dells realize it's a hot market,'' says IDC analyst Mark Melenovsky.
A monumental shift in the way technology is delivered is driving the popularity of these pizza-box-size machines. Instead of using massive computers in their offices, corporations can now buy computing power from other companies via the Web. These companies house the computers and the headaches, dishing up software as it's needed to perform specific tasks. But for this new technology-on-tap world to work, the Web must be as reliable as the phone system. That will fuel demand for single-purpose devices that can handle tasks without the breakdowns or sluggish performance that plague multifunction computers. By lashing these server appliances to big, general-purpose machines, the overall performance of online networks increases.
Network Appliance has ridden this wave to the top tier of the IT 100. The eight-year-old company makes two products: appliances for filing and storing data and others for caching Web pages. Selling to data-guzzling customers such as Yahoo! and Bank of America, Network Appliance doubled its revenues and net income, to $579 million and $783.8 million, respectively, in fiscal 2000 (ended Apr. 30). Next fixscal year, analysts expect revenues to top $1 billion and profits to nearly double. ``We're right in the center of the fastest-growing part of the computer business,'' crows CEO Warmenhoven.
He'll have plenty of company there. Nearly all of the hardware makers on the IT 100 are building server appliances. Dell Computer (No. 24) is offering Web serving and caching appliances. EMC (No. 26) is selling storage appliances that compete head-to-head with Network Appliance. And Sun Microsystems, IBM, and Compaq Computer are offering a host of different appliances. ``The front end of the dot-com infrastructure will be server appliances,'' claims Joe Barkan, Dell's director of business development for Internet servers. With the industry stalwarts jumping in, some upstarts may find it hard to hold on to their early lead. Analysts say Dell and IBM, for example, will steal market share from Mountain View (Calif.)-based Cobalt Networks, the leader in Web server appliances.
BIGGER BITE. No one is suggesting that appliances are going to displace general-purpose servers entirely. Companies will continue to install billions of dollars' worth of big machines to handle hundreds of applications, ranging from accounting to e-commerce transactions to managing payroll records. But server appliances will take an increasingly large bite out of the computing pie. By 2004, according to IDC, server appliances are pegged to represent 13% of the $90 billion in server sales, up from just over 1% of the $63 billion in server sales last year.
Over time, the appliances may also change the profit margins computer makers have grown to expect from server sales. That's why traditional server makers are rushing into the market. By trimming the operating system and using less-expensive chips, for example, Cobalt can sell a Web server for $1,500 and still see gross margins of 45%. Those machines compete with general-purpose servers from Compaq that cost four times that--and on which Compaq sees margins of 20% to 30%, says CIBC World Markets analyst Jim Berlino.
That has even nonbelievers dipping their toes in the water. On May 30, No. 11-ranked Sun Microsystems Inc. introduced a storage server aimed at Network Appliance's market, despite Sun Chairman Scott G. McNealy's dismissal that ``appliance is a marketing name'' for slimmed-down servers. Sour grapes because Sun is arriving late? Perhaps, but McNealy says that if the market wants appliances, he'll sell them.
He doesn't have much choice. Many customers swear by appliance servers. Proflowers.com, a La Jolla (Calif.) online florist that went live in 1998, last year installed a machine from CacheFlow Inc. to supplement its half-dozen Compaq servers. Since then, Proflowers has seen download times for most pages drop by more than half while the burden on the company's Web servers has plunged from near-capacity to just about 20% utilization, says Yoshio Kurtz, the company's chief technology officer. ``It was as if I had an additional 10 Web servers in there,'' Kurtz says.
And that's not even the sweet spot for appliance servers. So far, the biggest demand is for storage. With $600 million in sales, storage appliances last year made up 80% of the appliance market. Sales of such devices will grow to more than $6 billion by 2004, IDC says. ``Two or three years from now, appliances are going to be a much more mainstream concept that people will have to understand,'' predicts CacheFlow CEO Brian NeSmith.
Then, in the age of specialty computing, less will truly be more.
By David Rocks in New York
Copyright 2000 The McGraw-Hill Companies, Inc. All rights reserved.
6/8/00 4:29 PM |
