From Investors Business Daily, 02/02/98
How Will Compaq's Deal Tip Server Market Scales?
Date: 2/2/98 Author: Michael Tarsala
Makers of computer servers -the workhorses of corporate computing -
have reason to fret over the $9.3 billion merger of Compaq Computer Corp. and Digital Equipment Corp.
Sure, Hewlett-Packard Co. and Sun Microsystems Inc. - the server
market's current top dogs - can gain from the merger in the short
term. Palo Alto, Calif.- based HP and Mountain View, Calif.-based Sun
see it as an opportunity to take away Digital's customers.
But long term, it's a different story. Houston-based Compaq is poised
to overtake No. 2 Sun by using Microsoft Corp.'s increasingly popular
Windows NT format on its servers, analysts say. Sun only uses the
rival Unix system-which is losing market share - while HP uses both NT
and Unix.
"The threat to Sun is that now there's a powerhouse NT server company
with a very large, efficient service organization,"' said Tom
Copeland, analyst with International Data Corp. in Framingham, Mass.
"And there really hasn't been a company - other than HP - to have that
capability."
Servers are central computers that do little more than let people
share data, software and storage. They don't match PCs in terms of
sales volume.
But they are a popular computing solution, and go a long way toward
filling the coffers of Compaq, HP, Sun and others.
"Servers - that's where the game is," said Lou Mazzucchelli, analyst
with Gerard Klauer Mattison of New York. "That's where the margins
are, the big transaction dollars are. And that's why everyone wants to
be there."
So there's no question Compaq will stay in servers; the question is
which format the company will adopt - Unix or NT. Analysts think the
answer is only a formality.
Compaq hasn't said it will drop Maynard, Mass.-based Digital's Unix
business, but it's just a matter of time before it will, says IDC's
Copeland. Compaq is committed to its current line of servers running
Microsoft Corp.'s Windows NT. A two-pronged, Unix-NT strategy doesn't
make sense because it requires too much investment on the part of
Compaq, he adds.
Copeland also predicts Compaq eventually will dump Digital's lauded
Alpha chips that run applications on both Unix- and NT-based servers.
Compaq executives did not comment for this story.
If the 200,000 Digital Unix users end up in the camps of HP and Sun,
the two companies say they will be more than happy to take them.
"It's a major opportunity for us to pick up Digital's installed
base," said Nick Earle, HP's Unix business marketing manager. "We are
predicting that Compaq will not consider Unix and Alpha to be
strategic."
"We've been telling (Digital) customers for some time they were
falling off the cliff," said Anil Gadre, Sun's worldwide marketing
manager.
Gadre notes that rumors of Digital's eventual takeover swirled for
months. Now that it is done, Compaq must overcome the sense that its
server sales pitch is garbled.
Combined, Compaq and Digital support servers that run on five
different operating systems. They include NT, Digital's Unix, and VMS,
which is an older Digital operating system. They also support systems
from The Santa Cruz Operation Inc. in Santa Cruz, Calif., and the
former Tandem Computers Inc., acquired by Compaq in June.
"They used to have a very simple message for customers - NT," Gadre
said. "They have just made their story more complicated."
Compaq has been in the server game longer than most PC vendors. It
entered the market in '89 with a product line called Systempro. And
Compaq was one of the first to adopt the NT operating system for
servers in '93.
Despite its Digital acquisition, Compaq still would trail both HP and
Sun in server revenue. One reason is that HP and Sun each have broader
server lines than Compaq, and can take advantage of the higher profits
in equipment costing $100,000 or more.
Sun also has a Unix line that spans servers costing several thousand
dollars to $1 million-plus for mainframe-class machines. And HP sells
nearly as broad of a range as Sun for both Unix and NT.
Compaq, however, is nipping at Sun's heels, says Mazzucchelli.
"Sun has to figure out how they're going to maintain profitability and
growth as they're perceived as part of the total (computing)
solution,'' Mazzucchelli said. ''Frankly, if they don't, that could
drive them into the arms of someone like IBM."
Meanwhile, No. 1 HP must keep its edge over Compaq by stressing its
strengths in high-end servers - especially the ones that need to
operate 24 hours a day, analysts say.
Technology acquired from Tandem will allow groups of Compaq servers to
require less than 10 hours of downtime a year - better than any NT
server on the market. Improvements in software and hardware will help
Compaq's server strategy mature, analysts say.
Compaq and HP are banking on several NT performance gains being
developed. Microsoft expects to unveil a new, more powerful NT
operating system in the next 18 months. Among other things, the new
system will allow several NT servers to work together - the same way
Unix servers can today - to handle extremely large workloads.
By mid- '99, Santa Clara, Calif.-based Intel Corp. plans to introduce
a new family of significantly faster processors, code named "Merced."
The chips have been co-developed with HP since '93.
Analysts say the new NT/Merced servers by HP, Compaq and others will
be able to match Sun's Unix performance. They expect the server battle
then to heat up even more.
"It's a whole new ballgame," said IDC analyst Dave Vellante. "Compaq means business in the server market."
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