Hello everyone. Comments on the server market in today's WSJ...
John
February 23, 1999
Computer Industry's Focus
Shifts to Market for Servers
By DAVID P. HAMILTON
Staff Reporter of THE WALL STREET JOURNAL
The personal computer may still loom large in the public eye, but the
real battle for the future of computing increasingly lies in the market for
servers, the ubiquitous but little-seen computers that tie together the
world's networks.
Demand for servers is exploding because of the popularity of the
Internet and corporate networks that link employees, customers and
suppliers. Servers are poised to become even more pervasive as they
start to take on many of the software tasks now usually handled by
PCs. For instance, Microsoft Corp.'s Hotmail unit offers an e-mail
service on its Web servers that can replace a PC e-mail program.
Server Market Ramps Up-a
Forecast annual growth in server shipments and
revenue for 1999 to 2003:
Segment
Revenue
Shipment
Entry
+13.1%
+18.8%
Midrange
+ 2.1
+ 10.4
Mainframe
-12.0
- 4.6
Supercomputer
+ 6.0
+ 7.7
Fastest-Growing Server Vendors
1998 market share and percentage-point gain from year earlier:
Low
end
market
share
%
pt.
gain
Midrange
market
share
% pt.
gain
High
end
market
share
%
pt.
gain
Compaq
18.0%
+2.0
7.4%-b
+1.9-b
--
--
Dell
7.0
+3.0
--
--
--
--
Hewlett-Packard
12.0
0
23.0
+5.0
3.2%
+1.3
IBM
21.0
+2.0
28.0
+1.0
37.2
+8.1
Sun
11.0
+2.0
13.0
+3.0
5.6
+2.6
a-Figures show compound annual growth rate
b-Includes 1998 acquisition of Digital Equipment Corp.
Servers already represent a big chunk of the global computer industry.
Market-research firm International Data Corp. estimates that
world-wide server sales last year amounted to $59 billion, or almost a
third of the size of the 1998 PC market. While that sales figure is down
1.7% from the previous year, that is only because average server
prices are falling although demand has been skyrocketing.
That's particularly true at both extremes of the server market -- the low
end, where PC makers are stepping up a cut-rate attack with servers
that host departmental networks and run Microsoft's Windows NT
operating system on Intel Corp. microprocessors, and the high end,
where IBM and its competitors have slashed prices repeatedly on the
corporate data systems that used to be known as mainframes. In
1998, for instance, IDC estimates that hardware makers shipped 70%
more computing power on high-end servers than in the year before but
saw revenue fall 0.9%.
High Margins
By contrast, profit margins in the midrange market, for servers that can
host popular Web sites and fairly extensive networks, remain relatively
high amid strong demand. International Business Machines Corp., Sun
Microsystems Inc. and Hewlett-Packard Co. appear to be pulling
ahead in that market. All three companies are also gaining ground in
the high end and holding their own or better at the low end.
For IBM, that required a strategic
U-turn. Two years ago, Big Blue
belatedly realized that it spent too
much time trying to sell its customers
on individual server lines -- it offers
four -- and not enough assembling
packages of different IBM servers
that could deliver network services
more flexibly. Refocusing its strategy
helped IBM stem two years of
market-share losses, says IDC
analyst Steve Josselyn. In 1998, IBM
held 28% of the midrange server market, up one percentage point
from a year earlier.
H-P, by contrast, continued a blistering assault on the market last year.
Thanks to a combination of technological prowess and a focus on
supporting popular corporate-management software such as SAP,
H-P jumped ahead five percentage points from a year earlier to a 23%
share. Analysts, however, say H-P has lost momentum this year.
Big Strides
Sun, too, continued to make big strides, gaining three percentage
points to reach a 13% share of the midrange market -- a major
achievement, given that it held a measly 2% share just three years
earlier. So quickly has Sun shifted its focus that last year, it gained just
over half of its $10 billion in revenue from servers and only 30% from
workstations, whereas the year before it was the other way around,
according to IDC estimates. Sun declines to confirm those figures.
Sun has run up an early lead in the Internet server market, where
companies like both the reliability of Sun's equipment and the fact that
it is easy to add more Sun servers to an existing network without
interrupting service.
Smaller server makers, meanwhile, mostly lost ground last year.
Silicon Graphics Inc., NCR Corp. and Siemens AG's Siemens-Nixdorf
all saw sales and market share slip. The only other major midrange
server maker is Compaq Computer Corp., which, when counted
together with its recent acquisition, Digital Equipment Corp., held a
7.4% share in 1998.
But competition among server makers tells only part of the story. The
server industry has long been fragmented into a hodgepodge of
different software and microprocessor standards, mostly because they
are used by a relatively small, sophisticated base of users that haven't
demanded standardization. PC titans Microsoft and Intel have
promised to launch a fresh offensive in the server market that might
bring about a commodization, or structural lowering, of server prices
based on economies of scale. Microsoft plans to unveil its next version
of Windows NT, now dubbed Windows 2000, later this year, while Intel
expects to release next year a hefty new microprocessor aimed at the
server market, code-named Merced.
Going on Defensive
That Wintel alliance has already taken a big bite out of both the
workstation and low-end server markets, and the threat of PC-style
economics in higher-end server markets has pushed IBM and H-P into
defensive strategies. IBM, which already sells NT servers, insists that it
will maintain its other three proprietary hardware and software server
lines. But it also makes plug-in boards that allow users to run Windows
NT on its AS/400 server, which usually runs a proprietary IBM
operating system.
H-P is going even further. Like IBM, it plans to offer Windows 2000 on
existing systems that currently run only a popular server operating
system known as Unix. But it also has pledged to end development of
its proprietary microprocessor, the PARISC chip, by 2003, at which
time it will emphasize use of Intel chips instead. H-P helped develop
the architecture of Merced in a joint venture with Intel.
"We're saying, buy our Unix boxes and, in the future, we can make
them run NT," says Nick Earle, who heads up server marketing for
H-P.
Among the major server makers, only Sun plans to remain focused on
a homegrown operating system and microprocessor. "We want to be
a product company, not a broker" for Intel and Microsoft, says Greg
Papadopoulos, Sun's chief technology officer, adding that Sun figures
it can offer better performance and earn higher profits using its own
technology.
Intel and Microsoft won't find it easy to continue moving upstream.
Microsoft has already pushed back delivery of Windows 2000 by a
year, suggesting that the project has proved far more complex than it
anticipated. Similar doubts surround Intel's Merced chip, which is also
late.
Another wild card is the Linux operating system, which is distributed
for free over the Internet and maintained by a worldwide network of
software developers. While Linux has yet to make much headway
among big corporate buyers, many smaller Internet-based businesses
swear by it, with some predicting it could threaten Windows NT at the
low end.
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