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PC server market tumbling

Compaq, IBM, and other leading vendors will slash prices to clear out inventory in 1998 as they are troubled by oversupply.

An oversupply of PC servers will trouble Compaq Computer, IBM, and other leading server manufacturers throughout the year, forcing them to slash prices and clear out inventory, according to a new market research report.

Total server shipments declined 11 percent on a quarterly basis.

Compaq was hit hard by a surfeit of servers in the dealer channel in the first quarter of 1998, according to International Data Corporation. The PC giant's market share declined to 29.7 percent from 31.5 percent for the same period a year ago, the report added.

Inventory problems won't clear up for Compaq until the third quarter, IDC analyst Amir Ahari said.

Dell Computer, meanwhile, has established itself as a force to be reckoned with, which may also be affecting the market share of established leaders. Dell now commands 10 percent of the total shipments.

"Dell is just beating the competition through execution," Ahari noted. They continue to do well by not trying to expend a lot of energy going into new markets right now."

Compaq's decline was revised downward from a preliminary report in May stating that the company's market share was 34 percent after an estimated 10 percent decline in shipments. Without enough sales of more profitable servers to prop up its low-margin PC desktop business, Compaq reported a 95 percent decline in earnings for the quarter ending March 31.

IBM experienced fairly severe inventory management problems as well, according to the report, with unit shipments dropping 35 percent on a quarterly basis. The more diversified IBM cited PC price wars as a contributing factor in its 13.4 percent decline in revenues for the most recent quarter.

All told, server market growth was hampered as IBM and Compaq cut prices on older servers to clear out inventory. During the first quarter of 1998, worldwide unit shipments grew by 28 percent, the lowest growth rate in three years, according to Ahari.

Ahari cited economic weakness in the Asia-Pacific market and unexpectedly slow sales in Europe as the primary factors in the decline--this in addition to a typical first-quarter buying lull. The market will continue to feel effects of the oversupply, with worldwide PC server shipment growth predicted to slow to 22 percent in 1998, compared to 41 percent a year ago.

In spite of its problems, Compaq remained atop the PC server market, holding a 15.3 percentage point lead over second-place Hewlett-Packard. IBM remained the third-largest vendor, registering a 10.7 percent market share.

The big three are still better situated in the server market than "players who are not diversified or efficient enough to weather out the current situation," Ahari said in a prepared statement. On the other hand, a shakeup of the server vendor landscape is "inevitable," he added.

Gateway 2000, Micron, NEC, and Toshiba are among the midsized companies that will face rough seas as bigger vendors slash prices. All are trying to grow or start server product lineups.