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Dell seeks to conquer more territory with new, cheaper servers

Dell Computer hopes to repeat its earlier success in the PC business with a thrust into the market for cheaper, specialized servers.

Dell Computer hopes to repeat its earlier success in the PC business with a thrust into the market for the cheaper, specialized servers that have become a favorite tool of e-commerce sites.

The Round Rock, Texas-based PC maker plans to unveil a server appliance before its financial analyst meeting next month, according to sources. The new lineup, which may be marketed under the name PowerApp, will offer a choice of operating systems, including Novell's Internet Caching Server (ICS) or a customized version of Microsoft's Windows 2000, sources said.

More importantly, a new line of high-demand, fat-margin hardware will help Dell offset a steady decline in PC prices.

Server appliances--small, limited-function servers geared for specialized tasks such as email or storing data--are one of the hottest hardware growth areas, analysts said.

The rise in the number of e-commerce firms, Internet service providers and small businesses has helped to boost the market for server appliances as these companies have had to bulk up on hardware. A number of smaller companies, such as Network Appliance, and several Linux publishers have benefitted from this demand.

Dell?s major server competitors, Compaq and IBM, started pushing into the market last summer but with limited success. Both companies have focused their efforts on small businesses while repositioning their existing server products to compete for ISP business.

Meanwhile, Dell sat on the sidelines waiting for the sector to mature before offering a product. The strategy is typical for Dell, said analysts, who expect Dell to strike it rich in the server appliance market.

"They?ve got some heavy-hitting software manufacturers behind them, and they have a dedicated design to the device--they?re not taking an existing box and just giving it a paint job," said Piper Jaffray analyst Amir Ahari.

Dell executives see the market as mature enough to introduce a product with a good chance to succeed but young enough that the company can dictate the market's growth.

"Dell typically waits for a market to mature before getting into it," said Lindy Lesperance, an analyst with Technology Business Research. "But once they do, they quickly use their efficient manufacturing and distribution to roll over competitors."

If Dell takes the plunge, it will dive into one of the fastest-growing hardware markets. Market researcher Dataquest forecasts 2.9 million server appliances will be sold this year, 3.7 million in 2001, 5.1 million in 2002 and 7.3 million in 2003.

Big markets mean big money. Merrill Lynch predicts server appliance sales will reach $16 billion in 2002, an estimate some industry analysts say is conservative.

Dell is expected to unveil the product before mid-April, sources familiar with the product said. As recently as two months ago, PowerApp was the leading candidate for the server appliance name, but that could change before it is introduced, sources said.

A Dell representative declined to comment on any product plans but strongly hinted that Dell is preparing a significant announcement for the end of the month.

Sources familiar with Dell?s server appliance said it will sell below $5,000, making it a strong contender among products geared for ISPs, which typically range between $5,000 and $90,000. Those sold to small businesses typically cost as little as $1,000.

"Dell has a track record of coming in, under pricing, bringing down the costs and forcing a lot of people to revamp and revise the business model," said Ahari.

Dell?s strength as a successful seller online is likely to appeal to ISPs and their customers, say analysts. The PC maker, which takes in more than $25 million a day in Web-related sales, could easily convince ISP customers it knows their business.

"You?ve got a manufacturer, 50 percent of whose revenue is derived online," Ahari said. "If anyone knows online transactions, it?s Dell."

Dell?s biggest asset may be its ability to offer a server appliance that fits into an existing PC installation or appeals to customers looking for one manufacturer to supply everything--from PCs to servers. The computer manufacturer would also be in a better position to cross sell from server appliances to other PC products, say analysts. Many server appliance makers only sell a few specialized products and cannot deliver PCs, portables or other types of servers.

Dell will also be using more familiar PC software from Microsoft and Novell, rather than Linux and Unix, which have emerged as server appliance favorites. This is likely to appeal broadly to ISPs looking to build their hosting and connecting infrastructures around PC products, Ahari said.

Neither Microsoft nor Novell would comment on Dell?s server appliance.

Dell isn?t exactly new to selling specialized servers to ISPs. Last summer, the PC maker started offering ISPs Novell ICS on PowerEdge servers. But the server appliance would be a new design specifically for the needs of ISPs, e-commerce operations and small businesses, which typically look for a no-fuss box they plug in and forget about, sources said.

Success in this sizzling market could help boost Dell, which has taken some hard knocks recently as its core PC business declined. After issuing its second profit warning in half a year, the PC maker in January lowered its growth projections to 30 percent from 38 percent.

By contrast, some companies selling server appliances have the more-than-50 percent growth rate that once dazzled Dell investors. Merrill Lynch, for example, forecasts a five-year compound annual growth rate of 65 percent for Cobalt Networks and 50 percent for Network Appliance, two smaller companies in the market.