PC sales flu infects servers

Will price war spark PC demand? Stephen Baker, analyst, NPD Intelect

The companies that fared best were top-ranked IBM, whose revenue grew 13 percent to $3.3 billion, and fifth-place Dell Computer, which grew 21 percent to $884 million, according to figures compiled by IDC.

Many companies got hammered in the slide but managed to squeeze out market-share gains: Revenue for third-place Sun Microsystems slipped 3 percent to $2.05 billion, and fourth-place Compaq Computer dropped 2 percent to $1.96 billion. But while Hewlett-Packard maintained its second-place ranking, its 5 percent revenue drop to $2.12 billion meant it did even worse than the market as a whole.

Spending cutbacks by both home users and businesses have swept across the computer industry, causing an unprecedented decline in PC sales, inventory gluts and price wars.

Servers are the powerful, networked computers that handle everything from dishing up Web pages and processing stock sales to logging phone calls and approving loans. The machines are generally more profitable than PCs--especially because selling a server can spur related spending on services and other products--but the sector has had its ups and downs before. One bad quarter in recent memory came at the end of 1999, when IDC showed server sales dropping 6 percent from the previous year, to $14 billion.

But this time, most computer makers can't rely on PC sales or other revenue sources to compensate, and the withering dot-com revolution has undermined hopes that the Internet would spur huge server growth.

The economic climate remains sour, according to a recent survey of technology executives by Deutsche Banc Alex Brown. "No one we spoke with is currently planning a second-half pickup in spending at this time," analyst Christopher Mortenson said of the survey, which polled 260 chief information officers late last month.

"The worst is probably not over yet," and spending in the second quarter of 2002 probably will be "as weak or weaker" than in the first quarter, Mortenson said.

Regionally, the United States fared worst, with server sales dropping 16 percent to $4.4 billion in the first quarter, IDC said. Japan slipped 12 percent to 2.1 billion, and the rest of the Asia-Pacific region increased 12 percent to $1.2 billion. Western European sales increased 16 percent to $3.8 billion.

A contrite HP
HP was one of the companies hit hardest, acknowledging that its own problems compounded the spending slowdown.

"We did not do well last quarter, either the top-line (revenue) numbers or bottom-line" profits, said Duane Zitzner, president of HP's computing division, vowing to improve results at a gloomy analyst meeting last week. In that meeting, HP Chief Executive Carly Fiorina said the economic malaise that began in the United States and spread to Europe was hitting Asia as well.

HP is banking on two major elements for its server future: the long-awaited release of Intel's Itanium chip that HP helped develop and HP's top-end Superdome server. Superdome can accommodate as many as 64 of HP's specialized PA-RISC chips today but will be able to use second-generation Itanium chips in 2002.

Itanium, a radical departure from Intel's earlier chip, is still chiefly useful for testing the new design, Zitzner and others agree. But Superdome is catching on, he said, with sales to Amazon.com, American Airlines, AT&T Broadband, BMW, Cisco Systems, Debis IT Services, General Mills, Johnson & Johnson, Liz Claiborne, Mobilkom Austria, Nestle, Nextel, SAP, the U.S. Navy and Verizon.

But Superdome got off to a slower-than-expected start, HP has acknowledged. IDC's statistics reflect that view: In the first quarter of 2001, when the product went on sale, high-end server revenue at HP dropped 24 percent to $149 million.

A key battle: Unix servers
One of the hottest areas of battle is the market for Unix servers, comparatively expensive machines that experienced a renaissance when they proved adept at handling Internet chores and Microsoft had trouble making Windows servers sufficiently crash-proof.

Sun rose to the top of the Unix server market while IBM, HP and Compaq suffered from more complicated product lines. Now Sun is under attack.

Meta Group expects the excess capacity and secondary market glut to have been "digested" and the demand for nondiscretionary infrastructure enhancements to rise by the end of 2001. see commentary

Sun, which introduced a new product line as the market was souring, acknowledges the rough environment but argues that it's in a good position to win market share.

"I'd much rather play our hand than anybody else's right now," said Shahin Khan, head of marketing for Sun's server group. Down markets cripple weaker companies while strengthening the others, he said. "The downturn happened exactly as we were going through a transition. When the uptick comes, I think we'll be poised very well."

Sun is aggressively discounting prices, introducing its newest line at half the price of comparable IBM products, Khan said.

The Unix server market overall slipped 2 percent to $6.5 billion in sales for the first quarter. Meanwhile, the Windows server market grew 7 percent to about $3.2 billion, IDC said.

Dell and Compaq, the top two Windows server sellers, are locked in a price war to keep market share.