Servers popular despite market decline

The construction of Internet infrastructure by both dot.coms and "Old Economy" companies is driving demand for servers.

3 min read
The construction of Internet infrastructure by both dot.coms and "Old Economy" companies is driving demand for servers.

Now that Y2K has passed and a broader set of companies are realizing that e-business is real, they are scrambling to put infrastructure in place to support the transactions and massive amounts of data they need to manage. The need to store, access and exchange information online is vital to any e-business strategy, and servers handle this heavy lifting behind the scenes.

Also driving server demand is a post-Y2K resurgence in corporate spending and the need for server hardware upgrades for Windows 2000, especially in the second half of this year and 2001.

Last year, Sun Microsystems, IBM, Hewlett Packard, Compaq and Dell collectively represented approximately 70 percent of the $56 billion server market, according to International Data Corp. However, the total server market declined about 3 percent from 1998 levels.

Why are we interested in a declining market?

The answer is in the details of this market. Some segments have been declining while other segments have been growing nicely. I believe that Sun, Compaq and Dell can continue to be successful in servers because of the way plates are shifting within this market.

PC servers have been the highlight of the server market over the past year. PC servers grew 26 percent from 1998 to 1999, while the other server categories declined.

Dell and Compaq are targeting this market as a way to increase their margins and average selling prices and shift their product mix away from the desktop PCs. Last year, Compaq retained the No. 1 position in revenues with about 31 percent of the $17 billion PC server market. Dell grew 60 percent last year over the previous year to win the No. 2 position.

Dell has proven to be very successful as it intensified its focus on servers and introduced new products. It launched the PowerEdge 8450 (rack-optimized), 2400 (workgroup), and 4300 (departmental) servers in 1999.

I believe these new servers and Dell's strong relationships with corporate customers are making the company a growing force in this market.

Midrange servers, which are priced between $100,000 and $999,999, experienced a 10 percent sales decline from 1998 to 1999 because of Y2K-related corporate spending lockdowns, weakening sales of IBM midrange servers, and declining sales at second-tier system vendors.

Compaq and Sun had strong, double-digit growth despite the market decline. Sun managed to increase sales by an impressive 24 percent in 1999 from the previous year and capture 17 percent of the market. Compaq, meanwhile, grew its midrange server revenues by 18 percent last year, but only captured 6 percent of the total market.

I believe Sun has been successful because of its targeted Unix product offering and its early focus on Internet (ISPs and ASPs) customers' needs. Sun's sole focus on Unix has proven to be an excellent strategy recently. My view is that Sun will remain the one to beat in midrange servers.

Meanwhile, I view Dell and Compaq as the companies best positioned to execute against a positive growth trend for PC servers. As an attractive price-performance solution, I believe that PC servers will increasingly take share from higher priced server segments.