Servers: Internet Fuels Server Market Growth

It may be the best of times, but it's also the worst of times for integrators and solution providers who specialize in servers.

The continuing explosion of e-commerce and the Internet means a continuing explosion of demand for solution providers who install and configure servers to reliably deliver data to internal and external customers. "Servers are an extremely healthy business," says Mike Kerr, IBM's vice president of Web server products, Armonk, N.Y. "E-business is fueling the growth."

But, while demand continues to increase, margins on server hardware sales are shrinking, especially on units with Intel-based architecture.

"It used to be you made your money off hardware, but the margins have started getting thinner and thinner," says Joyce Becknell, director of computer platforms and architectures for Aberdeen Group, a Boston-based market research firm. "I don't know many solution providers in it for the hardware anymore. Sun, for example, has told its channel to become service providers, or else."

"It's no longer about the technology of the box," agrees John Enck, research director of server strategies for Stamford, Conn.-based Gartner Group. "All these things are interchangeable. There's not enough differentiation between the vendors to be able to build a business on, so it comes down to the same key issues that have differentiated solution providers for years,service, preloading, testing and more responsive support for their customers."

For solution providers willing to differentiate themselves, plenty of opportunities still exist. "I can't tell you how many times I've talked to clients who don't want to buy direct and are looking for an integrator or solution provider to do the integration and testing they don't have the opportunity to do," Enck says. "But integrators will have to be very good technically and very nimble to survive."

Those technically expert solution providers, Enck adds, have a particularly rich opportunity in providing solutions for corporations whose IT staffs are already lean and overworked.

"Clients these days are having a difficult time [staffing up] for projects they already have, so they're turning to integrators and consultants to assemble and manage their solutions for them," Enck says. "An integrator who is very knowledgeable about a particular set of products and can pull them together into a cohesive solution, like an e-business solution, is going to do very well."

Driving Server Sales

Vendors confirm that their solution-provider partners have turned to solution sales.

"If you go back five to seven years and look at our resellers, the higher percentage of their profit margin came from hardware rather than services," says Bill Cate, director of marketing for Sun's e-Sun Partner Sales in America. "Today, the higher percentage is coming from their services."

Service providers, including telcos, ASPs and ISPs, in fact, are driving server sales. "There's the theory that if you get the service-provider market right, you can also get the traditional IT market right," Aberdeen's Becknell says.

The IT market is also still very important, adds John Miller, Hewlett-Packard's server marketing manager for North America, Palo Alto, Calif. "We're targeting the service-provider market now because that's where the most growth is, but we still target our traditional IT customers because they're very big and still buy a lot of hardware," he says.

In fact, the two markets may be blurring. As Sun's Cate points out, corporate IT departments are becoming internal and external service providers themselves.

And, whether it's the corporate IT market or the e-business market, the competition is fierce. "From my perspective, I see a daily battle between Sun Microsystems and the key Intel server players offering Windows NT or Windows 2000," Gartner's Enck says. "They're competing for two things,the whole e-business infrastructure, including Web, application and database servers, and for the large-scale corporate applications, especially the database component. In the corporate world, Intel servers are having a much stronger play now, with NT ubiquitous in corporate applications. But there's a huge struggle on the back end."

Wintel platforms still have a credibility problem on the high end, say Enck and other analysts. "We still don't recommend Windows NT or 2000 as the best choice for 24/7 operations," Enck says. "It's doable, and there are cases where it makes a lot of sense, but it's a real struggle. Our research indicates the best possible reliability from NT and 2000 is 99.8 percent."

While both IBM and Compaq make claims regarding market leadership, this year's Annual Report Card shows the server market split. Compaq won in the entry-level server category (with IBM finishing fifth of six, just ahead of Dell). IBM's AS/400, however, won in the midrange server category, with Compaq finishing second. HP finished second in entry-level and third in midrange.

HP is aggressively developing faster and smaller servers, hitching its wagon to Intel's star in the development of the IA-64 chip, which HP will eventually use to replace PA-RISC, the chip its midrange servers have been based on since 1986.

"We expect HP to continue to offer strong arguments for adopting these systems and to promote itself as the champion of these new product types," says Martin Hingley, an analyst with IDC, Framingham, Mass.

"We have designed a plan for the future that is flexible enough to continue with PA as long as it delivers value above IA-64 and also seeks to migrate our customers to the new architecture in a nondisruptive way through things like in-chassis upgrades to IA-64, and OS binary compatibility for HP-UX across PA-RISC and IA-64," HP's Miller says.

The Migration To IA-64

But even if Intel starts shipping in the next few months, the widespread market acceptance of the IA-64 chip is still beyond the horizon. "Most people aren't expecting it to really kick in until 2002," Becknell says. "What's going on right now is a phenomenal amount of hedging from everyone but Sun, which is jousting with Intel. Of Compaq, IBM and HP, IBM is least wedded to the IA-64 because the PowerPC is a good, solid chip. But nobody's going to switch in the next two years."

Gartner's Enck warns end users that IA-64 is a "brand new processor. We advise caution about slapping it into production environments for any sort of data-crucial applications," he says.

While server vendors wait for Intel's new chip, they're fighting their usual battles over who provides more bang for the buck. But performance,and price/performance in particular,is, as always, a rapidly moving target. "Performance for HP9000 systems typically increases 30 to 40 percent a year through processor upgrades, system enhancements and OS tuning," says HP's Miller. Competing vendors make similar claims.

In addition to form factor issues, scalability, availability and reliability continue to be hot-button selling points with server vendors. "We're basically moving toward a service-on-the-fly and configure-on-the-fly capability," IBM's Kerr says.

While hardware engineers continue to improve performance and efficiency, the other big factor in the server marketplace is software, specifically the Linux operating system, which every vendor supports and which is gaining respect as it gains functionality.

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