System Builders Getting All Set For Big Upgrade Cycle

Like the seemingly resilient U.S. economy, the custom-system market, after making a somewhat soft landing in 2006, could be primed for renewed growth in the months ahead.

More energy-efficient and powerful multicore processors, the release of Microsoft's Windows Vista operating system, delayed spending on new hardware and a stable economy all could help fuel the fire. At least that is the theory— one that is raising optimism among many custom-system builders.

"It's positive from our perspective. There are a lot of things taking place. The hardware, the dual-core, Vista, the service pieces, the direct-push technology—those are all driving some business for us," said Dan King, president of New West Technologies, a POS solution provider and system builder in Portland, Ore. "And there are a lot of folks who have been sitting on their laurels for awhile. A lot of those folks are getting to the point where they just don't have a choice but to reinvest."

There is room for caution. Vista could continue to confuse the market as businesses delay adoption, perhaps for months. Custom-system builders have failed to gain much traction in the fast-growing notebook segment. And there are always supply shortages, inflation or a slowing in corporate profit growth to worry about.

SERVERS GET ENERGIZED

But system builders say Intel's initial rollout of quad-core processors already has begun to bolster custom server sales. And that combined with the pending release of Advanced Micro Devices' four-core Barcelona processor, should keep the custom-system builder channel busy crafting servers throughout the year.

"Quad-core processors will definitely drive sales this year," said James Huang, marketing manager at Amax Information Technologies, a Fremont, Calif.-based system builder and contract manufacturer. "Many of our OEM customers are already testing quad-core processors for their upcoming projects."

Last November, Intel began shipping its Quad-Core Intel Xeon 5300 and Intel Core 2 Extreme quad-core processors, beating rival AMD to market. In addition to sparking server upgrades, the quad-core processors are raising average selling prices for Intel and its partners, system builders say.

"Almost everything we're shipping is either 5100 or 5300 multicore Xeons," said Keith Josephson, vice president of engineering and CTO of ION Computer, a Hauppauge, N.Y.-based Intel Premier Partner and system builder. "I think there's a little bit of growth there."

ION manufactures 1U and 2U quad-core servers, which Josephson said offer increased performance over the servers they're replacing and use less energy. That's been a big selling point. System builders and solution providers are rolling out quad-core solutions at a time when data centers small and large are housing an increasing number of resource-hungry applications and are looking for cooler, more efficient solutions.

After record market-share gains that topped 25 percent last year in its ongoing rivalry with Intel, AMD is planning to add more fuel to the fire with the release of its Barcelona chip in the second quarter. The chip should be generally available in the third quarter. AMD executives believe the scalability of the new Barcelona microarchitecture, performance gains and single chip design will score significant points with the marketplace.

"Some people are saying Intel's quad-core is not a true quad-core," said David Chang, president of Agama Systems, a Houston-based system builder. "They say Intel is just putting four die on one platform. But can one-plus-one-plus-one-plus-one become more than four? That's what we'll see. But in the meantime, I think AMD is working hard to win back the channel."

The Sunnyvale, Calif.-based chip maker annoyed many system builders during the third and fourth quarters last year when it ran into supply problems and pricing issues while taking on Dell as a new OEM customer. Since then, AMD has been attempting to mend fences with system builders, promising—among other things—tighter partnerships with component suppliers, as it attempts to hold on to mind-share in the months leading up to Barcelona's launch.

So far, it looks like it may be succeeding. System builders such as Agama and Amax are planning to achieve growth in 2007 not only with Intel's quad-core technology but AMD's as well. "Our focus products will include high-performance clusters, general-purpose rack-optimized and pedestal servers, appliances, storage subsystems, graphics workstations, stable corporate image computer platforms based on both AMD and Intel processors," Huang said. "These products will take full advantage of the latest Intel and AMD dual- and quad-core processors, with better performance per watt than previous generations of processors."

Next: The Big Vista Question

THE BIG VISTA QUESTION

While the server business is looking up, another big factor is how much Microsoft's resource-hungry Vista operating system, which launched in January, will drive sales of new and more powerful desktops and workstations. According to research conducted by CRN and Cowen and Co., the most likely scenario is that adoption of Vista-based systems would lag predictions for the first part of 2007 but begin to accelerate as the year enters its later stages. Measurable growth would begin to show—and outpace predictions for later adoption—in 2008.

Custom-system sales traditionally are strongest in the SMB market, and that is where the impact of Vista is likely to be felt first among business clients. About one-third of SMB customers will begin initial deployment by the second half of 2007, compared with 16 percent of enterprise customers, according to the Cowen survey of 170 SMB solution providers and 238 enterprise IT buyers. Initial deployment aside, it may not be until the second half of 2008 before a third of SMBs will deploy Vista to half of all their PCs.

That tracks with what system builders such as Agama expect. "The midsize business [and] the small businesses will start using Vista first," Chang said. "For the school district, for the big corporation, no. Their cycle is longer. They are more hesitant."

Chang said initial growth spurred by Vista would begin to show in businesses with five to a couple of hundred clients. "They can do it easier," he said. "Then, the big corporations will follow."

For solution providers in the home and small-business market, the uptake could be quicker. D&H Distributing, which caters to many small system builders that sell into the home and SOHO market, reported that its initial sales of Vista Home Basic and Vista Home Premium to system builders got off to a stronger-than-anticipated start. "We feel we focus on small and midsize businesses that adapt to products like this," said Jeff Davis, vice president of sales at D&H, Harrisburg, Pa.

That could bode well for system sales in the small-business sector. Davis said that while peripheral sales were strong in 2006, system sales were a struggle because customers knew a big upgrade cycle was coming. "This year they have a good reason to buy hardware," he said. "This is the year for a big uplift in hardware."

In his mind, the only question mark for custom-system channel is notebooks. Whitebooks have yet to get off the ground, but he said Intel remains committed to the market. "I think they're going to reboot," he said. "They're committed to that, and they have the infrastructure together. It's still a pricing game."

Notebooks aside, solution providers still expect Vista will drive desktop sales in various markets. Whether it comes sooner or later, the reason many believe Vista eventually will be a significant growth engine is simple: To run well, Vista will demand ever-more memory, storage and processor speed, and its 3-D graphics capabilities will call out for greater GPU performance. And in most instances, customers will need to refresh hardware and applications to take advantage of Vista's new features.

"I've been waiting for it for a long time," said Babar Yasin, president and CEO of Arscho, a Berkeley, Calif.-based system builder. "That market will be growing substantially, in my opinion. This year, I'm really hoping the second and third quarter should be moving fast. Vista has some really great features."

Yasin said he believes that if Microsoft addresses some technical issues with its deployment as a digital media solution, as well as working with channel partners to provide migration from Media Center to Vista, that will have significant impact. "Vista is definitely a lot of work, but it's going to have a really nice look and feel to it," Yasin said.

Next: The Dell Factor

THE DELL FACTOR

Solution providers pointed to other factors working in favor of a positive outlook for custom systems. One of them is the well-publicized stumbles by Dell, the one-time market-share leader that has competed with system builders with low pricing partly resulting from its economies of scale favorable supplier terms.

The vendor's problems have not been lost on system builders who say that—in a market changing rapidly with new hardware, software and networking technology and capabilities—they are also finding growth by reaching out to one-time Dell customers who want a higher level of service and reliability than Dell has been delivering.

"People aren't thrilled with Dell," ION's Josephson said. "There was at least one [former Dell] customer we picked up recently. There are a couple more that we're working on."

Now Micro, a system builder in St. Paul, Minn., has been winning some business from Dell in the government and education markets, said Patrick Finn, president of the company. "It's not so much on price," he said. "It's more about their service and support, and how they've dropped the ball."

Travis Flake, president and CEO of ConXts Technologies, Tulsa, Okla., which sells about 80 percent of its systems to local school districts, though, said Dell remains a factor among customers who still compare his systems to Dell's on price. "We're winning bids, but we're having to cut margins," he said.

Still, Flake is anticipating a good year of growth in 2007 for other reasons, and it really has little to do with Vista or multicore processors or Dell. He said education customers tend to run their PCs and until they don't work anymore and buy solely on need. Now, they seem have the need to refresh their PCs and the money, thanks to the economy and the success of a number of bond elections. "Last year [we saw] more smaller orders," he said. "It wasn't the large 500-system orders, but I think that climate has changed a little bit, and I know there's a lot of stuff on the horizon for us, so we'll probably see an increase again."

For Now Micro, a positive outlook is tied more to the custom solutions it has been developing, such as its networked DVR surveillance box. "Much of our effort has been pushed into vertical markets," Finn said. "We're trying to exploit areas like digital signage and video surveillance."

System builders have plenty of reasons to be optimistic about 2007, and not all of them are tied to Vista or multicore processors. But new technology helps. "We like Vista and the new Office 2007, and having some advanced notice on some of the stuff that is coming, we're excited," King said. "We hope it will be better. Our goal is definitely it will be up."

Next: The Rollout