Virtualization Dampens Server Sales Growth


The Stamford, Conn.-based analyst firm said about 2 million servers were sold worldwide during the third quarter, up 9.1 percent over the same quarter last year. That was down from the 13.2 percent growth the server industry enjoyed last year.

Server revenue worldwide hit $13 billion during the third quarter, up 4.4 percent from the same period last year but down from the 5.1 percent growth experienced last year.

The server market is still growing, but at a slower rate due to the increasing use of virtualized servers, said Jeffrey Hewitt, research director at Gartner.

"It's not because of the economy," Hewitt said. "The economy is doing well. But vitualization is growing quickly. Customers don't need so many [physical] servers. But we will still see growth in physical server sales."

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Hewit said Gartner expects to see a noticeable impact from virtualization technology on server sales over the next five years, especially on sales of x86-class servers.

Hewit said Gartner expects the total number of x86-class servers, including both virtual and physical servers, to grow at a cumulative annual rate of 12 percent from 2005 to 2010. However, he said, customers using virtual server technology can be expected to deploy about eight virtual servers on a physical server.

"If you take out virtual servers, the physical server growth rate will only be about 5 percent annually," he said. "The market is still growing. But this could be an early indication of a slowdown in server growth. It's just beginning, but it's something everybody in this market is watching."

The impact is already happening, said Mitch Kleinman, executive vice president and general manager of Computer Configuration Services, an Irvine, Calif.-based IBM solution provider who also works closely with server virtualization vendor VMware.

Kleinman said that the typical server running Windows runs with a processor utilization rate of only 25 percent, with some applications using only 15 percent to 20 percent of a processor's capabilities. "If you layer VMware's Virtual Infrastructure 3 on a processor first, then layer Windows on top of it, and the application only uses 25 percent of the processor, you can run multiple applications with one processor," he said.

Kleinman cited one example of a specific application, ERP, which will be a key driver of physical and virtual server sales going forward. Consolidation in this space along with a push by vendors to move into the SMB market means that small- and midsize businesses are buying more physical servers to run ERP applications. "Sophisticated customers will look to virtualized servers or will look to use more servers in managed co-location facilities," he said.

One of Kleinman's customers has already made the move to virtualized servers and is glad it has to deal with fewer physical servers. West Coast Building Materials, an Anaheim, Calif.-based distributor of building materials with about 220 employees in five locations, was looking to move from a 30-year-old ERP application to applications from Atlanta-based Infor, which introduced it to Computer Configuration Services.

Joe Zaccari, IS director for West Coast, said Infor had given him a blueprint for implementing the software that required six "beefy" servers. However, he said that Computer Configuration Services showed how those six servers could be virtualized into two physical servers, which not only cut the need for the extra power, cooling and data center space, but also offered increased reliability.

"The main factor in moving to virtualized servers is that the environment I am running required six servers," Zaccari said. "If one server goes down, it would have affected the entire operation. In the virtualized world, if a server goes down, you can just migrate the application."

This point was driven home to Zaccari in July with the previous system when a hard drive crash caused the loss of six days worth of data, requiring four days just to get the data back up to date.

The other advantage for West Coast is flexibility for the future. "My computer room is not that big," Zaccari said. "Stuffing six more servers into a rack is difficult. Now we have just two new physical servers with 16 virtual servers built in. It lets me expand to new servers in the future without spending $10,000."

In terms of vendors, Hewlett-Packard is the unit volume leader, with a 26.5 percent market share, considerably ahead of Dell with its 22.5 percent market share. They are followed by IBM, which enjoyed a market share during the quarter of 16.3 percent, followed by Sun Microsystems at 4.1 percent and Fujitsu at 3.2 percent.

Revenuewise, IBM has the lead, taking just over one of every three dollars spent on servers during the quarter. HP, accounting for one-quarter of all server sales, was second, followed by Dell, Sun, and Fujitsu.

Dell is still the fastest-growing server vendor in terms of volume, with shipments up 10.5 percent compared to a year ago. HP, IBM, and Sun all grew their shipments about 7 percent, while Fujitsu's shipments dropped.

But Sun is by far the fastest-growing server vendor in revenue terms. The company, which has been making a successful comeback in the server space since the introduction of its AMD Opteron-based line, saw revenue grow nearly 25 percent over last year despite an increase in server volume of only 6.4 percent, indicating that the company is getting higher average selling prices than last year.