Wall Street Crisis Creates Channel Market For Server Virtualization

The purchase of New York-based financial services firm The Bear Stearns Companies on Monday by JPMorgan Chase at the fire sale price of $2 per share was unveiled on the same day that Stamford, Conn.-based analyst firm Gartner said that financial services was by far the biggest niche market for servers.

While Gartner said the situation with financial services companies is now too cloudy to forecast how that vertical, which accounts for about a quarter of all server revenue worldwide, will fare going forward, solution providers said they expect business to be brisk as that market consolidates and customers look for ways to optimize their IT spending.

Tough times are bringing customers to seriously look at their IT infrastructures, especially their server numbers, said Chris Taylor, vice president of professional services and solution sales at Evolving Solutions, a Hamel, Minn.-based solution provider.

And that is helping them take a good hard look at the potential of server virtualization to help cut costs, Taylor said.

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"One of the main drivers of virtualization is cost reduction, or cost containment," he said. "Now with business down and stock prices dropping, people are saying, we maybe should be taking another look at this."

As a result, Evolving already has about 15 server virtualization studies going on with customers, compared to eight in the previous quarter, despite the fact that the first quarter is usually the slowest part of the year, Taylor said.

"Any time you see interest in talking about new technologies, that's good for us," he said. "Everybody's concerned about the economy. But if you offer a way to cut costs, you'll do well. It won't necessarily lead to more product sales, but should lead to more services sales."

The reality is that solution providers are really in the simplification business, said Michael Piltoff, senior vice president of strategic marketing at Champion Solutions Group., a Boca Raton, Fla.-based solution provider.

"The more companies are desperate to lower costs, the better for us," Piltoff said. "While everybody talks about cutting costs, when the economy is working and a company is kicking butt, cutting costs is not an issue."

Server virtualization helps customers simplify their IT infrastructures and cut costs dramatically, Piltoff said. "If cost pressures continue, it helps us push our simplification message," he said.

Based on Champion's experience, server virtualization can lead to a 19:1 reduction in the number of Intel-based servers required by a company, and a 12:1 decrease in the number of Unix-based servers, Piltoff said. "And the software makes it easier to manage the servers and increase the SLA (service level agreement) capability."

The same is true about storage, Piltoff said. Using Gartner nomenclature, which ranks storage administrators in terms of expertise from 1 to 5, with 5 being the best, Piltoff said it might take three rank 3 people to administer 40 Tbytes of storage capacity normally, but only two rank 2 people to handle 80 Tbytes of virtualized storage. "So fewer people with lesser skill sets can be more productive," he said.

Gartner said on Monday that financial services accounts for about 25.3 percent of worldwide server revenue, compared to 14.4 percent for the communications vertical, 11.6 percent for government, and 48.8 percent for other verticals, said Kiyomi Yamada, principle research analyst at Gartner.

IBM, of Armonk, N.Y., has the lion's share of the financial services and government server verticals, with a 43.8 percent share of the financial services business and 37.0 percent of the government business. Hewlett-Packard, of Palo Alto, Calif., owned 40.1 percent of the communications server market, Gartner said.

There was a downturn in the US market in the financial services vertical in 2007, but growth in other markets like China and India more than made up for that, Yamada said. "In the US, a lot of little projects were postponed," she said.

Yamada said that forecasting the server business in 2008 is difficult, as server business trends tend to lag economic trends.

"If we go into a recession, it could be a deeper problem for server sales," she said. "But if you compare it to the internet bubble of 2001, the impact will be less. Companies have to invest in IT infrastructures, including servers. IT is an area where they can be competitive."

The latest Gartner server sales figures already include the impact of server virtualization. Server virtualization can be an inhibitor of server sales, but can also be a driver, Yamada said. "Total server volume growth is going to stay strong even with the virtualization effect," she said.