Guild Companies

If you're wondering why server vendors are knocking on your door these days, the answer is simple: The server market is contracting. Potential server buyers are flush with excess capacity, but not with cash. Server vendors big and small are chasing the same shrinking budget pie, and slashing prices to make demand where there isn't any. Hence, the worldwide server market shrank by 15 percent in the first quarter, says the Dataquest unit of consultancy Gartner .

According to Shahin Naftchi, senior server analyst at Dataquest, all of the server vendors are discounting like crazy in an attempt to eat market share. The marketeers at server companies have no other alternative than to focus on their share of sales or shipments in a contracting market, because to actually point out how sales or shipments are falling would merely remind them that their bonuses are going down and their jobs are on the line. Vendors have a strong belief that they can eat market share in a down economy—even if they make less profits than they would prefer or, in some cases, actually lose money—and that this will translate into increased sales and account control when the economy rebounds and the IT budget spigots open back up again. While this practice was undeniably effective in the past, when hardware and applications were closely tied to particular platforms and architectures, IT organizations can, if they design their applications properly, be in a permanent state of fickleness because of open standards. The only thing vendors that eat market share get in a down economy is heartburn, and the satisfaction that, at least for a while, their numbers looked better than their rivals'. To show progress, they have to keep eating that market share, which is difficult but profitable when a market is expanding, as the server market was in the late 1990s, and dangerous when a market is contracting, as the server market has been for the past two years.

Naftchi says shipments of servers in North America have been better than expected in the past two quarters, but that she is still not confident enough to say that the market has stabilized. This is, of course, good news for server buyers and bad news for server makers and their resellers. She also says that sales across all platform architectures are being pushed toward the low end of product lines, and that companies have been eager to adopt inexpensive Intel-based servers, which offer processing power that is equivalent to the RISC architectures used on Unix and proprietary servers like OS/400 machines. Sales for servers that cost less than $5,000 were up 30.7 percent in the first quarter of 2002, which suggests that as Intel and other processor makers such as IBM, Hewlett-Packard, and Sun Microsystems crank up the speeds of the processors, customers with modest needs can get by with smaller and smaller machines. This is also a factor in the declining revenues among all server vendors, and as companies push into the multiple gigahertz range with their server processors, the situation will only get worse—for vendors, not customers. You can buy a pretty decent server for $1,000 today. I just did, for example.

Dataquest's analysts reckon that about 1.1 million servers were sold in the first quarter of 2002, about 2.6 percent more than were sold during the same time last year, but about 85,500 machines shy of the shipments at the end of last year. The new HP, by which I mean HP plus the former Compaq, had the lion's share of worldwide shipments with 31 percent of the total machines sold; the majority of the machines sold by HP were Intel-based servers, which is true of every major server vendor with the exception of Sun. Dell had the second biggest shipment numbers, with 17.5 percent of the pie, and IBM, which had inched ahead of Dell's shipments in the fourth quarter of last year, fell back to the number-three position with 13.6 percent of shipments. Sun was the number-four vendor in terms of server shipments, with 6.3 percent of shipments. Other vendors, including Fujitsu Siemens, NEC, Acer, and thousands of white box vendors, pushed the remaining 31.6 percent of machines in the first quarter.

Because all servers are not created equal and do not, therefore, command the same prices, the vendors with the highest shipment numbers are not necessarily those who rake in the most money pushing servers. Even with server sales down by 8.7 percent in the first quarter of 2002 to $2.9 billion, IBM was able to maintain its number-one position by revenue market share. That sales level was, somewhat shockingly, $1 billion lower than IBM's server sales in the fourth quarter of 2001, but IBM never has had a great first quarter, and it probably never will, given the propensity of customers to do their big IT spending at the end of a year, when IBM is eager to close its books looking good and will give the best deals for volume buyers. Sun, which had bypassed Compaq for the coveted number-two position behind IBM a few quarters back, has dropped to the number-three position with $1.8 billion in server sales during the first quarter because the combined HP-Compaq company garnered $2.7 billion in server sales—split pretty evenly between the former HP and Compaq products. HP is within spitting distance of catching up and maybe surpassing IBM as the revenue leader in the server market. Sun at one time looked like it might be a contender, but the bursting of the dot-com bubble has probably relegated Sun to a permanent number-three status. Unless Dell does something significant to break into the big revenue, high-profit, top-end Unix server business, it will be in a nearly permanent number-four position in terms of server sales, too. Dell sold $724 million of servers in the first quarter of the year, a decline of 15.8 percent. The overall server market declined by 15.2 percent to $10.6 billion. IBM, Sun, HP (minus Compaq), and NEC did better on average than the rest of the server players by having a smaller revenue decline than the market at large, while Compaq did a little worse, and Fujitsu Siemens, Unisys, and others did quite a bit worse and brought the whole market down.