Volume 3, Number 31 -- September 13, 2006

Buyers Expect Softening in Server Spending in 2006

Published: September 13, 2006

by Timothy Prickett Morgan

According to a survey released by market analysts at TheInfoPro, spending on servers could be softening this year. TheInfoPro conducted in-depth surveys with 133 IT shops in the second quarter, and has released a new report that compares server spending from last winter and the middle of this year. The survey respondents indicated that their projections for server spending for the full 2006 year have fallen sharply by the middle of this year compared to late last year, when these same shops were asked what their server spending plans were for 2006.

Last fall, a little more than a third of the shops polled said they would spend about the same in 2006 as they did in 2005, and that has remained basically the same, falling by only a few percent. And only about 10 percent of those polled said they would actually spend less on servers. So more than half said they would spend more, and about a fifth of those sites polled said they would spend 25 percent or more on servers in 2006 than they did in 2005. Nearly a third said they would spend up to 10 percent more, too. But in the most recent survey from the second quarter, a few more companies said they would be adding 50 percent or more to their server budgets this year, but the aggregate number of companies that said they would spend more dropped and the amount that they said they would spend also dropped. Moreover, a lot more companies said they would be spending less, and quite a number of them said they planned to cut their server spending in half.

Bob Gill, the chief research officer at TheInfoPro who put together the report drawn from the survey, attributed the server spending decline on lower projections for spending on midrange RISC-based servers. Back at the end of 2005, more than half of the companies that buy RISC servers were anticipating spending more on these machines this year and only about a quarter were projecting a decline in spending. But in the second quarter, only about 30 percent of these same companies said they would boost RISC server spending, and over 40 percent said they would cut it.

Gill said that server spending declines stand in stark contrast to increases expected for server virtualization software. About 27 percent of the companies polled expected to spend about the same on server virtualization software in 2006 as they did in 2005, but 59 percent said that they would increase spending in this area, while only 14 percent said they would decrease it. That said, the same survey showed that 13 percent of the companies polled were skeptical about the benefits of virtualization, compared to only 6 percent in the survey conducted at the end of 2005.

Those companies that were surveyed said that EMC's various VMware products were their most popular hypervisors, with about 65 percent of those polled having VMware in various stages of deployment. Hypervisors and other virtualization technologies from Microsoft, IBM, Hewlett-Packard, and Sun were also present at these companies, but only Microsoft had any sizable penetration, which stands to reason given the ubiquity of Windows machines.

About half of the companies polled have a virtualization hypervisor installed (54 percent, to be precise), while 7 percent have it in pilot, 6 percent have it as a near-term plan, 9 percent have it as a long-term plan, and 24 percent do not have it in any plans. About three quarters of those companies polled have from 1 to 49 installed units of virtualization software, and this is about what they expect to deploy in 2006, too. Some companies claim to have hundreds or thousands of hypervisors installed. In the current survey, 41 percent of respondents say that server virtualization is critical for their business objectives.

"While virtualization is fast becoming a way of life for server professionals, as users gain experience they are realizing that not all applications are ideal candidates for virtualization," explains Gill. "At the same time, users believe they can wring more costs out of the data center virtualizing on X86 in the long run. Many see virtualization as a means of cutting costs while providing flexibility such as dynamic provisioning of server images. As standard offerings from Intel and AMD move to include multi-core, 64-bit processors, X86 system performance in comparison to RISC ceases to be an issue. Users don't expect to eliminate their RISC systems, but do expect to spend less on them in the future."

The situation may not be that simple. It is hard to separate budgetary pressures, which mean companies have less money to spend on machines because of business pressures, from the advances in technology, which allow server makers to pack more computing into a smaller box and almost always with a lower entry price point. It is a chicken and egg problem.

A big box from a decade ago can be replaced by an entry server today, and provide the same or better level of performance. This means that server buyers can constantly downshift to smaller platforms to do the same work. Most companies do not have massively growing workloads--or the server business would never slow down--and even if they are adding new workloads, they tend to put them on the least expensive platforms they can. It is the advances in electronics that enables the budgetary pressure, in fact, and the budgetary pressure keeps the heat on component makers to keep supplying more capacity for the same or less money.

If innovation stopped tomorrow, the advance of workloads would mean that people would have to spend more money--eventually--on bigger boxes. And until innovation stops, companies will continue to spend less money on smaller boxes that can now do the work performed by bigger boxes. The challenge in all of this will be for the IT suppliers and their partners to avoid going broke.


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Editor: Alex Woodie
Contributing Editors: Dan Burger, Joe Hertvik,
Shannon O'Donnell, Timothy Prickett Morgan
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Advertising Sales Representative: Kim Reed
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