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Thursday, October 7, 2010

Server vendors -- still innovating but the challenges are growing

Information Week just released a paper delving into the results of their of "State of the Server" survey. The magazine surveyed 579 IT professionals at North American companies and editor Alexander Wolfe put together a nice review of the responses and the server environment.

Here are some of the more interesting items that might be of significance for those reading from a financial and investment perspective who follow tech stocks:

Reduction in number of servers --

Most companies are trying hard to maintain or reduce the number of servers in their datacenters. 42% are reducing server count by consolidating old servers to fewer, new more capable systems. 26% are attempting to hold server count fairly constant; replacing servers on only a normal replacement cycle. 5% are in a "freeze" mode, avoiding new purchases and extending the life of existing servers.

There is a continued push toward virtualization. This trend should help the two major players in virtualization software, VMware and Citrix. This should also help semiconductor memory vendors (virtualization is a memory hog if you want to maintain application performance). It is somewhat mystifying to see Micron Technology miss yet another earnings estimate (earnings just announced tonight: $0.32, a miss of $0.06) and to see VMWare selling off the last couple of days.

All of this suggests that server vendors will have to fight for sales. This kind of environment often leads to vendors reducing prices to increase market share and thereby squeezing their own margins.

Budgets still tight --

When asked about 2010 server budgets versus 2009, only 11% of survey respondents said they plan to ramp up server spending significantly in 2010 while 65% were looking at either flat or slightly increased budgets.

This is another challenge for server vendors.

Rating the vendors --

Dell was rated number based on value proposition and usage. Dell is followed in order by HP, IBM, Oracle/Sun and Cisco Systems which recently began offering servers optimized for virtualization and integration with the network.

Larger enterprises preferred HP Proliant servers while Dell PowerEdge servers were more popular in smaller companies.

For RISC/Itanium servers, the ranking order was IBM, HP and Oracle/Sun. These servers most often run some variant of the Unix operating system rather than Windows and are much more popular in large enterprises than in smaller shops.

Differentiating factors --

Beyond the obvious x-86 versus RISC architecture question, many respondents didn't see a whole lot of difference between servers from one vendor versus another. The feeling is that they all offer similar server configurations, processors and memory.

This suggests that servers are becoming commodity items. Vendors will have to work harder to make their products stand out from their competitors. We can see how this became an opportunity that Cisco took advantage of by creating the Unified Computing System (UCS). UCS sets itself apart by combining processing, storage and networking in one physical unit. Cisco’s UCS partners, yielding best of breed integration, include EMC in storage, VMware for virtualization tools, NetApp for data management, and BMC for system administration and configuration.

We now see the other vendors touting their own integrated packages and creating slick marketing phrases to describe them.

Then there is the Oracle/Sun combination. Oracle is now promoting how the Sun boxes are optimized to run Oracle database software and applications. The promised speed and robustness of the hardware/software combination is now Oracle's primary differentiator.

Since processing power and form factors are so common across all the vendors, the other frontier where they compete is in the realm of power and cooling. Reducing power requirements and improving cooling capabilities are now looked at as factors that can contribute to saving money in data center operation.

Conclusion --

Here are some key takeaways from the report:

Most server offerings are very similar in capabilities.

Many companies are working to reduce the number of servers in use via consolidation and virtualization.

Maturity and processing power of x86 server architectures are undercutting the high-end dominance of RISC/Itanium. Nevertheless, RISC will remain a multi-billion dollar market and will evolve into a battle between Oracle/Sun’s UltraSPARC and IBM’s Power architectures, with Intel’s Itanium 2 waning as the x86 Xeon processor takes on more of its capabilities.

Cisco has pioneered the integrated server package all tied up with a spiffy acronym and marketing message. Say what you will, Cisco has hit on something that companies are finding to be unique and a step forward in data center server design. The report has a chart that shows how many companies are currently using a vendor's products and how many are planning to use a vendor's products. Cisco's UCS is the leader in the category of those planning to use the product with fully 16% of respondents looking at implementing UCS.

The report sums up the challenge facing server vendors: "the key will be fielding products with the right combination of memory, on-motherboard networking and power/cooling—at the right price—to serve what are effectively commodity requirements, all while not appearing to be commodities. "

As I said earlier, this is a tough environment for hardware manufacturers. It's no wonder many of these server vendors are also focused on software and services.

Source: download the report

Disclosure: no positions

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