PC DEALER PERSPECTIVES - Silver servers

Server margins are depressed and vendors are rapidly consolidating. But all is not lost for the reseller sector, as new sales drivers start to take effect.

According to research company Romtec, in June, the UK server market was valued at £22.04m compared with £22.11m for the same period last year, but with sales growing 16 per cent more than in May. Les Francis, senior analyst at research firm IDC, says the figures aren't the same as IDC's, but agrees that the market is flat.

These figures point to a market that is, at present, very difficult to negotiate. Demand for low-end servers is good, but margins are stagnant. This has sent alarm bells ringing in the industry's corridors of power, and changes to channel and product policies, as well as further consolidation, is almost certain to happen soon.

Dealers account for a significant portion of server sales with 5528 units in June, according to Romtec. And with VARs taking an additional nine per cent, the reseller outlet is clearly the dominant route for server products.

A little more than 11 per cent - about 863 units - was sold direct in the period, but Francis expects this to change. "Value-added services provided by resellers may come under increasing attack as vendors further develop their direct sales models and extend the portfolio of services they offer. Off-the-page and mail-order firms are also now offering server systems."

In particular, a big headache for the channel will come if there is a shift in Compaq's policy. The vendor dominates the Intel server sector in the UK. If it changes its strategy, there could be a massive impact on distributors and dealers.

The retail sector sells a small number of servers and although they are becoming cheaper and easier to install, not many more buyers are expected to follow this route. And even though the specifications of entry-level, Intel-based server products are being loaded with features that were once highly expensive, there are opportunities for resellers.

Francis says: "Many vendors have introduced entry-level server products that incorporate some of the key resilience features found in high-end configurations, such as hot-swap drives and power supplies. I believe this will provide the channel with opportunities in the SME market."

In the long term, prospects in Europe aren't so bleak. According to Martin Hingley, senior research director at IDC, the server market is buoyant at the moment, even though competition is aggressive and margins are under pressure.

"We are going through a period of transition. For vendors, the pace of change is accelerating, throwing a number of recent business issues, models and product types into consideration - all of which need to be addressed if they are not to fall behind," he says.

Francis adds: "The pace of the market and the ongoing consolidation is leaving some of the smaller vendors in potentially precarious positions. The status of niche vendors is by no means certain."

The recent takeover of Sequent by IBM is just one example of the consolidation occurring in the market, and more small, niche players can be expected to be swallowed up as the trend continues in the coming months. There is good reason why, says Hingley, the largest vendors are fighting to retain their share of a market in which competition is intense - especially in the UK - and in which profits are typically higher than in other market segments.

Various factors are currently having an impact on the server market, some are driving sales, others are restricting growth. But everything is likely to change.

Internet and ecommerce will continue to drive service sales. IDC predicts that information services and ISPs will generate a growing proportion of server sales, and their success can already be seen in the expansion of sales to telcos and business services. As voice and data integration and online content services develop, there will be a greater need for servers that can manage communications, as well as data services.

Francis also sees further development of different working structures boosting server sales. "Remote working is prompting many companies to review their communications and web strategies."

He adds: "There is also increasing demand for data security such as encryption and firewalls in this area." This could trigger sales of communications servers and the development of virtual private networks - an area which specialist server vendors and resellers might exploit to good effect.

It is partly this trend of re-evaluating the business structure that has led to an interesting idea being put forward by researchers. They predict there will be a switch from sales to service providers in the server market, from server sales to users at present.

IDC is already predicting that the supply of processing services - bureau IT services, for example - will become big business in the next few months and in the years ahead. This will happen because of the need to deal with shorter life cycles and cost cutting. It will also give users the ability to in-source specific applications.

"Companies will want to take advantage of a common web infrastructure to place email, ticketing, accounting and personnel with contractors," says Hingley.

In effect, this is an extension of the outsourcing trend and it is expected to grow, compelling vendors and their channel partners to develop service provision and ASP-type schemes that will meet the demand, meaning that IT service providers will have to not just sell servers, but buy and manage them and sell time and space on them.

Meanwhile, the core business of selling servers for network services and applications will continue, and one of the main battlefields will be operating systems. The advance of Windows NT as a server operating system continues, says Hingley, but Unix - and Linux - are hitting back.

Microsoft isn't going to have the market to itself.

Even if it doesn't provide a realistic alternative, Linux is certainly going to throw some potential adopters of Windows NT into doubt and that may hold back server sales, in the same way as the Year 2000 problem has, possibly stoking up demand for next year. According to Hingley, people will notice a slowdown in the market in the run-up to the millennium, while server vendors will have to work hard to hit their targets.

Hingley says: "We can expect the overall market to slow down significantly as European businesses defer purchasing, deployment and even evaluation in the approach to year 2000.

"If they've already tested and certified systems as compatible, many businesses won't want to buy again until next year. But clever vendors will be pushing hard to steal a march on their rivals by creating next-millennium packages."

Some vendors are already trying to do this by introducing multi-processor models and also jumping onto the Linux bandwagon. IDC expects Linux to have a big impact right across the market, becoming a viable alternative to incumbent operating systems in many user environments.

Even though it is not yet fully standardised and represents only a small proportion of server sales, Linux's position in the market as a free source code product is certainly attracting interest from the industry and the corporate sector, Hingley explains: "Everyone who was loyal during Windows NT's onslaught on Unix is now covering their bets by supporting Linux in one way or another.

"The more companies that go public and create an awareness for Linux by just being in the market, such as Red Hat, the more pressure Linux may assert on the low-end server market."

But Francis is less ebullient about Linux. "There has been a lot of talk about this system but we haven't seen much of it. Many vendors have adopted Linux but I don't know if the applications are there yet."

However, people shouldn't imagine that Windows NT isn't going to compete for and win a great deal of the server platform business. Microsoft's system will continue its push into the low-end market.

Still, Hingley believes it may struggle now in the lucrative mid-range segment. "NT/Windows 2000 will be prevented from moving into the more profitable mid-range markets by its relatively poor reliability in comparison with Risc-based technologies."

He argues that there is a good deal of uncertainty about the scalability of the NT platform and, indeed, about the 64-bit processor developments from Intel, and believes Intel's early IA64 product may not live up to expectations.

Delays in the technology road-map have already put back the project and the widely held belief is that the initial chips will under-perform Risc chips when they are first shipped. "This is despite the strong theoretical advantages that IA64's Explicit Parallel Instruction Set Computing (Epic) architecture has over super-scalar Risc designs," says Hingley.

Clearly, the top end of the market is going to continue to see many different technologies and platforms competing for some time to come, but it's the server market core, with its depressed prices and apparently flat growth, that's most worrying the industry.

Vendors are re-evaluating their positions carefully and considering fundamental changes, not only to the channel model, but to what they offer and sell, says Francis.

"A lot of the vendors are bolstering their service products and I can see some of them starting to offer installation services through resellers. Vendors are thinking hard now," he adds.

EXPECTED GROWTH IN EUROPEAN SERVER MARKET (1998-2003)

According to recent IDC research, the European server market is expected to increase at a compound annual growth rate (CAGR) of 6.2 per cent from $18bn in 1998 to $24.4bn in 2003, in terms of customer spending. In unit terms, this comes out at 833,000 in 1998 to 1.377 million by 2003.

Comment: These pan-European figures from IDC are perhaps slightly surprising in giving IBM such a strong lead, but they do include all products, not just the Intel-based servers in which Compaq is way in front. In the UK, IBM has a lot of catching up to do and has only just started to hit back at the market leader. Compaq has been in pole position for some time with the Proliant range, and the vendor probably has 40 per cent of the Intel market.

According to Romtec-GfK, at the moment Hewlett Packard is second and IBM third. With consolidation continuing, it is looking increasingly likely that four or five companies will dominate the market in the foreseeable future - IBM, Compaq, HP, Fujitsu-Siemens and Sun. Dell does not appear in IDC's server figures although it is certainly one of the top players now in Intel-based server sales.

Already, Compaq has absorbed Digital, IBM has swallowed Sequent, and there is also the joining of Siemens and Fujitsu, which will be a powerful force in Germany in particular. More consolidation is bound to follow.

One other noteworthy point is that Compaq, which is at present believed to be considering its channel strategies, is the clear UK market leader and the staple diet of the channel in terms of servers. If it switches its policies and starts to sell servers direct, it is likely to have a significant impact on reseller channel sales.