WORKSTATIONS - Action stations

As the channel tries desperately to maintain margin from desktop PCs, could the answer to achieving increased revenue lie in shifting focus to the workstation market?

The agreement between Siemens and Fujitsu to merge their EuropeanPCs, could the answer to achieving increased revenue lie in shifting focus to the workstation market? operations (PC Dealer, 23 June) is proof - if proof was needed - that the channel is being squeezed and is scrambling for ways to maintain margins.

The venture, to be known as Fujitsu Siemens Computers, will combine the PC, server and mainframe businesses of both companies, and will create the world's fifth largest computer organisation.

Peter Lemon, analyst at IDC, believes the deal is yet another example of the pressure of falling margins on vendors, forcing them to consolidate.

'There is some extremely cutthroat pricing at the moment,' he warns.

Compaq is a case in point. The vendor has lost a raft of top management and is having to restructure and cut costs in an effort to boost ailing profits. Ben Rosen, chairman and acting chief executive of Compaq, recently said pricing pressures and inadequate revenue growth were contributing factors to the vendor's recent poor performance. Compaq adds that it plans to eliminate $2 billion in ongoing operating costs once its restructuring plans are fully in place.

Things are not much healthier at the distributor level either. Last month, Ingram Micro was forced to lay off staff and reorganise its UK operation into four business units, each of which will have to justify its existence over the coming months, or face the axe.

Confirming the overall trend toward cheaper machines are figures from IDC showing that direct sellers are continuing to take a huge chunk out of the channel. According to the research company global sales volumes in the second quarter are set to decline by about 2.3 per cent from the first quarter of this year. This is despite healthy sales in the US and Japan, which means the shortfall is mainly in Europe and, in particular, the UK.

So with the wolves at the door, what are the options for escape? A move to higher ground seems to be the best option. Dave Parsons, director of workstation marketing at Compaq, says as prices start to drop, low-end workstations could replace desktop machines.

IDC figures seem to back up his projection, showing that workstation shipments grew 22 per cent in 1998 compared with the previous year. This trend is set to continue, according to Dataquest, with sales set to double between 1998 and 2001.

The figures seem to be encouraging for any reseller considering the workstation market as a possible cash cow, but on closer inspection, things are not quite so clear cut. The increase in unit sales is being driven by the low-end Intel/NT machines, while the traditional Unix market continues to shrink.

IDC predicts that big enterprises with a large installed base of Unix workstations will begin to move NT systems into their core application area over the next two years, but says the changeover won't be easy and will take several years to complete.

'The lower cost of high performance Intel-based Windows NT systems brought workstation capabilities to a much broader set of users than has historically been the case with Unix workstations,' says Tome Copeland, director of the workstation research group at IDC. 'The result has been a significant increase in units, but a modest decline in overall workstation revenue.'

The report adds that Windows NT-based workstation shipments grew by 36 per cent during 1998 to $1.7 million, while revenue increased by 18 per cent to $6.8 million. In particular, branded NT workstations - machines specifically marked as workstations - showed exceptional growth: 98 per cent in units and 60 per cent in revenue.

IDC claims this strong growth indicates the increased focus by PC vendors on the workstation sector. Hewlett Packard was the market leader in both units units shipped with 40 per cent of the market and 34 per cent in terms of revenue followed by Dell with 19 per cent in both units shipped and revenue.

'With more branded NT workstations than Unix workstations being shipped in 1998, NT is driving the growth in the market. NT workstations have surpassed the start-up phase and have become mainstream,' says Copeland.

Jay Moore, senior analyst at Aberdeen Group, predicts that NT will grow 30 per cent in year 2000, with Unix sales declining by 65 per cent overall during the same period. David Altounian, director of workstation marketing at Dell, puts the growth down to three factors. 'The first is that graphics performance is growing on these platforms at a phenomenal rate. Second is the processor performance moving up the curve. And the third is the NT transition.'

The healthy state of the NT workstation market seems to indicate that if resellers are considering a move out of the PC sector, now is the time to jump.

But any reseller wanting to leverage knowledge and sales experience gained in PCs should make a decision quickly, according to Kathleen Tandy, product marketing manager at HP. She claims the NT workstation market is beginning to become distinct from high-end PCs. 'The biggest trend we are going to see is more architectural differentiation between workstations and PCs, and that's going to be fuelled by technology available from the chipset and CPU manufacturers,' she says.

Another factor that threatens to put a wall between PCs and workstations is clustering. 'There is a lot of discussion about the difference between a commercial desktop and a low-end workstation,' says Parsons. 'But before too long, there will be an argument in the market between high-end workstations and a low-end servers as clusters of technical workstations are pulled together.'

But Trevor Pugsly, marketing manager at Computacenter, argues that the distinction drawn between the PC and the low-end NT workstation market has been overblown by vendors attempting to carve a niche for their products.

He claims that from the reseller and customer point of view, the incoming breed of Intel-based machines, from Compaq, IBM, and HP, are PCs with go-faster stripes.

Pugsly classifies any PC with more than one processor as a workstation and says his customers - mainly financial institutions - do the same.

They see workstations in terms of their processing power and the competitive advantage that added speed will give them. He admits customers expect 24-hour uptime from the machines, but that the same rules apply as in the PC market. 'It's bread and butter stuff for us - it's not difficult,' he adds.

As far as margins go, Pugsly says there is money to be made in the peripherals that accompany workstation sales. Focusing on the financial market, he says the latest line of TFT (thin film transistor) flat-screen monitors has helped to boost sales. Most customers require between two and three monitors and that in the City, where the bulk of financial customers are located, space is at a premium. 'The cost of the monitors is negligible next to the money saved on space.'

Alice Smitheman, PC business unit manager at Computer 2000, agrees that financial institutions are the main customers for Intel/NT workstations from Compaq, HP and IBM, adding that all three vendors are experiencing good levels of growth compared with the PC market. She adds that financial institutions use intensive applications that require workstation power.

'We are seeing more launches in the SME sector and in the visual industries requiring technical design, such as film and animation.'

IBM is targeting the key workstation markets with its NT/Intel-based Intellistation range, according to Steve Caldwell, marketing manager for EMEA at IBM. He identifies the four key markets as being the financial sector; mechanical Cad design; digital media; and telecoms operators, which he claims provide the biggest potential market for IBM.

Caldwell agrees there are higher margins to be had in the workstation market - about 10 per cent compared with the PC market. He cites IDC figures that estimate a market for about 793,000 workstation in Europe this year.

'The potential is very large in the workstation market. But the rate of change of products is dictated by Intel at the moment, which means things are not moving as fast as they could be.'

Silicon Graphics (SGI) is another vendor previously strong in the Unix market. It recently seized on the opportunities for NT/Intel-based systems and, according to Jim Irving, workstation channel director at SGI, it has been selling NT machines since January. The vendor was prompted into the move by IDC predictions that the market for NT-based systems would outstrip demand for Unix by up to ten-fold by 2002.

While there is clearly some room for manoeuvre in the low-end NT Intel sector, the Unix high-end market is a different ball game, says Steve Brazier, analyst at Canalys. He claims the pressure from NT has forced the Unix market to the higher end and has led to an overall decline in sales.

According to IDC, 1998 was the second year in a row where the traditional Unix workstation market declined in both shipments and revenue, by six per cent and 16 per cent respectively. Total shipments were 599,110 and total revenue was $7.9 billion. IDC puts the shortfall down to decreased investment in Unix by US and European companies, and by the economic problems in Asia, particularly Japan. Sun Microsystems was the only vendor to increase Unix shipments in 1998 - it accounts for 50 per cent of traditional workstations shipped.

The Unix market is basically a closed one with a close-knit channel built up over a considerable time. 'It will be very hard to break into,' Brazier believes. 'Dealers will need to become skilled in the applications that the niche industries in this sector require.' His advice to anyone thinking of moving towards the high-end is that NT server and networking offer a more diverse and open market.

Irving agrees that a reseller looking to get into the Unix space would have to make a lot of investments in training staff and building up relations with the key customers. 'They would have to be looking to add real value in Unix machines - you just can't walk in off the streets and do that,' he says.

Mark Byatt, marketing director of Sun, HP and Compaq reseller Morse, says it is important to remember that workstations are not often sold as isolated products. Morse, for instance, will routinely sell workstations as part of a complete system, along with networking equipment, standard PCs and associated services. He adds that any company selling just PCs is going to find it difficult to survive, but competition in the workstation sector is going to become more competitive and more cutthroat in the long run.

The rift between the Unix and NT markets is set to decrease with the arrival of Windows 2000. When it eventually happens, it will provide an extra boost to the NT sector. The main effect will be to bring NT's reliability and functionality a little closer to the Unix ideal, but without sacrificing its usability. Features such as universal serial bus (USB), FireWire and DVD support, will increase PC workstation appeal in the second half of this year - providing the boys in Redmond deliver on time.

Microsoft is behind the idea of shunting workstations to fill the space held by PCs. Speaking at WinHec, the annual conference at which PC hardware manufacturers are briefed on Microsoft's product plans, Steve Ballmer, president of Microsoft, maintained that the software vendor wasn't seeing any slowdown in growth in the PC market. He also claimed the PC industry has great opportunities for growth by moving into different areas, such as high-end servers and workstations in the business sector.

With even Microsoft backing the idea, it seems inevitable that there will be an overall market shift towards higher end hardware. NT has already begun to oust Unix from the low-end, providing opportunities for any resellers seeking an easy transition to different markets.

The real high-end Unix markets, such as chemicals and pharmaceuticals, are still out of reach, dominated by a handful of resellers and distributors with a long track record of selling into this space. But things are changing and it seems the key to cracking the market is NT. When NT becomes a real competitor to Unix in the eyes of the traditional Unix market, then resellers from the low-end workstation sector may at last be able to break into this last bastion.

OPPORTUNITY KNOCKS FOR PC BUILDERS

PC builders as well as resellers are being hit by decreasing margins, but they have been slow to seize on the potential opportunities in the workstation market, says Sukh Rayat, managing director of components distributor Flashpoint.

PC Dealer: Has the channel taken full advantage of the opportunities in the workstation market?

Rayat: Not many PC builders manufacture specialist workstations, but it is definitely an area to develop, especially when there is little or no value in manufacturing low-end PCs. Builders have to find ways of moving up into higher margin areas and provide a better overall package for customers.

PC Dealer: What's holding them back? Why aren't they doing it now?

Rayat: The main problem is that workstations are a software and hardware package, and the software is very specialist, such as industrial Cad.

These are very computer intensive applications that do a massive number of calculations. Many of these software vendors are locked into special agreements with workstation vendors, such as Silicon Graphics, and this considerably raises the barrier for entry systems builders. Successful negotiation with proprietory software vendors is the way to get into the market.

PC Dealer: What is being done to break down the barriers?

Rayat: Events such as the integrator forum in Monte Carlo discuss the threats to systems integrators from issues such as free PCs and selling direct. They discuss which markets companies can get into now that they are under threat, and areas such as workstations are being highlighted as target markets.