May 16, 2002

Is the server market doomed?

Author: JT Smith

- by Jack Bryar -
The market for traditional servers continues
to fall away. However the growth of the Linux server market is the one
(tiny) bright light in the market.  Will the good news from the Linux
community attract the VARs and Systems integrators it needs to take over
the marketplace? Or will the server market simply evaporate ?

The bad news for server vendors never stops. Gartner Dataquest recently
released news that the dollar volume generated by server sales continues
to decline, as it has for better than 18 months.  There are very few
bright spots in this picture, but one of them is coming from the Linux segment
of the market.  According to Gartner, Linux server sales rose by an
astounding  79% in  the first quarter of 2001. Given that the
overall market for servers fell by double digits, this is even more impressive.
Gartner reports that the dollar volume generated by Intel servers fell
by 17%.

According to Gartner, the growth in Linux servers was one of the reasons
that IBM managed to hold  and even grow its share of the server market..
In addition to an aggressive, Linux-oriented advertising program, the company
has courted the Linux community with programs such as DeveloperWorks,
and a variety of free tools and training programs.  Today IBM claims
an inventory of over 2,800 Linux based applications, available either through
the company or its partners.  Within the market for Open Systems servers,
IBM's aggressive promotion and marketing has propelled it past Dell as
the premier Linux vendor. In the last year IBM's share of the Linux market
rose from 15% to 34%. Meanwhile Dell's share fell from 52% a year ago to
22% and falling.

While Linux's growth and IBM's numbers look impressive, Linux still
generates a relatively puny financial footprint. Gartner's figures show
the Linux server market generating a little under $236 million in the first
quarter, or roughly 6% of the overall server market.

Computer Reseller News ran another survey recently hinting
that the number may be misleading. According to CRN, the fall-off in name
brand hardware hides a couple of important trends . One of these is the
explosive growth in customized no-name "white box" systems sold through
VARs and system integrators.

to CRN
, VARs and SIs report that they are now selling four white boxes
for every branded system. Sixty-two percent of those polled  by CRN
reported that they built their own servers, compared to 51 percent last
year. While these white boxes still tend to be loaded with Microsoft products
rather than Linux, there is a substantial minority of developers who are
either using or evaluating Linux. The two major considerations are flexibility
and margin. SI's who build their own can make as much as a 25% margin on
white box systems compared to branded boxes with Microsoft or other proprietary
software. However a
perceived lack of applications
remains a major barrier to widespread
adoption by this community.

Would more aggressive promotion of Linux by hardware vendors
help turn the server market around?

There's substantial reason for doubt. For one thing, small servers,
especially, have become a glut on the market. As Microsoft clients have
migrated from NT to Windows 2000, they have found they no longer need the
clutter of print servers and workgroup file servers required by the old
operating system. In order to subsidize the cost of conversion, many of
these machines are being cannibalized and converted to provide a patchwork
of minor functions  such as Intranet services. While a significant
percentage of these "internal white boxes" may run Linux,  this in-house
after-market continues to be a significant drag on the demand, especially 
for workgroup level and mid-range servers.

In addition, the market is unlikely to improve because the underlying
structure of the enterprise network is beginning to change.  Mass
storage of data is migrating to a variety of storage network appliances
capable of handling terabytes of data. Directory Services architecture
is becoming more and more sophisticated.

Peer-to-peer architectures and "Grid" schemes for sharing computing
cycles across  workgroups are beginning to go mainstream. All these
developments are eroding the demand for traditional client/server 
technology.  Over time, Linux could grow to dominate the server marketplace.
Unfortunately, it is not clear how big that market will be.

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