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February 28, 1999

US SERVER MARKET CONSOLIDATES IN FOURTH QUARTER

By CBR Staff Writer

By Timothy Prickett Morgan

By now, everyone knows that the fourth quarter of 1998 was pretty bad for IBM and a number of smaller vendors when it came to server sales, and new statistics compiled by market researcher Dataquest show how decreasing prices and increasing competition is making things difficult for server vendors in the US. Dataquest says that the total US server market came in at $4.4bn during the fourth quarter, down 4.3% from $4.6bn in the same quarter of 1997. (These numbers are for raw processors and do not include storage and other peripherals that server vendors typically include in the server numbers they talk about to Wall Street and customers.) Dataquest says that server shipments in the US were up 15.9% in the quarter compared to last year, but did not elaborate on the exact numbers except to add that entry server unit growth was a smidgen above 19% and that revenues remained essentially flat in this part of the market. In the final quarter of 1997, IBM had dominant server market share in the US with $1.346bn in sales and 29.1% of the market; sales grew a piddling 0.3% to $1.351bn in the fourth quarter of 1998, representing a 30.5% market share. Compaq’s PC and Unix server lines in combination brought in $744m in revenue during the quarter, up 4.6% from 1997 levels and representing 16.8% of the total US server market. Hewlett-Packard was next in line with $685m in server sales during Q4, up 17.9% over 1997’s fourth quarter and representing 15.4% market share. HP’s server sales growth is apparently driven mostly by increasing NetServer PC server sales, but HP doesn’t break its server numbers out in its financials, much less pit Intel versus PA-RISC against each other in its public books. Sun Microsystems had the second highest level of growth in the fourth quarter with server sales up 20.3% over last year to $572m. The Cinderella story, of course, is Dell Computer’s server line, which Dataquest says nearly doubled in size to $250m in the quarter. The share of other vendors in the US server pie dropped in the quarter by 40% to $832m in the fourth quarter of 1998, down from $1.39bn in 1997. Dataquest says that it expects continued consolidation in the US server market and that server vendors will be struggling to find more efficient distribution models – that means e-business for most of them – as well as a focus on services that complement their hardware offerings to prop up their top lines. If hardware profits drop low enough, especially at the low end of the server market, services for these machines may even turn out to be more profitable than the hardware itself, making for a very tough competitive environment that favors aggressive and lean players like Dell over struggling companies like IBM and, to a lesser extent, Compaq and Hewlett-Packard. As usual, Sun Microsystems is an exception to most rules, since it doesn’t have an established, high-end, proprietary server line to protect like IBM (with S/390 and AS/400) and Compaq (with Digital and Tandem) and is aggressively playing its trump card in the Internet market. The trick for Sun, of course, is to spark excitement in its new Starfire high-end server line while at the same time making its low-end line the more competitive with low-end and midrange NT- based PC servers. With over $1 billion in sales for Starfire in 1998, Sun seems to have its high-end act together. But with a brand-name that is nearly synonymous with the Internet and network computing, it seems obvious that Sun should be able to do better than it has convincing server buyers that Solaris and Sparc servers are a credible and sensible – even preferable – alternative to PC servers running Windows NT. Sun doesn’t want to end up like IBM, relying on revenues and profits from high-end servers to prop up flagging low-end server and stagnant midrange server sales.

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