May 23, 2003 6:12 PM PDT
IDC: Servers to make mild recovery
Server sales of about $49 billion in 2002 will stay flat in 2003, then begin a steady growth to about $58 billion in 2007, analysts at IDC's Enterprise ServerVision conference said Thursday. Although server makers such as IBM, Sun Microsystems, Hewlett-Packard, Dell Computer and Fujitsu stand to benefit from the growth, nobody expects a return to the nearly $70 billion in spending from 2000.
Increasing sales of machines running Windows and Linux will fuel the growth, according to IDC. The Unix server market is expected to remain the single largest part of the overall server market through 2007, but it likely won't show much growth.
"In a market that's overall falling, the Linux server market has been hot," analyst Jean Bozman said. From 1999 to 2002, Linux server shipments increased from 173,000 to 598,000, while revenue from their sales increased from $749 million to $2 billion, she said.
At the conference, IDC also highlighted several areas it says will trigger growth--everything from digital identification tags and Internet-based phone calls to outsourcing and instant messaging.
Servers are the powerful machines that handle important data storage and processing tasks behind Internet services and many corporate operations. Sales in these computers rocketed as a surge of Internet companies positioned for growth in online businesses in the late 1990s, but they reversed course when the dot-com boom went bust.
The predicted server sales growth rate of about 4 percent per year through 2007 is lower than the 8 percent expected for software and the 7 percent for computing services, said John Gantz, IDC's chief research officer.
IDC also analyzed the "stickiness," or loyalty, of customers for various companies given the types of computing tasks they run. For tasks requiring higher-end, expensive machines, such as mainframes or higher-end Unix servers, computers often have a lifespan of more than eight years because customers buy new systems so infrequently. But in other tasks, often run on lower-end systems running Windows or Linux, server life spans are only three or four years.
IBM has the greatest percentage of such "sticky" systems installed--ones that customers aren't likely to switch out rapidly--when one considers the top four server companies' installed base, IDC analyst Matthew Eastwood said. Dell, specializing in lower-end systems, is at the opposite pole.
"IBM is really the king of these back-office process workloads. About two-thirds of their installed base is safe," Eastwood said. Dell has the "lowest stickiness," with about 9 percent of its installed systems in this more stable part of the market.
The less stickiness there is in a market segment, the more likely it is that customers will buy just on the basis of price, Eastman said.
Sun is in second place for stickiness, which protects it somewhat against incursions from Linux and Windows systems. "There are certainly plenty of workloads in the Sun installed base that are at risk, but there are a lot that are not," Eastwood said.
HP is in third because it also sells numerous short-life span Intel-based servers.
Though Unix is often used for more demanding tasks where stickiness is high, Windows and Linux are both moving in that direction. The improvement of those operating systems, typically found on Intel-based servers, is part of a long history in which newer systems gradually become good enough to replace existing technology, said Mark Melenovsky, IDC's program director for volume systems and Internet infrastructure.
Disruptions periodically wash over the server market as new waves of less-expensive equipment become good enough for many tasks. In the early 1990s, mainframes and minicomputers were disrupted by the arrival of Unix systems with the new class of RISC (reduced instruction set computing) processors. Now the RISC-Unix systems are being disrupted by the arrival of Intel systems running Windows and Linux, Melenovsky said.
Four percent of servers shipped in 1994 ran Windows; in 2002 that had increased to 60 percent. And now, Windows has become a significant presence in the higher-end task of housing databases: In 2002, 15 percent of database servers ran Windows.
Pain and recovery
The current pain in the server arena is a microcosm of the broader information technology market, which IDC said has spending of about $1 trillion per year.
"2002 was the worst year ever in our history. 2001 was the worst year before that," Gantz said of the overall IT market.
There are two reasons the IT market has been slow to rebound, Gantz said.
First, companies no longer are installing new computing equipment but are retrofitting it with complicated existing infrastructure, a much more expensive process. He likened the difference to the construction of two tunnels: The Chunnel bored previously untouched ground between England and France at a cost of $387 million per mile, while the "Big Dig" beneath Boston is costing $2 billion per mile because it occupies already extensively used ground.
Also slowing a rebound is conservative spending in the face of "wild cards"--unpredictable and often global events such as terrorism, accounting scandals, wars, volatile oil prices and now the SARS virus, the last of which IDC estimates has lopped $1 billion in technology spending this year.
Two triggers for IT spending are on the horizon, Gantz said. In the shorter term--likely 2004 and 2005--a modest boost likely will take place as companies pay for the most needed upgrades. And in the longer term--toward the end of the decade and beyond--IT infrastructure will have to accommodate a huge growth in radio-frequency identification (RFID) tags, digital dog tags that can be used to track consumer goods, cars in toll booths, bank notes and many other items.
RFID tags are used today to track cattle and clothing products, but they will expand in use dramatically--especially as today's passive RFID tags that respond only when bathed with an outside signal are replaced with tags that actively broadcast information, Gantz said.
"The population of these things will be in the billions," Gantz said, and computing equipment will have to keep up. "Suddenly, out in the distance, the need for bandwidth goes up astronomically."
Today, a total of roughly 300 petabits of data traverses the world's computer networks each day. That will increase to about 5,000 petabits per day in 2007, and with the advent of RFID tags in the next decade, will surge to about 100,000 per day in 2013, IDC projects.
Gantz also identified several other growth areas:
For the first time, more digital photographs will be taken this year than film; computing equipment will have to accommodate the storage and transfer of those images.
Internet-based phone calls, or voice over IP (Internet Protocol), will increase in use tenfold by 2007. "You can lower your line charges enough to more than pay for the new equipment. This is very scary for telecommunications companies. They're looking at potentially permanent erosion of their business," Gantz said.
In instant messaging, "fantastic growth is expected" in businesses, with the 20 million corporate instant-messaging users of 2002 expected to increase to about 280 million in 2007, Gantz said. "This is one those technologies that chief information officers hate, but it's being built into new applications. People are bringing it in anyway," he said.
Mobile Internet use will increase significantly by 2007, with about 35 percent of cars equipped with "telematics" equipment for Internet access and 65 percent of Internet users employing mobile devices such as cell phones for Internet services.
Outsourcing will increase as new technologies such as Web services make it easier to move different business processes to different computer systems. Highest on companies' lists of processes that could be outsourced are employee training, information security, customer service, human relations and procurement, Gantz said.