March 21, 2007 4:00 AM PDT

Server buyers shift toward muscle machines

Defying the prevailing pattern of the computer industry, server prices increased at the end of last year as customers showed a new preference for more powerful machines.

"For the first time in 10 years, we've seen the average selling price marketwide go up year-over-year," said analyst Matthew Eastwood. In the fourth quarter of 2006, worldwide server sales increased 5.2 percent to $15.2 billion but shipments stayed level at 2 million units, meaning that the average server price tag went up from $7,308 to $7,690.

Nobody expects the market to return to the days when million-dollar mainframes ruled the roost, but customers took a step in that direction. Seeking to cut the operational costs that come with the fleets of lower-end servers that dominate the market today, they opted instead to load more work onto a smaller number of more powerful servers.

According to analysts and server makers, virtualization and multicore processors helped trigger the change. Virtualization can make a single server more efficient, running more software at the same time in separate partitions called virtual machines. And multicore processors let a single chip handle the work of two or four single-core models.

But both technologies require servers to be equipped with more memory, more hard drives, more network capacity, and presto! Up goes the price tag.

Server makers accustomed to building a business on products that constantly sell for less could be expected to revel in the prospect of price hikes. But it's not all sunny news: on Tuesday, IDC pruned 4.5 million systems and $2.4 billion in sales out of its forecast for Intel- and AMD-based servers, adjusting for customers' preferences to consolidate work onto fewer, more powerful systems.

The fourth quarter was something of an anomaly, and server price declines will resume, IDC analyst Michelle Bailey predicted--but they'll be less dramatic than in earlier years. "The declines are not going to be what they used to be," she said.

For more than a year, Hewlett-Packard has seen increases in the average price of an x86 server--those using Intel's Xeon or Advanced Micro Devices' Opteron processors, said Paul Miller, marketing chief for the company's x86 server business.

He agrees with Bailey's assessment that price declines won't be the same. "Price points are pretty close to the bottom for the acceptable feature set. I don't think you'll see too much more price erosion in the market," he said.

But Jay Parker, director of Dell's PowerEdge servers group, is betting on a new round of bigger price cuts. Dell has profited from the shift toward lower-end systems and urges customers to buy systems with multicore processors in favor of bigger-iron machines with four, eight or 16 processors.

"We expect that to begin this year but accelerate next year," Parker said. "You'll see IBM and HP try to prop that up, and you'll see Dell try to drive that down."

CONTINUED: Why HP's servers sell for more…
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