High-End Wintel-Based Rackmount Servers - The Big Get Bigger

Market Overview

The high-end rackmount ("RM") Intel-based server market is defined as servers (usually more than one) mounted into floor-standing ("FS") equipment racks, plus storage and other peripherals. Prices range from ~$10K for a bare-bones configuration to $100+K for a "loaded" configuration. This market grew out of the need for customers to put more equipment in limited floor space, so that systems grow up first, then out. (Note that this analysis covers only multi-system configurations; it does not cover mainframe-style systems, in which a single system fills one or more racks.)

Current market size for all rackmount servers is estimated at ~$5 billion, and is estimated to grow 40%-60% (to $7-8 billion) in the next 1-2 years [Source: TEC]. The expected rapid growth within the segment is due to two main factors: the historical trend of increased server shipments as a whole, and a shift from floor-standing (also called "pedestal", "tower", and "mini-tower") servers to rackmount units. With the exception of "internet appliance"-like servers (driven by ISPs and similar internet-related businesses), the shift will be more pronounced in the high-end markets than in the low-end and mid-range market. Thus, it can be considered a predatory market, its prey being the floor-standing market.

As with the server market in general, this market appears to be consolidating. Presently there are only four vendors with significant (10% or more) market share. Consolidation is expected to continue.

Adjacent markets are clusters - traditionally built using numerous free-standing systems. "Cluster in a box" appears to be a market which will grow significantly in the coming years, in some cases supplanting the current many-box configurations.

Market Winners

The current market share leader is Compaq (~30%), followed by Dell, HP, and IBM (~10-15% each). Compaq's leadership stems from its historical dominance in the server marketplace, coupled with quality products. In addition, Compaq offers the greatest diversity of rackmount products, and has overcome the problem of a 42U rack that won't fit (upright) through a door. This provides a significant advantage, because it helps allow Compaq (or its resellers) to ship racks with systems already installed, without worrying if the customer needs "ten men and a boy" to tip it over just to get it through a door.

Compaq is having problems trying to shift from a VAR/channel-based distribution model to a direct sales model (similar to Dell's). In addition, there have been complaints regarding the difficulty of building and installing racks and servers - customers don't want to spend an excessive amount of time installing systems, nor do they want to be forced into hiring an expert to do it for them. Compaq has recently redesigned their racks, but it is too early to tell if the complaints have been addressed. A potential weakness is, paradoxically, its breadth of offerings - if there is no clear distinction between products, confusion can arise. For example, Compaq presently offers five distinct 4P models.

Market Challenges

By virtue of their current position in the PC server market, the current market challengers are Dell, HP, and IBM. All offer rack solutions (servers and racks) similar to Compaq's offerings.

• Dell: Dell's strengths are its price, delivery, customer satisfaction, and its aggressive pursuit of Compaq. Its weaknesses are in server management (incl. remote mgmt.), relying on HP's OpenView in this area.

• HP: HP's strengths are its system design, and its reputation for quality. Its weakness is its "incomplete" product set: Compaq and Dell have 4U/4 CPU systems, whereas currently HP's smallest 4 CPU system requires 7U in the rack.

• IBM: IBM continues to try to make inroads in the high end, and the Netfinity 7000 M10 has won numerous magazine and show awards, as well as performing extremely well in various benchmark tests. However, IBM presently lacks a 4P/4U server to compete with Compaq and Dell.

Market Losers

Due to the consolidation taking place in the Intel-based server industry - the big four are controlling an increasingly greater percentage of sales volume (~75% in June '99 vs. 66% in 1998 vs. 58% in 1997) [Source:IDC]. In this marketplace, the "also-rans" will be those vendors who are not in the top four in sales (e.g. Data General, Unisys, Toshiba, Micron/NetFrame), or those whose names are not associated with either datacenters/data warehousing, clusters or ----similar high-end environments.

Market Predictions

This market will continue to grow, both in size and market share, over the next 3-5 years. This market share increase will come at the expense of freestanding systems. Market share split will change from 40%-50% RM vs. 50%-60% FS (now) to 70+% RM vs. 30% FS within three years. In raw numbers, this is expected to translate into $10 billion per year in 2001, showing a CAGR of approx. 30%.

The "cannibalization" of the freestanding server market will be due to the desire to increase processing density per square foot of floor space. In addition, customers want the ability to add servers without having to rearrange their computer room. Although the initial cost for installing a rack system is a little high for some users (>$1000 for a typical rack), customers are willing to make the tradeoff for increased flexibility for the future.

Regarding the top four vendors: Compaq will retain its lead and even increase its overall share, but will lose 3-5% of its lead over Dell in the next two years. Dell will continue to hold the #2 position, but will gain market share at the expense of Compaq and the small players. HP and IBM will maintain their relative positions. (60% probability)

Vendor Recommendations

1. Vendors need to continue to provide more functionality per unit volume - "density is king".

2. Vendors need to provide product breadth - a solution for all product segments in the rack server spectrum.

3. Vendors can differentiate themselves by making installation and configuration simple and easy (across a number of areas). One way this can happen is for vendors to pre-build the systems, so that the customer doesn't have to go through the pain and expense of getting the racks built on-site.

The long-term winners will be the already-large vendors. Market consolidation has already started, and is expected to continue. The long term losers will be the smaller vendors, e.g. Unisys, Data General, Toshiba. Although it is unlikely (<10% probability) that the majority of smaller players will disappear completely in the next five years, market share for the "big four" is expected to increase (80% probability). To move into the large-market-share crowd, smaller vendors will need to provide something extra, whether a significant new technology, or attacking a previously-overlooked market. However, given the relative maturity of the market and technology, and that Intel's technology drives all the vendors, we do not believe there will be a technological breakthrough significant enough to accomplish this. (80% probability of non-breakthrough)

User Recommendations

Users who are building datacenter and data warehousing infrastructure have the most immediate need/want of rackmount systems. In addition, ISPs can utilize a large number of 1U or 2U appliance servers in a single rack. In general, customers looking to locate a large number of processors (or processors and drives) in a central spot will gravitate to racks and rackmount equipment.

High-end rackmount systems are not recommended for small groups with modest computing needs, e.g. workgroup/small department-only computing environments.

Regarding particular vendors: because of the consolidation underway, users may want to be cautious about choosing one of the smaller players in the market.