Hardware: Tightwad IT Buyers Loosen Up

Technology is like oxygen to the folks at Sabre Holdings Corp, which runs the
world's largest computerized airline reservation system. But in the midst of a
travel industry slump, Sabre's vaunted computer systems aren't exempt from
penny-pinching. When it came time to upgrade key hardware last year, it bypassed
pricey, proprietary servers and purchased cheaper off-the-shelf machines running
hot new microprocessors. The results: Sabre saved as much as 80% on costs, yet
got faster speeds. Says chief technology officer R Craig Murphy: "You want
the price to go down and the performance to go up."

Such is life for tech buyers today. As the global economy slowly strengthens,
corporations and consumers are investing in new tech gear again. But most haven't
shed their post-bubble preoccupation with keeping spending in check. This means
that, for the next few years, revenue growth is going to come slowly in the
computer hardware business. After a 4.8% gain in 2004, worldwide sales of PCs,
servers, storage, networking, and peripherals should tick up modestly by 6.2% in
2005, to $386.6 bn, according to research firm International Data Corp. (IDC).
"There's still a little devil sitting on the shoulder of the IT
manager," says IDC Senior Vice-President Crawford Del Prete. "It's
saying: Before you go out and install hundreds of servers, think."

Smart
devil. With customers unwilling to spend money on gear just to get the latest
models or most recent version of Windows, the focus is moving to equipment that's
both less expensive and more useful.

That outlook is one reason there are big differences in growth among the
various slices of the server market. Overall, this hardware segment's growth
will be 4.2%, to $53.7 bn. Linux servers, though, should see a hearty 26% sales
jump, while servers running Windows will grow 8.1%, according to market
forecaster Gartner. Meanwhile, mainframes and servers based on proprietary
versions of Unix-mainly from Hewlett-Packard, IBM, and Sun Microsystems-should
see sales continue to shrink. That's partly a reaction to higher price tags.

So 2005 could be the year that Unix servers finally cede their market-share
lead to machines running Microsoft Corp.'s Windows. Gartner forecasts that
Windows servers this year will grab 36% of spending, compared with Unix' 33%
and Linux' 11%. Soon, says Kevin Johnson, Microsoft's head of sales, it's
going to be a game of "Windows vs. Linux."

Small is Better

Similar frugality suffuses the storage business. Undeniably, there's major
demand for more capacity. A recent survey of 80 companies by Sanford C.
Bernstein & Co. found they had, on average, 25% less data storage space than
they need. But to fill this gap, companies increasingly are opting for cheaper
hardware that comes in smaller building blocks. This gear typically gets
less-than-critical data, such as old e-mails that must be archived under
Sarbanes-Oxley regulations. IDC says overall storage sales will notch just a 5%
gain, to $27.3 bn. And sales growth in midsize storage systems should be two to
three times greater than in high-end hardware, predicts Bernstein analyst Toni
M. Sacconaghi. "That trend is inexorable," he says.

Spotlight 2005 Prospects

Across the hardware industry, intense global competition and low component
costs are constantly pushing prices down. For proof, look no further than the PC
sector, where punishing price wars have only accelerated consolidation. Most
recently, IBM agreed to hand off its legendary PC business to China's Lenovo
Group, a company with lower costs and global ambitions. The deal would form the
world's third-largest PC player, with about 9% of the market, and extend
Lenovo's market lead in China, one of the few remaining growth areas for PCs.

Sofa Strategy

There are still some sunny spots on Planet PC. The longtime dream of
convergence between computing and consumer electronics is finally a reality.
After years of effort, PCs based on Microsoft's media center software are
showing signs of acceptance. More than 1 million such models have been sold,
allowing users to control the PC and whole entertainment systems by remote from
the sofa.

PC giants hope the jazzy new media centers will offset slowing home PC sales
and become the beachhead they use to sell everything from plasma TVs to digital
music players. Even better, media centers are selling for an average of $1,300
apiece, twice the price of plain-vanilla desktops, according to NPD Group. The
PC camp will have to contend with a resurgent Apple Computer, still enjoying
success with its iPods and basking in praise for its iMac G5 desktops. "The
consumer market's going to feel like the Wild West," says IDC's Del
Prete.

The business market is much bigger, though. That's one reason Dell, which
concentrates on corporate customers, was able to push its overall PC market
share to 18% in the third quarter, up from 16% the year before. Among
gadget-happy professionals, the hottest thing will be phone and personal digital
assistant combos; sales of these smart handhelds should jump 43.5%, to $16.3 bn.

Economic pressures are easing, there's plenty of cash on the books, and
tech executives are more optimistic than they have been in four years. But the
bitter memory of the tech wreck lingers, leaving everyone cautious about how
much to invest in new hardware. "The engineer in me isn't necessarily
always happy," says Sabre's Murphy. But his inner bean- counter?
Ecstatic.

By Andrew Park in Dallas in BusinessWeek. Copyright 2005 by The
McGrraw-Hill Companies,Inc