SERVER & WORKSTATIONS: From Heady Highs to Dismal Lows

July 2001: It is amazing to see how much action the staid and unglamorous
servers segment has seen. Growth has jumped to 46% in unit terms and to 76% in
revenues. Enterprises of all shapes and sizes have servers on top of their IT
shopping lists, and vendors are happy about that.

July 2002: No need for an analysis of the performance of the server segment
in fiscal 2001-02–the gloom is evident. Blame it on the slowdown, for everyone
else is, but there are also squeezed IT budgets to point the accusing finger at.
A dismal year has led to growth rates plummeting in all categories. And the
final tally–down a massive 20% in unit terms and 15% in revenue terms.

Unlike fiscal 2000-01, ven dors did not have a market of over 400 ISPs to
cater to. Back then, the market was awash with orders from those waiting to
deploy servers before they lost out on a headstart–everyone was automating,
going on-line and kicking off new business plans. Fiscal 2001-02 started on a
gloomy note–ISPs were gone, as were Internet data centers and dot-coms. The
only hope for server companies to protect their numbers lay in the
IT-intensification drives in the banking, finance, services, insurance and
telecom sectors. Also, expectations from the prospects in the manufacturing
segment were high, with companies exhibiting definite trends of integrating
various applications into a common Web-based solution. Not to forget was hope
hinging on orders from companies deploying SCM, ERP or CRM solutions–the
market hoped that orders would cascade into the server market.

Compaq was #1 in overall sales, including PC servers, registering flat revenues of Rs 476 crore in fiscal 2000-01 Sun Microsystems retained its lead in the non-Intel server marketplace, but even its revenues were down 24% The banking and financial services space–coupled with telecom–drove growth, making up 50% of total sales

No one, however, seemed to have foreseen the severity of the slowdown. IT
budgets were frozen or dropped altogether, and this sent sales into a downward
spiral. But the vendors’ pain was the CIOs’ gain. For this breed of IT
people, the last fiscal offered a key bargaining tool that will not be forgotten
in a hurry–marketers, of course, would like to forget the wafer-thin margins
they were forced to live with at the soonest. Given the ebbing sales figures,
vendors were forced to play the price card. This, in fact, became the biggest
reason among vendors for not signing a deal–"We walked out of the deal
because the price got simply too low to make sense." Chances are you have
heard that one many times by now. Another favorite was–"The competition
is undercutting to the point of stripping." However, CIOs still got the job
done, given the undercutting, and by pitting one vendor against the other. In
some cases, prices were driven down by as much as 50-60%–also setting a trend
for future deals. Apart from hitting the vendor bottomline, the process also
extended the sales cycle due to multiple rounds of quotations and
counter-quotations.

THE BATTLE BEGINS: Sun Microsystems led the pack, with demand coming in from the animation, graphics, and CAD/CAM verticals. However, SGI’s focus on high-end computing and R&D saw it gain 33% and inch closer

Market movers

So who were buying servers? The BFSI segment did not let vendors down, and
accounted for the largest chunk of demand for servers. The segment continued to
whet server appetites, with investments in server consolidation and core banking
investments. Given the rapid strides made by private banks, their public sector
counterparts moved heavily into upgrading their back-end processes–read core
servers to enable them to compete on fronts like e-banking and ATM facilities.
BFSI was closely followed in the demand drivers’ list by the telecom segment,
which revved up its infrastructure investments considerably. Huge investments
happened in basic services, with telecom players racing each other to put their
infrastructure in place. In mobile telephony, and key players expanded their
networks to keep pace with the rising demand.

RESURGENT SGI: SGI was closing in on the top, as it shifted focus and moved out of the Intel space and showed 19% growth. The manufacturing, education and government segments were the leading growth drivers

While the manufacturing vertical pitched for 23% of total server demand (IDC
India estimates), this figure was lower by 16%, when compared to the previous
year. A little sunshine came from the government, which increased its spend by
over 110% and accounted for 8% of total server demand. The education segment
also pitched in, doubling its purchases from 3% in fiscal 2000-01 to 6% in
2001-02. In the traditional workstation marketplace, Sun Microsystems led the
pack, with demand coming in from the animations, graphics, and CAD/CAM
verticals. While Sun dropped 28% in units terms, SGI, with its focus on the
high-end computing, education, research and entertainment segments, gained 33%
and inched closer to Sun in a battle for the leadership position. However, in
the personal workstation space, SGI discontinued its Intel workstations–the
battle here is now being fought between the new HP and IBM.

Top players

So who’s the biggest of them all? In the server (RISC and Intel) segment,
Compaq continues its dominance and leads the race by quite a margin. In fact, in
a slowdown year, Compaq has increased the gap between itself and the next player
(Sun Microsystems) by over Rs 191 crore, from Rs 100 crore in fiscal 2000-01.
This is in consonance with global numbers.

According to Gartner estimates, Compaq led the global server market with over
23.3% of the total of over 4 million server shipments, followed by Dell and IBM.

While Compaq India showed flat growth, thanks to Sun’s drop of 24%, it
increased its hold in the overall server market.

Sun’s revenues fell from Rs 373 crore to Rs 285 crore, while HP was the
other server vendor showing a significant drop in sales, down to Rs 200 crore
from Rs 340 crore in the previous year. Sun Micro, meanwhile, continued it
dominance in the non-Intel space with a 33% marketshare, but a few notches down
from its 2001-01 marketshare of 37%.

DIPS AND DOWNS: It was a slow market through the year with the same addendum–unit sales were up in this space, with Compaq again leading. But in value terms, growth was negative for two of the top three

The star players were again Compaq and IBM–Compaq edged out HP (though now
only from a historical perspective, post the latter’s merger with Compaq) for
the number two slot and increased its marketshare to 25%, from 22% earlier.

IBM also managed to strengthen its position and gained 5% to corner a
marketshare of 19%. Both vendors cannibalized marketshare from leader Sun and HP
(now in fourth place). In the Intel space, Compaq, with its ProLiant series,
remained unchallenged and posted a growth of 4%, even as the market dipped by
over 14%. While IBM maintained its hold, Compaq’s growth was due to the fall
of HP and HCL. HP was down 56%, while HCL slipped by 35%.

Strategy

The key word for all vendors was "survival". With the market
severely underperforming, vendors tried all permutations to outperform the
market. The clear strategies–beef up channel partners and expand reach to have
presence in the ‘B’ & ‘C’ class cities. HP joined hands with TCS and
PriceWaterhouse Coopers, hoping that the server model would be led more by
consultancy-led customized solution and that it could gain with the help of
these giants.

LONE CRUSADER: How tough the year gone by was can be gauged from the fact that the best performer in this space showed flat growth. Even overall leader Compaq showed a negative 2% growth

HP managed to sell a few Superdomes, but unlike in developed markets, this
model will take time to catch the fancy of the buyer. Last year’s IT budgets
were under severe pressure and they perceived consultancy firms as high
cost-accruing. Also, HP re-looked at the government market and aggressively
sought empanelment with government agencies. The move helped HP net orders in
the government space. HP introduced the blade server in the last quarter of the
fiscal and tried to add value in the Intel server space, concentrating on
four-way servers. But uncertainty about the merger and the future of its
products and services became a constraint for the company–while future
uncertainty was a key concern for HP’s clients, IBM has no trouble on this
front.

But then, IBM had already had its own breed of trouble when it launched its
‘eServer’ campaign in 2000–aggressive ad spends, however, ensured that
there were no re-runs this year. According to analysts, IBM was the most visible
among all the vendors and won many new accounts despite a global drop in
numbers. Moreover, IBM is possibly the only company that kept its marketing buzz
alive with new ideas like bringing mainframe capabilities into its Intel servers
(X-series). Another strategy adopted by IBM was to expand its reach and it
included more channel partners into its fold. This also meant less dependence on
its direct model via IBM Global Services and an in-house server team. The tieup
with Wipro was a big step on that front. Today, IBM has associations with all
major systems integrators in the country, like TCS, CMC, Accel ICIM, DCM and CMS
Computers.

BLUES AWAY: Sun increased its hold, but it was IBM that brought in the best results–it showed a 17% jump in revenues on 60% growth in unit sales. The numbers, however, also indicate crashing per-unit realization

In terms of verticals, IBM maintained its hold in the core-banking and
high-performance computing segment. However, IBM still faces problems in the
telecom space, and according to market analysts, it is the lack of enough market
penetration that is constraining growth in this space. The much-touted fastest
server, ‘Regatta’, was launched with fanfare but according to analysts, it
did not find many too many takers. The highlight for IBM has been getting into a
tieup with Wipro, which has been a major Sun partner and contributes about
45-50% of Sun Microsystems India’s revenue. Will it bring in the necessary
clout? Only the numbers recorded in the ongoing year can answer that one–whether
it was just another high-profile media event or whether IBM actually gains from
this relationship.

HERE COMES THE SUN: It was Sun Micro that led for the second consecutive year, but even its revenues took a beating, down 24% from the previous year to Rs 285 crore

But IBM’s gain could be Sun’s pain. With Wipro accounting for over 45-50%
of Sun’s revenues in India, any possible tilt from Wipro towards IBM could
spell bad times for Sun. But let’s take closer look at Sun’s performance in
the last fiscal. Sun did not escape the embrace of the slowdown and saw revenues
tumble from Rs 373 crore to Rs 285 crore in the server segment. But it is a long
shot before it loses its leadership position. In the high end, Sun sold its high
end E15K to Citibank and Tata Teleservices. Other deals included Texas
Instruments, Reliance, IIT Delhi, and Anna University. In the telecom segment
they signed on the dotted line with Hutchinson, BSNL and Bharti. Sensing the
uncertainty amongst HP and Compaq customers, Sun initiated a shift over campaign
in December and offered a buy back and trade in offer for HP- Compaq customers.
Given the success of the campaign, Sun is planning a similar exercise in the
current year. Also Sun made efforts to get into the B & C class cities and
tied up with Indian major HCL Infosystems, partly to offset Wipro and partly to
leverage HCL’s reach and make inroads into this fast growing segment. Also
with the HCL tie-up, Sun hopes to leverage its partner’s links in the
government segment to achieve significantly breakthroughs. Meanwhile Compaq
continued its leadership in the overall servers as well as PC servers’ space.
The ProLiant series were unstoppable and none of the other vendors could manage
to get close to Compaq. The Compaq charge and customer keenness for its products
is evident given the fact that while units dropped by 2%, Compaq managed to
increase its sales by 4%. In a slowdown year, Compaq actually increased its
average sales value from Rs 2.6 lakh to Rs 2.8 lakhs. Again the channel network
supported Compaq to the helm and Compaq made all the effort to pamper its
channel partners. Also its tie up with all the major SIs like CMC, Tata Elxsi
and Tata Infotech paved the way for the success of ProLiant.

Himalaya Futuristic did well and increased sales thanks to the banking and
telecom segment. However the Alphas faced some problems. This was partly because
of the merger uncertainty and partly because of the lack of communication
regarding Alpha’s future. Among the major orders bagged by Compaq in the
non-Intel space includes Orange, Canara Bank, HLL and NTPC. Also old accounts
like Indian Railways MCF and Orange gave Compaq repeat deals and chipped in the
dominance of the server market.

Current outlook

So what’s the outlook for this year. Firstly, while HP-Compaq is operating
as a single entity, other vendors are trying to exploit the continued
uncertainty amongst CIOs. As a vendor mentions, their strategy would be to ‘deal
with the nuisance value’ of the merger. Sun, for example, will have a shift
over campaign for HP-Compaq customers. However in the first quarter, HP has done
exceedingly well and cracked deals like IOC and the SBI deal, so it remains to
be seen whether the other vendors are successful on this front. But don’t
forget that the new HP top brasses happen to be ex-Compaq people, from a company
that has led the Indian hardware market.

BFSI ON TOP: The slowdown had an impact on purchases in the financial sector too, but it remained by far the hottest sales driver for the beleaguered servers segment

Another FY01-02 trend expected to dominate is the vendors targeting the 'B'
& 'C' class cities and therefore active channel engagement. In terms of
verticals, most of the vendors will continue to focus on the sweet spots–telecom
and BFSI. However other verticals like government and education could provide
some saving grace for the vendors. On the Intel server side, Blade serves could
be the surprise winners, especially in the front-end server. According to
Gartner’s forecast Blade servers shipments will ramp up from 84810 units to
over a million by 2002.

Vendor-wise, Sun is trying to move away from its few focussed accounts in
software, banking, and telecom. This year the focus seems to be on expanding
reach and targeting the government segment (with lot of help from HCL). IBM,
while doing reasonably well in the domestic Indian market, hasn’t been able to
achieve the kind of market penetration it has long hoped for. The tieup gives
IBM a foot into Wipro Infotech’s large domestic market and the company will
continue to expand its reach by increasing its channel partners. And finally,
the new HP will try to leverage the Compaq brands in its kitty. Also to keep in
mind is that with the ex-Compaq team in place and well-versed with the market
scenario, conditions and customer locations, dislodging the new HP in the server
market could be well nigh impossible.

TEAM DQ