Tuesday, May 7, 2013

Google and Facebook Shaking Server market

See more about server marketplace at Google, Facebook Top Buyers of Intel Server Chips

and at SSD, Flash, iPad, PC, Tablet, and Servers Architecture

Insightful, timely, and accurate semiconductor consulting.Semiconductor information and news at - www.maltiel-consulting.com

Google and Facebook Are Shaking Up the Server Market

The 'Net giants are shunning traditional suppliers for cheaper, made-to-order hardware.

Hewlett-Packard and Dell, the top two global vendors of server computers, are caught in a whirlwind of change.
The personal-computer market, which generates enormous revenue for both firms, gets most of the attention when the companies' attempts to right their businesses are analyzed. But the humble server, which many assume is the stable part of the computer world, is experiencing far greater change -- change that, in coming years, could pay off in a big way for the duo, or cause them tremendous pain.
Hewlett-Packard (ticker: HPQ) made up 26.5% of worldwide server sales volume in the December quarter; Dell (DELL), 21.3%. Servers handle a myriad of tasks in corporate- and Internet-data centers, from serving up files to desktop computers in offices to processing online purchases to streaming video to tablet computers. Last year, the server market was worth roughly $52.5 billion on shipments of 9.7 million units, according to research firm Gartner.
That's relatively minuscule, compared with 2012 PC shipments of 352 million units. But the corporate market is a bastion of profits that offsets the low margins on PCs.
In the fiscal fourth quarter ended in January, for example, Hewlett-Packard's enterprise group, although not a perfect proxy since it sells networking and storage equipment in addition to servers, accounted for almost 16% of HP's total profit. PCs produced only 3% of the company's earnings, even though they generated greater revenue.
And unlike the personal-computer market, which is fighting tablets and smartphones for attention, servers are constantly finding new uses, and they're not going away anytime soon. "Servers have always been a gluttonous market," says Gartner analyst Jeff Hewitt, meaning the industry just can't get enough of them. Richard Fichera, who follows the industry for Forrester Research, even argues that building server farms is "the élan vital [vital impulse] of modern society."
Fichera and Hewitt agree that a couple of massive changes are under way.
One is that large Internet stars such as Google (GOOG), Facebook (FB) and Amazon.com (AMZN) are building their own servers by picking out parts and having machines assembled to spec by some outfit other than Dell or HP, often one of the Asia-based "original design manufacturers," such as Inventec, Quanta or Wistron. Google and Amazon "have incredibly low-cost infrastructures" as a result of using this commodity hardware, says Fichera.
Public and private organizations, such as schools, government and smaller companies, don't have the resources of a Google, but they're eagerto get the kinds of savings that can come from buying cheap, no-name hardware.
The category of "other," meaning not HP and Dell, made up 35% of server unit shipments in the fourth quarter, up from 31% a year earlier. Hewitt expects the figure to rise this year.
"The substitution of commodity servers for name brands is a real thing," observes Fichera. He cites a "large Wall Street firm" that has more than 75,000 servers, of which 20% are nonbranded. Hewitt says that Google and other nonbrand buyers have "been one of the primary drivers of unit growth" in the server market for some time.
The other trend is toward simple, modular servers -- basically, appliances -- that perform one dedicated task. As Hewitt sees it, the software vendor VMware (VMW) brought about a revolution in servers by allowing companies to use a single machine for several tasks simultaneously. The inadvertent outcome of VMware's software is that some of the server "workloads" -- video serving, database queries -- are now as big as the entire database market in terms of the number of "virtual servers" they employ. That makes it feasible to create specialized, stripped-down servers built for each kind of workload.
And he observes, "Where it gets interesting over the next three to four years is that these low-power processors in our cellphones are all that's needed for certain kinds of server workloads that don't demand a lot of individual CPU horsepower."
Both trends are being helped by the breakdown of the old WinTel regime in computing. Says Hewitt: "For years, if you did what Microsoft (MSFT) and Intel (INTC) told you to do in terms of product design, you could make money." Now, "You can still listen to Intel, but there are other influences weighing on server design."
HP and Dell realize all this, of course. They hope that some outfits that aren't Google will look to them to wrap their brand and support around the cheaper hardware -- to mainstream it. HP and Dell can certainly build server appliances.
But for the moment, both trends favor the no-name vendors of Asia, along with the Silicon Valley appliance start-ups. "There is market pressure on Dell and HP from both sides," says Hewitt. The outcome, he adds, "will depend, in part, on how they respond and whether they want to end up squeezed into a higher-margin but increasingly lower-volume segment of the market."
THE STAR OF BLACKBERRY'S fiscal fourth-quarter earnings report on Thursday was undoubtedly the phone maker's chief, Thorsten Heins, who resonated calm, confidence, and intelligence as he batted away the frantic questions of the business news anchors. This is a man who will go places.
And what of the business? What we know is that BlackBerry's subscriber base is declining; it fell by three million last quarter. Shipments of the new BlackBerry models are off to a good, but not great, start, with one million shipped in the quarter. And the company produced a surprise profit in the three-month period.
The stock (BBRY), which is up almost 22% this year, trades at just 1.2 times tangible book value, and the company has a still significant cash pile of $2.9 billion. All that probably puts a floor under its shares, around their Thursday close of $14.44. What we don't know is whether sales of the new handsets will speed up or slow down, and by how much. The mobile market is fiercely competitive, with Apple (AAPL) and Samsung Electronics (005930.Korea) dominating sales. We don't know how quickly -- or whether -- subscribers will keep sliding. But the drop last quarter -- the quarter in which BlackBerry introduced new phones -- isn't encouraging.
Probably, earnings estimates will rise in coming weeks as the next new model, the Q10, comes to market. This is a stock that still trades based on the premise that BlackBerry the company can be a profitable third- or fourth-place player in the smartphone market. For now, based on those hopes, the stock will continue to levitate. 

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