Sun redefines entry-level servers

The company has slashed prices of entry-level Sun Fire servers by a third. It will have to do much more to bring home the bacon say Rahul Neel Mani & Shipra Arora

Technology heavyweight Sun Microsystems is dropping prices of its servers, across the board, as it wants to leave no stone unturned in its efforts to grab a slice of the (Standard Intel Architecture Server) SIAS pie. This is especially true in India. With BFSI and telecom companies expanding their networks and Small and Medium businesses looking for expansion, it makes sense for Sun Microsystems to mount an assault. The company’s tryst with low-end servers isn’t new, but it is trying to create a fresh footprint for itself in the volume server market by ushering in a frenzied price war in this segment. It recently slashed the price tag of its entry-level offering, the Sun Fire V20z, by a third. The starting price for the V20z server with a 2.2 GHz Opteron 248 processor now stands at $995.

Sun’s aggressive push to sell cheaper servers is being seen by experts as a bid to gain a foothold in the SIAS market, which is all about unit shipments. According to Sanjit Sinha, Head, Hardware Research Group, IDC India, price cuts by any vendor in the volume segment clearly indicate its strategy to gain market share. Says K.P. Unnikrishnan, Director Marketing, Sun Microsystems India, “We set out to show the world that Sun is a low-cost leader. To that end, we completely revamped our low-end server and storage lines. We are now unquestionably on the offensive, with powerful resources at our disposal, and an excellent product calendar.”

The question remains whether IBM and HP, who have traditionally dominated the x86 market, will rise to the bait? Can Sun sustain itself at such low margins? If yes, then for how long? Whatever the answers, 2004 will be the year for low-end servers from Sun with the company going after SIAS sales in a big way. In its fourth quarter (ending June 30, 2004), the company’s x86 server shipments jumped 115 percent over the previous quarter, while overall the company posted an increase of 4.3 percent in revenues to $3.11 billion. “Sun’s recent financial results prove that its strategy of cutting costs and going after the x86 server market is working,” says Unnikrishnan. Gartner’s vendor scorecard for Sun in the Asia Pacific also endorses the fact that the company is doing pretty well in terms of business volumes. However, at the same time, it also adds that the company must do better in terms of continuing to broaden its non-SPARC range. SPARC being proprietary does not give Sun the required exposure in markets that are moving towards a standards based approach.

With a couple of new additions to its line up, the company is not relying solely on pricing. “Traditionally we have been the leaders in the RISC/Unix space and in the last two years we have been offering compelling products on x86. Our commitment to the low-end server market is reiterated by our increasing portfolio of offerings in the x86 segment,” says Unnikrishnan.

Indian Impact

One reason for Sun’s fast growth is the development of entry-level servers catering primarily to the SMB segment, says K P Unnikrishnan

Sun’s march towards x86 could translate into significant gains for the company in the Indian server market as SIAS revenues make up almost half the overall server market in India (as per IDC). This apart, the x86 segment is also estimated to be growing at a significant rate. As per IDC sources, while Sun leads the non-x86 server market in India, its position in the x86 server space has not been very strong. The aggressive pricing strategy adopted by the company might well open the x86 floodgates for Sun in India.

Why the low-end interests Sun?

Sun is relying on the entry-level server market to drive its overall server business. As per the company, the preliminary reports for Q2, 2004 server sales from Gartner Dataquest show that Sun’s year-on-year (Y-o-Y) server volume grew by around 35 percent, outpacing all other tracked vendors and topped the overall market growth rate of 24.6 percent. In addition, Sun is the only vendor in the top five that had double-digit growth in terms of server volume on Y-o-Y and a quarter-to-quarter basis. Sun attributes this growth, in part, to its growing focus on the low-end. “One reason for Sun’s fast growth is the development of entry-level servers catering primarily to the SMB segment,” says Unnikrishnan.

According to Sinha, the opportunity in low-end servers is huge. “IT penetration is increasing and there is a correlation between desktop PC penetration and the low-end server market.

Greater market penetration automatically creates a scope for volume servers in the next few years,” he adds. He further explains that as the breadth of penetration increases the first impact is on the low-end or the volume server market. Some of the key markets driving growth will be SMB, BFSI and retail. Last year SBI alone accounted for a deal of 12,000 servers, primarily low-end boxes. The branch automation exercises of large public sector banks, insurance companies and government departments in India that are on a computerisation spree will propel this market segment. What these users need is a low-end single or dual processor box that can take care of branch operations.

The low end server market is the most effective strategy when it comes to bolstering volumes, something that Sun requires at this point of time. Worldwide, vendors are turning towards the low-end server business. The first quarter findings of research firm Gartner reveal that the low-end server market will be the next big driver for growth. As per Gartner, in Q1 2004 there was a clear move by users towards low-end servers and Linux. The number of servers sold worldwide grew by around 27 percent in Q1, 2004 over the same period last year, corresponding growth in revenue terms for server hardware stood at 9.3 percent due to the growth in the low-end market. Sun’s emphasis on lower-priced servers resulted in its revenues falling by 12.5 percent but unit shipments rose by 26.5 percent in Q1, 2004 as compared to the same period last year. According to Sinha, besides the good growth potential in the low-end server market, it also helps in getting the vendors a larger footprint, coverage and visibility for the brand.

Who’s buying low-end servers?

Sun has SMBs in its sights. SMBs (especially those in auto ancillaries, pharmaceuticals and textiles) that are part of the supply chain of a larger enterprise are looking at investing in servers and networking. These companies are using business intelligence tools to extract information from ERP systems. As the latest versions of enterprise applications consume more memory and CPU power (than their predecessors). SMBs are moving from high-end desktops to entry-level servers. The downward trend of server pricing has helped accelerate this transition.

However, SMBs do not have the budgets or resources of their larger competitors and they tend to be conservative with regard to their IT spending, especially in sluggish market conditions. These firms typically wait before making technology investments and may not have formal budgeting procedures for capital equipment spending. It is this very hurdle that Sun is trying to address through its aggressive pricing. “We constantly come out with unique offerings and programs for the market to counter this hurdle on the SME front,” explains Unnikrishnan.

Rivals strike back

Sun is not the only player singing the volume tune. The server market has been stagnant for the last few years. It was only after mid-2003 that this market segment looked up because telcos and MNCs started buying again. SMBs were the only segment buying through all this turmoil which is why the big four vendors all launched a slew of low-cost servers. HP, with its ProLiant range and ML series, made a big splash. IBM wasn’t far behind. The BladeCenter and xSeries servers from Big Blue have made inroads. Dell in launching new PowerEdge models and it is a potential challenger in this category. Even if Sun pares its prices to the bone, huge discounts on list price are being offered by the other vendors. Sun’s competitors may offer bigger discounts even if they cannot match it on list price.

HP and IBM have a distinct advantage as these two companies have already made deep inroads into enterprise data centres. Sun will have its work cut out. Dell, with its direct sales model has made significant progress in the Indian market with an 11 percent share (as per Q1, 04 IDC estimates). Amit Midha, Director Enterprise Sales and Marketing, Dell APAC says, “Dell will position [PowerEdge] as a midrange server because even at a slightly higher price people can not afford to miss this opportunity.” Dell customises the servers at the time of manufacturing because they are all built to order (BTO). The PowerEdge 1800, 1850, 2800 and 2850 servers will be available with factory installed Windows 2003 Server and Red Hat Linux 3.0 (Enterprise Ed.). The 1850 and 2850 servers are available at Rs. 104,376 and Rs. 108,206 respectively.

Says Vaibhav Phadnis, country manager, ISS, enterprise server group, HP India, “The ProLiant ML150 brings affordable computing to customers. The server can support up to 250 clients for applications from file and print, messaging and entry-level databases.” Powered by Intel Xeon 2.4 GHz processors, it also provides availability through hot pluggable discs. The server has a Intel 7501 chipset, 12 GB memory scalability, and up to 730 GB of storage capacity all this at a price of Rs 94,990 (excluding taxes). In all these cases, the prices are >$1,700-1,800 and do not match Sun’s prices which are less than $1,000. In a price sensitive market like India, Sun may well grab a big chunk of business.

However, Sun is not taking the risk of riding purely on cost. According to Unnikrishnan, “Cost is not the only driver in this market. It is the value proposition.” Sun recently expanded its Solaris x86 portfolio with three new systems running AMD’s 64-bit Opteron processors in a bid to deepen its penetration into the x86 segment. The new Sun Fire v40z server is a four-way version of the Sun Fire v20z. The Sun Java Workstations W1100z and W2100z are targeted at the entry-level x86 server market with one CPU and two CPUs respectively. All three systems can run Solaris, Linux and Microsoft Windows.

What Sun needs to get right

According to Sinha, reach and distribution will play a major role in any vendor’s SMB strategy. Sun agrees as Unnikrishnan points out that the SMB market is channel-driven. The company is enhancing its presence in B and C towns through its channels. Sun’s partners in India like Wipro, Accel ICIM, Tech Pacific, Ingram Micro, HCL, CMC and Tata Infotech will play a key role in determining the success of Sun’s low-end strategy in the country.

The coming quarters will reveal if Sun’s gambit has succeeded. One thing is certain, with profit margins being on the higher side, vendors will drop their prices further to catch up with Sun if its market share goes up dramatically.

shipra@expresscomputeronline.com

rahul@expresscomputeronline.com