Servers' Rising Sun

Recent research indicates that overall growth of the worldwide server market has slowed. According to IDC, “Market demand for volume servers waned somewhat in 4Q05, with spending growth of 6.1 percent and midrange enterprise servers posting a revenue decline of 11.5 percent in year-over-year comparisons.” This slowdown, coupled with the, “potential negative affects from increases in server utilization through the use of virtualization technologies,” has lead IDC to “lower midterm expectations for overall server spending.” However, IDC does expect growth to continue; it projects a compound annual growth rate (CAGR) of 2.7 percent over the next five years and estimates that by 2010 customer spending will surpass today’s $55.5 billion to reach $62.8 billion. During the same period regions of rapid growth will include the emerging markets of Central and Eastern Europe, the Middle East, and Africa region, which is showing a CAGR of over 9 percent representing $4.6 billion and Asia/Pacific (excluding Japan), with a CAGR of 5.8 percent representing $9.2 billion. In the midst of the market shift, one company in the arena is shining, Sun Microsystems.

In April of this year Jonathan Schwartz replaced co-founder Scott McNealy as Chief Executive Officer and President of Sun; since then the company has been rolling out new products and continuing to grow. Though gaining it recent attention, and not without merit, some say Sun’s growth needs to be seen in perspective; as Tom Yager of InfoWorld puts it, “having majority share of a dwindling market is nothing to crow about, and that a 10-foot rise from a mile-deep hole is hardly a rocket-like ascent.” However, Yager and others still see Sun’s ascent as unique; in the same article Jean Bozman, research vice president for worldwide server research at IDC, is quoted as saying, “Sun is a standout.” The achievements of Sun are all the more notable since they represent the fact that the company is indeed making its way out of a “mile-deep hole.” According to InformationWeek, the dot.com bust hit Sun particularly hard, “Sun was among the most injured IT companies during the bust, suffering a dramatic drop in shares from about $64 in 2000 to less than $5 last week.” CEO and President Schwartz believes the company is now poised to recover from that blow, “I believe we're in what precedes a bubble, which is global build-out.” he said. Data shows that he is on the right track.

According to Reuters, Sun recently reported that its server business, “returned to growth in the company's fiscal third quarter for the first time in five years, [and] continued growth in the fiscal fourth quarter ended June 30.” Further, “Revenue growth in Sun's most recent quarter exceeded analysts' average estimates.” In its quarterly survey of the server market IDC indicates that Sun increased its share of the worldwide server market 1.7 percent in the three months ended June 30, it now holds 12.9 percent, and that its server revenue jumped 15.5 percent to $1.59 billion for the same period. Though not number one in the overall server market, Gartner reports that Sun is the number one server vendor in the global Unix space.

Putting an interesting spin on Sun’s growth in the Unix space, Schwartz says that since 70 percent of the licenses for Solaris 10, its operating system based on Unix code, are being used with IBM, Dell and HP hardware, competitor growth is actually offering Sun opportunities. These opportunities have helped Sun, however, the company did not get to this position without risk. Most notable among its risks was Sun’s move to open-source Solaris. According to Tom Yager, “The only intelligent argument in favor of taking Unix down was that it was closed source. So Sun took the bold step of open sourcing its crown jewel, Solaris, to take the ‘proprietary’ millstone from around its neck.” Opening up Solaris was a risk, but one that is paying off. Referring to a Gartner report, Forbes says that, “After former Chief executive Scott McNealy's decision to open-source its Solaris 10 platform, the company's Solaris-based servers are now found in the majority of global Unix server shipments, enjoying a 56.9 percent share.”

While Sun may be the leading Unix server vendor, it is not number one overall. However, according to IDC, Sun was the only large computer maker to gain share in the worldwide server market in the second quarter. Sun is indeed moving up; it recently took back the market’s number three spot, one that it relinquished to Dell in the third quarter of last year. In relinquishing its seat Dell moved back to the number four position, dropping to 10.3 percent of the market from 11.1 percent in the first quarter of 2006. It’s revenue slipped accordingly, down 1.3 percent to a year-over-year estimate of $1.27 billion. The number one and two vendors, IBM and Hewlett-Packard Co., also saw year-over-year declines; to 31 percent and 27.8 percent respectively.

Is Sun’s rise indicative of anything? According to Tom Yager it is. “Sun's growth is good news for the entire industry. It proves . . . that trends are useless in predicting the future. Find players with vision, drive and patience, mixed with a desire to please customers as well as shareholders, and it's easy to pick the winners. Sun's a winner.”

More information on this topic can be found at:

Northern Light's Software Market Intelligence Center

and in the following articles:

Sun Ahead in Server Market
ComputerWorld, September 18, 2006
Inexplicably, we've gotten through much of 2006 without Linux completely kicking Unix out of the market. Analysts and Linux faithful are at a loss to explain how Sun Microsystems' server revenue climbed almost 14 percent since the second quarter last year, pushing Sun ahead of Dell in the rankings. Gartner pegs Sun's Unix server market share at 56.9 percent.

BEA Leads App Server Study
eWeek, September 18, 2006
Evans Data is expected to release soon a study on application servers that shows that developers chose BEA Systems' WebLogic server as the No. 1 application server on the market. BEA is expected to play the study result prominently at its BEAWorld conference, which runs Sept. 18-20 in San Francisco, sources said.

Sun to Target Intersection of Storage, Services, Server Markets: Schwartz
InformationWeek, September 13, 2006
Sun Microsystems Chief Executive Officer and President Jonathan Schwartz said Sun would continue to target customers who view information technology as a "weapon" rather than those who view it as a cost to be cut. Speaking at the company's annual media day, Schwartz said the company will expand in servers, software, services, and storage, while focusing on where those areas intersect.

Sun Micro Regains No. 3 Server Spot from Dell
Reuters, August 23, 2006
Sun Microsystems Inc. regained the No. 3 ranking from Dell Inc. in the market for business server computers in the second quarter as it launched new products, researcher IDC said on Tuesday. Sun also was the only large computer maker to gain share in the worldwide server market in the second quarter, according to IDC. Dell had usurped the No. 3 position from Sun in the third quarter of 2005 and held it through this year's first quarter.

AMD's Race for Server Space
BusinessWeek, August 22, 2006
For all its recent success, there's still one major goal that has eluded Advanced Micro Devices, the perennial second-place runner in the market for computer chips. Despite having made rival Intel sweat over the past year by taking up residence in servers and PCs from Dell, AMD has always labored with a long-term goal in mind: a 30% share of the combined market for PC and server chips.