Are Servers Doomed?

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Sorry, IBM (NYSE: IBM  ) . Tough luck, Hewlett-Packard (NYSE: HPQ  ) . Dig deeper, Dell (Nasdaq: DELL  ) . Servers -- once considered the Big Engines of a web-driven economy -- are the least attractive option for technology investors, according to analysts at Credit Suisse.

Everyone wants a Prius, even in IT
More specifically, Credit Suisse says that tech buyers will spend more on blade servers, as the sort of Big Engines that made Sun Microsystems (Nasdaq: JAVA  ) rich in the '90s lose their luster.

"We believe blade servers will be the most strategic segment for vendors," reads a research report excerpted in Barron's. "We believe blades will represent the key source of industry profit and revenue growth in coming years. Our forecast suggests that blade servers will account for 21.3% of server revenue in 2012, up from 10.3% in 2008."

There are good reasons to trust Credit Suisse's numbers. But before I get into why, you may want a little background about blade servers. Picture your PC's innards -- the green "motherboard" that has a bunch of chips glued to it -- and you'll have a rudimentary idea of what a blade server looks like. Essentially, it's a naked server, a chip-heavy slab of pure processing horsepower that slides into a cabinet, where it is cooled by fans and connected to data-storage devices.

Stripped-down servers are cheaper to buy and arguably cheaper to maintain. They don't have as much "stuff," and they can be swapped out when needed, like an oil filter for your car. IT managers love this. Server makers love it less, because there isn't as much profit to be had in the blade business. (On the flip side, they may also sell more blade servers than Big Engines -- potentially great news for commodity specialists such as Dell.)

More broadly, the shift to blades suggests a broader trend towards common, lower-cost systems and open-source technology. Big Engine makers like IBM are adjusting by pitching whole packages of servers, software, and professional services.

Who needs an operating system?
Others, like Oracle (Nasdaq: ORCL  ) , are adjusting by concentrating on specialist hardware devices known as "appliances." CEO Larry Ellison waxed enthusiastic about his company's try at a database appliance called Exadata during this week's earnings conference call.

Exadata, built in concert with HP, is winning customers from Teradata (NYSE: TDC  ) , IBM, and others, Ellison said, because its highly tuned combination of hardware and software vastly outperform Big Engines that run databases and a mess of other stuff. Specialization breeds performance, according to Oracle.

What's more, Big Engines are like PCs, in that they depend on operating systems. Some run versions of Windows, others Solaris, and still others Red Hat's (NYSE: RHT  ) particular blend of Linux. Ellison envisions future appliances like Exadata not needing a server OS.

"We have the Oracle database running directly on a [virtual machine] with no intermediate operating system, so that's actually up and running," Ellison said during the earnings call.

Think about that, and then think about a recent announcement from the Norwegian browser maker, Opera. Its new service, which it calls Unite, is designed to transform average PCs into -- wait for it -- servers.

"We are giving developers a chance to develop applications (known as Opera Unite services) that directly link people's personal computers together, so that you can connect with one or more of your friends at the same time. It all happens through the browser, so no additional software has to be downloaded," wrote Opera's Lawrence Eng in a recent blog post.

No wonder Sun fell into Oracle's waiting arms. Big Engines, its bread and butter, are beginning to look irrelevant even on the Web.

The future isn't served
All the same, investors shouldn't panic. All of the remaining server suppliers are fairly well-diversified, and those who businesses are built around data centers that serve content -- Akamai, for example -- are as important as ever. Server usurpers such as Opera Unite are still very early in their development.

But they're here, they're aggressive, and they want their pound of plastic. Be vigilant, tech investors. This is a war worth watching.

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Fool contributor Tim Beyers owned shares of IBM and Oracle at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy serves fresh disclosure-y goodness daily.

Read/Post Comments (5) | Recommend This Article (5)

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  • Report this Comment On June 25, 2009, at 5:10 PM, kpinvest wrote:

    This is one of the reasons I like VMWare so much. You can buy one really big, expensive server, and with virtualization, run multiple instances of servers on one piece of hardware. Let's say you run six different instances of Windows Server 2008 on one machine. That's less space (obviously), but it's also less power consumption, less air conditioning that's required, and less physical maintenance overall.

    Of course, if that one piece of hardware does bite the dust, you're up a certain creek without a paddle. But, if one of the virtual servers dies, it's just a file that you can restore from a backup. Downtime and redundancy are minimal.

    Virtualization still has a long way to go, and I think the future of the technology is bright; I will keep my bull cap on.

  • Report this Comment On June 25, 2009, at 5:47 PM, tennis0034 wrote:

    You shouldn't provide condolences to HP -- they're the largest manufacturer of Blades in the world!

  • Report this Comment On June 26, 2009, at 11:17 AM, joetemple wrote:

    While it is very easy to look at the volume of Intel based servers and point to it as an overwelming force in the tech industry, I would remind you that folks have been looking at PC volumes and predicting the demise of "big iron" for over 20 years and it still has not happened. IBM maintains very healthy Mainframe, Supercomputer, High End UNIX, and even High End Intel server businesses. A lot of the services and software revenue that drives growth in the current economy is tied to solutions involving infrastructure and significant part of that is driven by consolidation and virtualization on large machines.

    There is still a lot of money in large machines and if the virtualization trend continues that part of the market will grow revenue. The reason for this is a very simple truth that comes for system theory. LARGE MACHINES WILL ALWAYS HAVE HIGHER AVERAGE UTILIZATION THAN A BUNCH OF SMALL MACHINES DOING THE SAME WORK. Since virtualization is about gaining efficiency by driving utilization up, virtualization will drive demand for large machines. Also, there still remain workloads which only large machines can accomplish due to legacy code, serial nature of the work itself, or dynamic updates to massive amounts of data that does not partition well.

    I would argue that Sun's troubles come, not from the large nature of its servers, (only some of them are large), but rather its inability to build large servers that are effective at virtualization. The best entree for both Sun and HP)into the virtualization market is VMware, Xen or other x86 hypervisors. This drives them toward Intel servers for a big part of current business, leaving only legacy stuff on their "larger" servers. However, it is not the largness of the servers that matters it is the effectiveness at virtualization.

    If efficiency and virtualization go back out of fashion then "blades everywhere" will move forward as stated in the article. However, given current economic conditions movement away from efficiency won't happen any time soon.

    The dynamic we really have in the server marketplace is "good enough efficiency" at the best price v "a good enough price" at the best efficiency. Local conditions will cause businesses to choose one or the other and sometimes a combination of both. In any case the strongholds for both points of view will reside with the encumbent technology or legacy at most enterprises.

  • Report this Comment On June 26, 2009, at 12:32 PM, jpanspac wrote:

    Ellison is either confused or intentionally being misleading. Virtualization does not eliminate the need for an OS. It gives the computer the ability to run multiple OSes.

  • Report this Comment On June 26, 2009, at 12:54 PM, joetemple wrote:

    What people mean when they say "eliminate the OS" is usually that the OS is buried under a layer of abstraction. This is no a new idea.. It goes back to at least to the forrunners of IBM System i. (System 3, System 32, 34,36,38, and AS/400). The OS is there but the user doesn't have to interact with it or explicitly buy it.

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