In the world of computer hardware, servers are sexy. They're more profitable than desktop and notebook PCs. They're more complicated, too. And they drive sales of high-margin add-ons such as storage systems, software, and services.
And in the world of servers, blade servers are one of the most attractive places to be. In the first quarter, blade-server revenue grew 24% year over year, twice the rate of the server market overall. It was the second-fastest-growing segment behind mainframes, which are benefiting from an IBM (NYSE: IBM) product refresh. Blade servers now account for more than 15% of server revenue, and their share is expected to continue growing.
Another horse in the race
But blade servers have recently gone from a three-horse to a four-horse race. New entrant Cisco (Nasdaq: CSCO) took 9.4% of the market revenue in the first quarter to claim third place, according to IDC. Former No. 3 Dell (Nasdaq: DELL) was bumped to No. 4 with 8.2% share.
Cisco isn't just picking on Dell. Hewlett-Packard (NYSE: HPQ) retained its first-place position but saw its market share decline to 50.0% from 53.4% a year earlier. Likewise, IBM kept its second-place position but saw its market share decline to 20.2% from 28.1% a year earlier.
The biggest loser
It's not personal; it's just business. But Dell may feel as if Cisco painted a target on its back. With x86 systems -- which use industry-standard processors from Intel (Nasdaq: INTC) or Advanced Micro Devices (NYSE: AMD) -- accounting for 90% of blade revenue and blade servers accounting for 20.5% of x86 server revenue, Dell is the server vendor most exposed to Cisco's assault. It's the only major server vendor that offers only x86 systems. And in the first quarter, it lost market share and had the worst growth of the Big 3 server vendors.
Worldwide Server Systems Factory Revenue, Q1 2011
|
Vendor |
Q1 2011 Market Share |
Q1 2010 Market Share |
Q1 2011/Q1 2010 Revenue Growth |
|---|---|---|---|
| HP | 31.5% | 31.8% | 10.8% |
| IBM | 29.2% | 26.9% | 22.1% |
| Dell | 15.6% | 16.0% | 9.7% |
| Oracle (Nasdaq: ORCL) | 6.5% | 6.4% | 13.6% |
| Fujitsu | 4.8% | 6.4% | (15.6%) |
| Others | 12.3% | 12.5% | 10.6% |
| All Vendors | 100% | 100% | 12.1% |
Source: IDC's Worldwide Quarterly Server Tracker, May 2011.
Foolish takeaway
Although there's a lot going right at Dell -- and wrong at Cisco -- servers are a key source of profits for Dell. If Cisco continues to gain traction in blade servers, it could nip Dell's potential turnaround in the bud. It could also exacerbate HP's agony and act as a slight drag on IBM, but Cisco's impact on HP and IBM is likely to be far less noticeable and unlikely to change their course. Success in blade servers is also unlikely to turn Cisco around.
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