Consolidate or go for grid of cheap servers?

Most fortune-500 companies have already done some consolidation. The benefits of server consolidation have been huge - the tens or hundreds of servers, each with different patch levels and service contracts contributing to low utilizations have been replaced by a few high-end servers. Nicholas Carr, in his blog asks if the server industry will suffer as a result of higher CPU utilization (resulting either from virtualization or consolidation)?

SAP's Charles Zedlewski provides a good counterargument, why the server industry will be ok after all.

The real metrics that organizations should consider are
1. Costs per processing unit,
2. Volatility of computing demand.

In the long term, enterprises of the future will go with a limited number of highly consolidated servers running some virtualization software, yielding about 60%-70% in utilization, with additional computing power available on-demand to run complex statistical and marketing programs, provided by OEM vendors like Sun, IBM or other providers using generic hardware.

I wouldn't be too worried about any drastic reduction in computing demand, simply because firms would (hopefully) buy this additional lower cost processing capacity to make better business decisions. The only server manufacturers who would truly go away are server divisions or companies that make expensive, generic hardware (Dell, HP?).

Space and power - the drivers for hardware design

Once upon a time, hardware and software costs were a significant portion of a company's IT budget. As costs of harware and software reduced, companies are more concerned about data-center costs, which are now a significant portion of IT budgets. Some of these costs are also incurred by other departments in the company, and facility managers have to take these factors into account when desgning a data-center.

Data-center costs are - real estate costs, power costs for HVAC and computer equipment.

The IT eco-system

Here is a pictorial representation of the IT ecosystem I put together. I will use this as a basis for the next few posts.

SAP and Microsoft

Two software leaders SAP and Microsoft, are slowly reentering the On-demand marketplace. These two software giants have not targeted the early adopters in the Gartner Hype cycle, and usually have enter the field later than most other cutting edge ISVs. Consequently, they have used their deeper pockets and other resources to steadily erode marketshare of other incumbents in the field.

Also, while SAP has provided some limited resources to open source projects like SAPdb, and Microsoft may be forced to license its software in the EU, both companies have largely eschewed open-source and continue to rely on traditional software business models.

Both companies a strong partner program to complementors (ISVs, distributors, systems integrators and Value added resellers) significant incentives to partner.

Are they competitors or do they complement each other?

Currently, SAP and Microsoft products largely complement each other. SAP and Microsoft are also collaborating in Mendocino to integrate back-office ERP with front-office Microsoft Office products, possibly using .Net and NetWeaver.

However, Microsoft, with its newly renamed Dynamics products is targeting the small and medium business (SMB) ERP markets, the same market that SAP is increasingly focused on to increase its growth.

We will know in the next few months whether the Dynamics products start gaining traction in the marketplace or whether a the product requires a lot more than a new name to be successful.

Salesforce earnings 2/22

Salesforce has undoubtedly been a phenomenal success - with a value-proposition targeted at companies' frustration with lengthy CRM installations. Well, once the installation is complete, customers are only going to be satisfied if the product is fundamentally feature-rich. Also, customers in a subscription model are always going to look at the pricing of comparative products.

With Microsoft announcing its entry into the CRM market, SAP entering the On-demand CRM space, and open source offerings from Daffodil and SugarCRM , the added-value provided by Salesforce has significantly diminished. Salesforce has been forced to add value in other areas - which it has tried to do with the Appexchange platform, but I cannot think of any serious venture-funded ISV developing software to be solely on the Appforce platform, especially with so many other CRM products entering the market.


Service delivery has also been a problem in the recent past, with two high-profile outages, after which the company has started disclosing root-cause and service availability at trust.salesforce.com , but not before several blogs started complaining about the lack of visibility and corporate IT departments going into the "I told you so mode".

While the quality of earnings is high due to the subscription model (since customers provide recurring revenue and a huge attrition is unlikely to occur), I am very skeptical that Salesforce deserves a P/E ratio of 151 when even SAP and Microsoft are trading at more modest multiples.

Dell's poor outlook for next year

Dell's performance as a cost-leader using a direct-sales channel is being threatened. As other manufacturers have gained significant efficiency in manufacturing, they are able to manufacture and sell higher quality products to customers. VAR Business provides a good overview of Dell's malaise. As VARs find more ways to beat Dell , we haven't seen any major changes in Dell's strategy apart from some blathering about manufacturing computers with AMD chips .

With enterprise markets tending to move more towards HP and Lenovo, and consumers switching towards whitebox computers, Dell must work fast to recapture these market segments where it has been most successful in the past.

At least, Rollins isn't busy giving away hardware and chuckling at competitors as they take market share away.

Sunset?

Sun Microsystems' future does not look very bright. They have "successfully" opensourced the Solaris operating system with 4 million downloads, and more recently have started giving away Niagara servers on free trials.

While open-source and try-before-you-buy hardware may build communities and be very good for the customer, I fail to see how any of this will make Sun any money. More likely, if there is a widespread adoption of Solaris, it will be on whitebox servers.
Sunfire servers may be state of the art and may only sip juice, but they more than 3 times more expensive than whitebox servers.

Sun has also been notorious for failing to make money on good products (Java?). I see Sun continuing to dig a deeper hole for itself in the next few quarters, until a company with money and focus on monetization(maybe Oracle) buys them.

It is also funny to see Schwartz chuckling at HP.

"We all enjoyed the site HP put up to promote Sun's Niagara announcement - it's worth a good chuckle."

Only time will tell who has the last laugh.