Server Wars

By Frank Gibney Jr. With Reporting by Cathy Booth Thomas/Austin, Eric Roston and Julie Rawe/New York and Chris Taylor/San Francisco

You might think, with all those rock-bottom prices in the ads and all those stories of mergers in the business pages, that there's a war on in the PC business. But you would be wrong. The PC wars are history. Dell won, by virtue of its manufacturing and marketing supremacy.

The new computer war is being fought on a higher plane, over the powerful data crunchers known as servers. Created as attachments to enable refrigerator-size mainframe computers to serve many clients at once, servers now have become the main attraction--helping firms of all sizes do business more efficiently through the Internet. Whether it is Merrill Lynch grinding out data on the world's financial markets or Target Stores tuning its nationwide supply chain to suit this hour's online sales, there has never been more demand for the kind of computing muscle and speed that the newest servers deliver.

At stake is a $60 billion worldwide market for hardware alone. That market includes the servers themselves, which can be as bulky as an IBM mainframe or as slender as a cigarette carton, as well as storage devices. All this iron runs on a variety of software: operating systems and protocols from Unix to Linux and, increasingly, Windows. There are battles over whose protocols are open to adaptation (guess where Windows stands?) and whether there ought to be more standardization. But those conflicts are being resolved by a vast new parallel business called Web services, which encompasses the software and technical expertise that enable companies to exchange data seamlessly.

Some firms package this new realm and call it enterprise computing. Others call it edge computing, and it really is: powerful servers and software at the core of a business allow employees at the edge to work more efficiently and less expensively from anywhere, packing lighter laptops and handhelds and accessing vast amounts of software and data that reside...wherever. As Jonathan Eunice, president of the consultancy Illuminata, puts it, "Increasingly, customers are saying, 'I want a solution, and I don't care how you do it.'"

The gladiators in this war include plenty of familiar names, though their number gets smaller by the year (remember Digital Equipment Corp., or Data General?). At the top of the pile are such titans as Sun Microsystems and IBM; they are in gigabyte-to-gigabyte competition for customers like Citigroup that need the world's most powerful machines and can pay more than $1 million a pop for them. Below Sun and Big Blue are innovators like Hewlett-Packard that develop much of their own technology or firms like Compaq that buy it through acquisitions (as Compaq bought DEC in 1997).

But this is a two-front war, with a lot of skirmishing also at the lower end of the market. High-powered computing has traditionally relied on the costly, time-consuming R. and D. that makes Sun and IBM legendary. But continuing advances in microprocessor technology enable Intel to sell blazing-fast chips that, when run by Microsoft Windows, allow some manufacturers to sell very fast servers for as little as $2,500. That trend is broadening the market for servers, making them affordable to almost any firm that wants to sell on the Web or manage its inventory better. That, naturally, is the arena in which Michael Dell has elected to pick his next fight.

This contest is worth following not only for those who work or invest in the computer industry but also for buyers of servers, software and services. Those customers look like the only sure winners, as fierce competition makes the technology more capable and less expensive every day. Here are the major players, their strengths and weaknesses, and the odds that they will be around to fight another day.

SUN MICROSYSTEMS Scott McNealy has been preaching the gospel of network computing ever since Sun was founded in 1982, and in 1995 the company launched Java, now the world's most popular software platform and the heart of the action for many a high-end Unix server. The company benefited wildly during the dotcom boom as hundreds of Internet start-ups snapped up Sun's powerful servers.

Unfortunately, just as many companies went bankrupt when the boom went bust, flooding the market with new and used Sun products at a fraction of their retail price. Sun's sales have dropped for two straight quarters. Sun's share price fell from $65 in September 2000 to a low of $7.50 late in 2001. And McNealy was forced to lay off 3,900 of his 43,000 workers.

Sun is committed to its unique, premium combination of proprietary hardware and open software, but McNealy, the industry's biggest Microsoft critic, won't go near Wintel-based machinery. That could be a problem as customers flock to cheaper solutions. Employment website monster.com for instance, switched from a Sun system to Dell's standard, plain-Jane servers more than two years ago and has no interest in switching back. "I don't need to have the latest whiz-bang server," says chief technology officer Brian Farrey. "Dell instead asked, 'How can we make your life easier?'"

But don't count Sun out. Any analyst will tell you Sun knows the server game better than anyone else. It is a creative technology company with a relatively simple solution to computing that draws great respect. McNealy in September introduced Sun's fastest server yet, the SunFire 15K (list price: $4.1 million) and has reorganized itself behind a powerful operating suite called SunONE (for Open Network Environment). R.-and-D. spending is still an industry-leading 15%.

COMPAQ AND HP These companies would not be attempting a merger if they thought they could win the server wars on their own. Battered by Dell in PCs, they are relying on HP's technology and Compaq's scale to mount a combined offensive. Based on HP proprietary technology, HP servers are currently neck and neck with Sun and IBM at the top end of the market. But the legendary Silicon Valley mainstay is also at the forefront of the move toward module computing, in which companies combine servers like Lego blocks and the servers keep getting smaller and more powerful, thanks to fast new chips like the Intel Itanium 64. Combining Intel and Windows gives HP the ability to compete down-market with Dell--and Compaq.

Therein lies one problem. Frank Harbist, general manager of HP's volume system business, admits his orders are still to beat Compaq, which is out to top HP. Analysts point out that the longer the merger takes, the more customers--fearing for the stability of both companies--will head for the safety of Dell, Sun or IBM.

DELL The world's No. 1 computer manufacturer and No. 1 Internet retailer is now also the leading producer, for the huge U.S. market, of Intel-based servers that sell for less than $100,000. According to research group IDC, 80% of all the servers now sold are based on Intel chips. Michael Dell is a loud advocate of this trend toward standardization. And he is counting on the server and storage business, estimating that within a few years, it, along with notebooks, will account for 70% of Dell's revenues. That server push has helped this year: the company announced $7.5 billion in third-quarter revenues, only 10% less than last year's--the best result in an industry marked by worse declines.

The Dell strategy is to leverage its manufacturing and marketing talent to enable it to deliver the kind of out-of-the-box, high-volume operation that made it dominant in PCs. Its partnerships with database king Oracle and Linux maven Red Hat (Linux is an increasingly popular--and open--alternative to Windows for Intel-based servers) give customers access to powerful options. And in November Dell announced a co-branding arrangement with data-storage king EMC. Although Dell operates mostly at the low end of the market, the idea is to climb steadily toward faster and more expensive machines as the technology arrives.

Dell's big drawback: it's still a box company. The Texas titan relies almost completely on Intel and Microsoft for its technology, whereas all its competitors have hefty research facilities of their own.

IBM Big Blue wants to fight this war on every front, from the entry-level segment to the market for the gnarliest, priciest servers. Just days after Sun rolled out its SunFire 15K, IBM unveiled its p690 "Regatta" server. Each company claims in full-page ads that its machines can whip those of its rival.

IBM is hedging its bets with an all-out push into what it calls global services, under which it will come to your company, any company, with the hardware and software you need to do business. Want a system that runs on Linux? Windows? Unix? No problem. "IBM comes to the table with a palette of colors and says, 'Paint any picture you want,'" says Dan Kusnetzky, a vice president of IDC. IBM has been slashing prices on its hardware lately. Sun's McNealy claims that IBM's strategy is "to get the hardware in there for free and bury you with global services."

Fact is, customers want these services, and IBM has a deep enough bench to provide them. IBM is paying closer attention than ever before to customers, and recent innovations in "self-healing" technology brought about by the company's eLisa development program may eventually lead to a realm in which fewer IBM tech service personnel have to move in with you to make sure your systems keep running smoothly.

The question for IBM, however, is simple: can Big Blue do everything for everybody? Or will it be bled dry in one market segment after another by competitors who are focused on doing one thing well?

--With reporting by Cathy Booth Thomas/Austin, Eric Roston and Julie Rawe/New York and Chris Taylor/San Francisco