Servers: More Bells And Whistles, Please

Tech buyers aren't just looking for bargains now -- they want innovation

Soon after Jeffrey Skolnick took over as head of the Center of Excellence in Bioinformatics at State University of New York at Buffalo in 2002, he bought 2,000 low-end servers from Dell Inc. (DEL ). The center needed new computers for the massive calculations required for drug discovery, and Skolnick was thrilled at what he thought would be huge savings. "I was very optimistic," he recalls. Turns out, it wasn't that simple. The servers crashed regularly, and Dell's techies didn't fix the problem. A Dell spokesman declined to comment on Skolnick's complaint but said other customers at the university were happy with its products.

One year later, Skolnick ordered new servers -- and this time he looked for more sophisticated technology instead of low prices. He bought an IBM (IBM ) system comprised of 500 "blade" servers -- complete servers packed onto thin cards that plug into refrigerator-size racks like books on a shelf. While pricey, blade servers save on space and electricity costs. Another big advantage is IBM's software, which keeps the blades working in concert so none sit idle waiting for the next task. Skolnick expects the gear to cut his operating costs by 70%.

The moral of the story: Innovation is making a comeback in server land. During the tech downturn, corporate buyers scooped up bare-bones servers and made lean-and-mean Dell the fastest-growing server supplier. The $46 billion server industry looked on course to follow PCs, moving inexorably toward commoditization. But that vision turned out to be simplistic. True, Dell continues to thrive and servers are built increasingly on top of standards such as Windows, Linux, and Intel (INTC ) chips. But just as hiring a slew of composers won't get you a Mozart symphony, there's still a need for engineering ingenuity to accomplish complex jobs. "Standards are good," IBM CEO Samuel J. Palmisano said in a recent speech. "But there's incredible room for innovation."

That's having a major impact on computer makers -- especially Big Blue. A Feb. 27 report from researcher IDC shows IBM, which spends more than $1 billion on server research and development each year, is thriving in most segments of the market. It dominates the blade market, the fastest-growing server sector, with a 35% share. It boosted its share of the mid-tier Unix market by four points in 2003, to 26.4%, largely because of a cutting-edge server based on IBM's own Power 4 processor. Most surprising, IBM is growing faster than Dell in key segments of the low-end server market. According to the IDC report, Big Blue had the fastest percentage growth for the past eight quarters in the market for Intel servers, which cost $1,000 to $25,000. One key reason: IBM sells servers with 8 to 16 Intel chips, while Dell has stopped selling those more complex systems. IBM is using its knowhow in 16-chip servers to deliver other innovations: Customers can rent supercomputing power from Intel clusters in IBM's new hosting centers.

Not that it's time to pass the hat for Dell. Its strategy of hyperefficiency, including spare investments in technology, helped Dell boost its share of the server market last year to 9.1% from 8.2%. IBM, meantime, increased its lead to 31.6% from 29.3%. In fact, Dell and IBM act like pincers in the server market, with IBM squeezing from the top and Dell from the bottom. Sun Microsystems Inc. (SUNW ), in particular, has lost share.

Now, Sun and Hewlett-Packard Co. (HPQ ) are making their own bets on innovations. This summer, HP will start selling a high-end server that has 128 processors, up from 64 chips. Meanwhile, Sun has been investing heavily in what it calls "throughput" computing. These are servers with a chip that can run two programs at once -- leading to an 80% improvement over processing one job at a time. The company expects to introduce the first throughput server this summer.

No question, cost is a critical factor in the server market. But buyers such as Skolnick are showing that once again, innovation is important, too.

By Spencer E. Ante in New York

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