Tightwad IT Buyers Loosen Up

-- Healthy demand will keep sales of new computers on the upswing -- But remembering the slump, companies will favor smaller, cheaper systems

Technology is like oxygen to the folks at Sabre Holdings Corp. (TSG ), which runs the world's largest computerized airline reservation system. But in the midst of a travel industry slump, Sabre's vaunted computer systems aren't exempt from penny-pinching. When it came time to upgrade key hardware last year, it bypassed pricey, proprietary servers and purchased cheaper off-the-shelf machines running hot new microprocessors. The results: Sabre saved as much as 80% on costs, yet got faster speeds. Says Chief Technology Officer R. Craig Murphy: "You want the price to go down and the performance to go up."

Such is life for tech buyers today. As the global economy slowly strengthens, corporations and consumers are investing in new tech gear again. But most haven't shed their post-bubble preoccupation with keeping spending in check. This means that, for the next few years, revenue growth is going to come slowly in the computer hardware business. After a 4.8% gain in 2004, worldwide sales of PCs, servers, storage, networking, and peripherals should tick up modestly by 6.2% in 2005, to $386.6 billion, according to research firm International Data Corp. (IDC) (IDC ). "There's still a little devil sitting on the shoulder of the IT manager," says IDC Senior Vice-President Crawford Del Prete. "It's saying: 'Before you go out and install hundreds of servers, think."'

Smart devil. With customers unwilling to spend money on gear just to get the latest models or most recent version of Windows, the focus is moving to equipment that's both less expensive and more useful. Take Sabre's 140 new servers. They cost less to buy and maintain, in part because they run Linux, an open-source operating system. But since they're designed around a 64-bit chip from Advanced Micro Devices Inc. (AMD ), they're able to handle complex tasks such as quickly sifting through millions of domestic airfares for the lowest price, a job that earlier cheapo servers never could have handled. Now, Sabre is looking to move its international fare-search engine to a similar system.

That outlook is one reason there are big differences in growth among the various slices of the server market. Overall, this hardware segment's growth will be 4.2%, to $53.7 billion. Linux servers, though, should see a hearty 26% sales jump, while servers running Windows will grow 8.1%, according to market forecaster Gartner Inc. (IT ). Meanwhile, mainframes and servers based on proprietary versions of Unix -- mainly from Hewlett-Packard, IBM, and Sun Microsystems Inc. (SUNW ) -- should see sales continue to shrink. That's partly a reaction to higher price tags.

So 2005 could be the year that Unix servers finally cede their market-share lead to machines running Microsoft Corp.'s (MSFT ) Windows. Gartner forecasts that Windows servers this year will grab 36% of spending, compared with Unix' 33% and Linux' 11%. Soon, says Kevin Johnson, Microsoft's head of sales, it's going to be a game of "Windows vs. Linux."


Similar frugality suffuses the storage business. Undeniably, there's major demand for more capacity. A recent survey of 80 companies by Sanford C. Bernstein & Co. found they had, on average, 25% less data storage space than they need. But to fill this gap, companies increasingly are opting for cheaper hardware that comes in smaller building blocks. This gear typically gets less-than-critical data, such as old e-mails that must be archived under Sarbanes-Oxley regulations. IDC says overall storage sales will notch just a 5% gain, to $27.3 billion. And sales growth in midsize storage systems should be two to three times greater than in high-end hardware, predicts Bernstein analyst Toni M. Sacconaghi. "That trend is inexorable," he says.

Across the hardware industry, intense global competition and low component costs are constantly pushing prices down. For proof, look no further than the PC sector, where punishing price wars have only accelerated consolidation. Most recently, IBM agreed to hand off its legendary PC business to China's Lenovo Group Ltd., a company with lower costs and global ambitions. The deal would form the world's third-largest PC player, with about 9% of the market, and extend Lenovo's market lead in China, one of the few remaining growth areas for PCs.


The timing of this deal is tricky, however. By the time it closes in midsummer, many companies will have purchased new PCs to take advantage of wireless networking and other tech advancements. All told, PC spending will grow just 4.1% in 2005, to $168.9 billion, predicts IDC.

There are still some sunny spots on Planet PC. The longtime dream of convergence between computing and consumer electronics is finally a reality. After years of effort, PCs based on Microsoft's media center software are showing signs of acceptance. More than 1 million such models have been sold, allowing users to control the PC and whole entertainment systems by remote from the sofa.

PC giants hope the jazzy new media centers will offset slowing home PC sales and become the beachhead they use to sell everything from plasma TVs to digital music players. Even better, media centers are selling for an average of $1,300 apiece, twice the price of plain-vanilla desktops, according to NPD Group Inc. The PC camp will have to contend with a resurgent Apple Computer Corp. (AAPL ), still enjoying success with its iPods and basking in praise for its iMac G5 desktops. "The consumer market's going to feel like the Wild West," says IDC's Del Prete.

The business market is much bigger, though. That's one reason Dell Inc. (DELL ), which concentrates on corporate customers, was able to push its overall PC market share to 18% in the third quarter, up from 16% the year before. Among gadget-happy professionals, the hottest thing will be phone and personal digital assistant combos; sales of these smart handhelds should jump 43.5%, to $16.3 billion.

Economic pressures are easing, there's plenty of cash on the books, and tech executives are more optimistic than they have been in four years. But the bitter memory of the tech wreck lingers, leaving everyone cautious about how much to invest in new hardware. "The engineer in me isn't necessarily always happy," says Sabre's Murphy. But his inner bean- counter? Ecstatic.

By Andrew Park in Dallas

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