Will Virtualization Doom Server Sales?

Dark times may be ahead for the server sector -- thanks largely to its own innovations -- if new findings are correct.

The promise behind virtualization has long been that one well-equipped server could do the work of several. So what happens once customers begin following that idea -- and buying fewer servers?

That scenario is cause for concern, according to industry analyst Infiniti Research. This week, the firm published a study indicating that server sales will trail off in coming years, and even decline, as virtualization reduces the need for physical hardware.

The company's TechNavio online research unit released the findings to coincide with the upcoming Storage Expo conference in London next week.

The study suggests that sales will slow to two percent in 2008 -- representing a marked decline from the 5.9 percent annual growth rates that fellow market researcher IDC saw in 2006, and the 8.9 percent from a recent Gartner study.

According to Infiniti's numbers, server sales may actually turn negative by 2014 with 24.5 million units deployed, down from the 29 million servers operating in 2006.

"Our view is that to offset this volume pressure, hardware vendors will be forced to improve unit margins by building in virtualization capability, memory and I/O interfaces in the hardware," Rahul Agarwal, co-founder of Infiniti Research, said in a statement. Agarwal is also head of business development for TechNavio. "Our research also appears to indicate that some vendors may push thin client sales as desktop virtualization proliferates," he said.

Infiniti's report said the small-to-medium-sized business sector would likely take the lead in server consolidation. That's because they use less efficient servers than do large enterprises, and so have more to gain from consolidating.

For example, the report said that Stonebridge Bank, a small regional bank in Pennsylvania, successfully consolidated from 131 servers to just 26.

Fortunately, Agarwal said there is hope for server players -- if they can adjust accordingly.

"The server market of tomorrow will be a value game and not a volume game," he said.

IDC and Gartner drew similar conclusions in their own server sales figures.

In general, the researchers found that fewer physical units are being sold, but those that are feature more expensive add-ons. They typically have two or four processors, 8GB, 16GB or 32GB of memory and lots of storage and backup. As a result, Gartner in February began noting that the rise in sales revenue outpaced the number of physical units that were shipped.

Not surprisingly, hardware vendors don't see things the same as Infiniti.

"While virtualization is an excellent technology for server consolidation, we believe innovations in hardware technologies will continue to drive demand for new servers among businesses looking to remain competitive," said Tim Mueting, product manager for virtualization solutions at AMD, in a statement e-mailed to InternetNews.com.

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