You're Not Buying Enough Servers! Blame Virtualization...

A very telling discussion I read this afternoon, courtesy of internetnews.com...

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.

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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.

Rival Intel echoed AMD's sentiments that there is plenty of room in the market to grow, even with server consolidation.

"There are both upward and downward impacts to the server unit market because of virtualization," a spokesperson said. "We believe dynamic load balancing, disaster recovery, accelerated refresh and autonomic computing have positive impacts that offset the server consolidation effect."

The spokesperson declined to go into further detail, citing the quiet period before Intel releases its quarterly figures.

David Lord, a spokesperson for Dell, was likewise optimistic, adding that whatever declines come from virtualization would be offset by sales in other areas.

"At the end of the day, you are always looking at the ability to do more," he told InternetNews.com. "You can do more with less, but the even better thing about it is when [customers] simplify their environments, it will free up capital to invest in other areas of innovation and growth."

Scary stuff...or is it? Will virtualization the "category killer" actually drive an evolutionary leap in server technologies due to market pressures. Now that VMware is releasing ESX 3i with the virtualization code built right into firmware, we're starting to see the fruits of this change.