Virtualization: Real Trouble for Servers?

Technology to help companies make more efficient use of computers is crimping demand for some machines, forcing strategy shifts for IT giants

by Aaron Ricadela

For some of the biggest technology companies, the trend toward piling more software onto fewer computers has become a powerful engine of wealth creation.

EMC (EMC) subsidiary VMware, which specializes in software that helps companies make more efficient use of computers, has said that an initial public offering could generate $100 million. Hewlett-Packard (HPQ) reported a 13% increase in second-quarter revenue May 16, thanks in part to sales of higher-priced machines that pack more computing power onto less hardware. At a conference in Los Angeles on May 15, Microsoft (MSFT) Chairman Bill Gates talked up efficiency-friendly features in a planned operating system.

At the heart of that fanfare is a technology called virtualization, which lets companies run programs written for a host of different chips and operating systems on a single, more efficient computer. The process helps users get more from the machines they have and in some cases depend on fewer servers, the powerful machines that run Web sites and corporate networks. "It's amazing," says Steve Davidek, operations and systems administrator for the city of Sparks, Nev., who estimates the city has saved $50,000 over the past year since it started using VMware software. "You start to think, 'What isn't virtualized?'"

Server Sales in for a Tumble

But what's good for Sparks and the likes of VMWare could throttle growth in other pockets of the computer industry. Market researcher IDC recently said the trend toward virtualization, along with increased use of chips with multiple processing cores, will cost computer makers $2.4 billion in sales, or more than 4.5 million servers, between now and 2010, as companies do more with less. And IDC slashed its annual growth forecast for worldwide sales of servers that use chips from Intel (INTC) and Advanced Micro Devices (AMD) to 39%, from 61%.

"Customers are looking at a more consolidated environment as a good thing," says Matt Eastwood, vice-president of enterprise platforms at IDC. "The big question in the market is, What does this mean to the server vendors?"

The answer: Plenty, and not all of it good. Companies such as HP, Dell (DELL), IBM (IBM), and Sun Microsystems (SUNW) count on the server market's continued health. Server sales accounted for 18% of HP's $25.5 billion in revenue for the quarter ended Apr. 30 and 11% of Dell's $14.4 billion in revenue for the quarter ended Feb. 2. Sun is even more dependent on servers.

Too Early to Say

The fortunes of chipmakers Intel and AMD could also turn in part on how the virtualization market develops. As companies use software from VMware, Microsoft, and smaller companies such as XenSource and Virtual Iron Software to consolidate sprawling sets of software programs onto fewer computers, the once fast-growing market for some types of servers—specifically, low-cost x86 servers—could suffer. "It does have an impact on total server count," says Diane Bryant, vice-president and general manager of Intel's server platforms group.

So far, vendors have managed to stave off ill effects of increased reliance on virtual machine software. After all, companies need to buy new servers to tap into the technology and many require more powerful and expensive hardware to exploit it. Intel points to customers' desire to update their data centers with new equipment to support virtualization and hasn't adjusted its shipment forecasts, says Boyd Davis, general manager of server platforms group marketing.