By Aaron Ricadela
Friday, May 18 2007 10:59 AM
URL: http://www.zdnetasia.com/news/hardware/0,39042972,62014066,00.htm

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 subsidiary VMware, which specializes in software that helps companies make more efficient use of computers, has said that an initial public offering could generate US$100 million. Hewlett-Packard reported a 13 percent 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 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," said Steve Davidek, operations and systems administrator for the city of Sparks, Nev., who estimates the city has saved US$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 US$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 growth forecast for worldwide sales of servers that use chips from Intel and Advanced Micro Devices (AMD) to 39 percent, from 61 percent.

"Customers are looking at a more consolidated environment as a good thing," said 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, IBM, and Sun Microsystems count on the server market's continued health. Server sales accounted for 18 percent of HP's US$25.5 billion in revenue for the quarter ended Apr. 30 and 11 percent of Dell's US$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," said 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, said Boyd Davis, general manager of server platforms group marketing.

At HP, Paul Miller, vice-president of marketing for industry standard servers and blade systems, says virtualization is raising the average price of its x86 servers as customers add features to more efficiently run groups of programs on fewer machines. That's offsetting slower sales of the servers. "They're loading them up with memory, drives, and software—all of the elements that from HP's standpoint drive a larger sale," said Miller. "We're bullish on virtualization." Customers using VMware or other virtualization software will account for about 25 percent of HP's sales of ultra-thin, high-margin blade servers this year, against 5 percent in 2006, said Miller.

'Mixed positive'
Diane Greene, president and CEO of VMware, said 70 percent of the company's customers upgrade to a pricier form of data storage when they install its software, and many choose more powerful servers. "That can be a positive if you think people are going to refresh their hardware and put in a rich configuration," she pointed out. The trend could give out, but not for a while, she said. "When there are 25 million servers out there and only 1 million of them are virtualized, what is the time frame? It could be a long time."

Although virtualization knowhow has been knocking around the computer industry for decades, demand has increased lately as companies shift to low-cost computing. They're looking for ways to slice sky-high electricity and cooling bills for massive storehouses of power-packed machines.

"Some customers were penny-wise and pound-foolish," said IDC analyst Eastwood. Power and cooling costs accounted for 50 cents on each dollar's worth of server hardware in companies' data centers last year, compared with 15 cents in 1996. By 2010, the figure could go to 70 cents on the dollar. Running programs on fewer machines could help ease the power problem. But vendors will need to keep innovating to profit from the trend rather than suffer from it. Bear Stearns (BSC) analyst Andrew Neff noted in an Apr. 13 research note that the technology will likely be a "mixed positive" for Dell, Sun, HP, and IBM. Case in point: IBM Chief Financial Officer Mark Loughridge said on the company's Apr. 17 first-quarter earnings call that shipments of the company's Intel-based servers declined from the previous year because of virtualization. Yet the technology has increased demand for more expensive servers that use IBM's Power chip. Microsoft, meanwhile, is struggling to deliver virtualization software for Windows code-named Viridian. The company in May said it would delay testing of the software and scale back its features.

Smooth operations
This week, Dell plans to announce a group of servers, software, and consulting services called "Project Hybrid" that can help customers install virtualized environments more quickly. Performance and energy efficiency will be key selling points, a Dell spokesman said.

Outpacing slower x86 server sales could ultimately be a matter of designing products that tap into customers' future needs. Robert Strickland, senior vice-president and chief information officer at Deutsche Telekom subsidiary T-Mobile International, noted that using virtualization doesn't have to mean buying fewer servers; the technology could let the company eventually invest more in computers for testing new software and backing up data.

Mark Hillman, director of global computing centers for General Motors, uses software from Sun that can distribute computing to servers with free capacity to create a daily production schedule for vehicles at 40 plants. In the future, the company may use virtualization software to assign processing to free servers to meet spikes in demand when it runs marketing promotions. "These technologies will let us respond to those needs much more easily," he said. "The basic technology has arrived, and now it's a matter of exploiting it."

You don't need to tell that to VMware. The company's sales rose 95 percent, to US$256 million, during the Mar. 31 quarter and don't show any signs of slowing. The company's newest products can move programs from an overloaded server to a less taxed one without interrupting users' work.

Greene said: "Customers are obviously getting huge value from virtualization." And as long as they can, so are the companies such as VMware that specialize in it.