What will fill data centre holes?

With Halloween on the calendar this time of year, VARs might be preparing for ghosts and goblins to arrive in their midst.

But is an evil spirit or an angel coming to their businesses in the form of x86 server virtualization?

Gartner analyst Tom Bittman, chief of research for IT infrastructure and operations, believes x86 server sales are going to stumble for several years.

“We’re predicting the market is going to go through a correction,” he said in an interview.

“It’s going to take another three, four years before the market grows. The x86 server market in particular will either flatten out or decline over the next few years due to virtualization.”

As a technology that allows multiple operating systems to run on a server, virtualization has long had acceptance in mainframe and Unix organizations. Popular uses include consolidating application test and development centres, Web servers and file and print servers. Now its spreading to Windows and Linux.

Market leader

The dominant Windows software is VMware Inc.’s ESX. Microsoft does have Virtual Server 2005, although Bittman said it is not ready yet for production use. However, a year from now Microsoft is expected to include virtualization in the next version of Windows Server (now code-named Longhorn), which will accelerate opportunities and challenges for hardware VARs.

Meanwhile the open source Xen virtualization engine has been included in the just-released Novell Suse Linux Enterprise 10, and is about to be included in new releases from Red Hat and Sun Solaris x86. A commercial version of Xen with management tools called XenEnterprise and sold through VARs has been available since April.

A recent Forrester Research study of North American adoption of server virtualization shows roughly 40 per cent of enterprise-sized companies have already implemented it in an attempt to wring more efficiencies from their data centres.

On the other hand, adoption by medium and medium-to-large sized companies averaged below 20 per cent, a market VARs should be targeting.

But the technology is a threat to hardware sales: After all, the point of virtualizing servers is to cut down on the number of them.

System integrators who specialize in the technology agree to a point. Charles Tsoi, president of Sudden Service Technologies of Vancouver, a Hewlett-Packard, IBM and VMware partner with annual sales of about $13 million, reports his server sales and revenues have been impacted by server virtualization. A customer who would buy 10 servers for about $60,000 is now buying two for roughly the same price or less.

But, he added, “we do add more value to customers with solutions, plus there is revenue from software – and virtualization software is not cheap.”

“I see it as a way to expand my footprint to customers,” he said.

Similarly, Gary Sohal, president of Audcomp Computer Systems of Hamilton, Ont., also an HP and IBM partner, has seen a drop in hardware servers sold due to server virtualization. However, sales of blades are up. For example, he is in the middle of helping a customer trim a data centre of 178 rack servers to 110 blades, mainly due to virtualization.

Not worried

“I absolutely agree that in the long term we will see an overall decline in (the sale of ) servers,” he said.

“We’re not worried about it,” he added. “All that means is that there are other spin-offs such as specialization in virtualization, for example, or other services.”

Perhaps to no great surprise, hardware manufacturers insist there’s no reason for smart VARs to lose income. “I don’t think we’re going to see the kinds of impact Tom (Bittman) is pointing to,” said Kevin Leahy, IBM’s director of virtualization marketing, adding that “the lower end of the standalone Intel market could be impacted.”

However, he was quick to say customers using the technology are buying “richly-configured servers,” with larger memory configurations and more network connections.

“We’re seeing our partners drive bigger, better, higher-value systems, he said. “What they should see is increased profit” from integration, configuration and business process automation consulting services.

“We don’t intend on having a flat server business in the remainder of ’06 or ’07,” declared Dave Frederickson, vice-president of HP Canada’s solution partner organization. As a result of virtualization “we see a robust market for high-end servers and associated services around it.”

The pace of that will increase when Microsoft adds virtualization to Longhorn, essentially including the technology in the price of the server.

When, though, isn’t clear. Microsoft is only promising it will be added 180 days after Longhorn is released. That could be late 2007, or early 2008, giving VMware and Xen time to earn market share.

But note this, said Bittman: Fifty-six per cent of attendees surveyed at a Gartner conference last December expect their companies will be using VMware for virtualization at the end of next year, while 23 per cent said Xen and 13 per cent said Microsoft software.

However, 38 per cent believe that by 2009 Microsoft will be their organization’s choice, 26 per cent think their employer will be using Xen and only 15 per cent predict VMware.

VMware, Bittman predicts, will have to cut its prices and focus on management software to survive.

In the meantime solution providers and system integrators should prepare.

“There’s opportunity here” for integrators said Bittman, “but the smart ones will cannibalize the ones who are not so smart.”

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Howard Solomon
Howard Solomon
Currently a freelance writer, I'm the former editor of ITWorldCanada.com and Computing Canada. An IT journalist since 1997, I've written for several of ITWC's sister publications including ITBusiness.ca and Computer Dealer News. Before that I was a staff reporter at the Calgary Herald and the Brampton (Ont.) Daily Times. I can be reached at hsolomon [@] soloreporter.com

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