Tech Hardware Supply Chain - Gazhoo

Bhavin Shah
(852) 2800-8538
bhavin.a.shah@jpmorgan.com
Based on inputs from primary
research contacts, servers
possess utilization rates below
20%, versus 40-50% for storage
systems
Asia Pacific Equity Research
20 April 2009
Key segment themes to follow in servers
We expect to hear a lot about server virtualization, blade servers, and how the
Mainframe would remain vibrant in the next 12-18 months. There could be
increasing adoption of server virtualization software, but its lasting impact on server
units and revenues could be deflationary, in our view. The performance benefits of
blade servers could blunt the sales velocity of non-bladed industry standard servers.
At the same time, there could be increased focus on developing tools or standards to
work around the proprietary backplane and software of blade servers. We expect the
proprietary lock to persist, as vendors appreciate the renewed switching costs for
customers. In UNIX, there could be an increasing level of pitched battles if the
macroeconomic environment cools, as this market can be more vulnerable to tighter
spending conditions.
Table 15: Key segment themes to follow in servers
1. Virtualization – early positive, long-term negative for servers
2. Blade server momentum could partially counter macro
3. Proprietary lock not likely to go into extinction yet
4. UNIX could turn into a battleground if the macro cools
5. Mainframe cycle could provide IBM a partial macro buffer
Source: J.P. Morgan.
Server Theme #1: Virtualization—Early positive, long-term negative
We think the disruptive technology of server virtualization will continue to grab the
attention of investors. There is an argument that virtualization could be a boon for
hardware and related software and services sales. In early stages, virtualization could
drive greater systems management complexity, requiring more hardware and postsales
support.
While debatable, we think that server virtualization will ultimately be a deflationary
force in the long-run. We do not subscribe to the argument that virtualization will
drive more hardware and post-sales revenue in the very long run. Our view would
not bode well for server units or revenue.
Server virtualization defined
The server virtualization software enables IT managers to run multiple applications,
or virtual servers, on a single physical server. Key benefits include: (1) consolidation
of server assets, particularly x86 platforms; and (2) the ability to move and share
applications throughout the data center. In other words, server virtualization enables
IT managers to share applications and related data in one server with other servers,
but previously, one server ran one application on one operating system. Server
virtualization could increase the availability of applications by using multiple access
points.
Based on inputs from primary research contacts, servers possess utilization rates
below 20%. In contrast, storage utilization levels could be in the 40-50% range.
Given this disparity, we expect server virtualization to be a disruptive force in
servers, but we do not expect storage virtualization to be such in storage given the
fairly high utilization levels already achieved.
The primary force behind the low utilization levels in servers can be traced to the
advent of the industry standard server. Over the past decade, the growth in the
industry standard server (x86-based) contributed to a wave of under-managed and
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