Tech Hardware Supply Chain - Gazhoo

Bhavin Shah
(852) 2800-8538
bhavin.a.shah@jpmorgan.com
Today, there remains a
significant level of proprietary
features in both blade servers
and back-end servers
28
Asia Pacific Equity Research
20 April 2009
In blade servers, so far, it has been all about Hewlett-Packard and then IBM. Dell and
Sun have been refocusing, but they have substantial ground to make up, and both
companies must contend with the added hurdle of the proprietary lock. As noted
earlier, there is a proprietary wrap with the blade server chassis, which increases the
switching costs to move to another blade server vendor. The chassis only works with
the blades of the same vendor. In addition, the backplane, which controls the server,
and related software typically are proprietary. So, it appears that the blade server
market has become the equivalent of a razor-blade model.
Figure 12: Blade server market by region
% share of worldwide blade server market revenues
ROW
30%
Western Europe
32%
Source: Gartner Servers Quarterly Statistics Worldwide Database, March 2009.
United States
38%
For vendors looking to gain market share in blades, one way around the proprietary
lock could be to pursue share in the emerging markets where the blade adoption rate
has trailed the U.S. and Western Europe (Figure 12). Here, outside of Hewlett-
Packard and IBM, we think Dell could be in better position than Sun. Dell has been
boosting its focus on the emerging markets, and it has the added benefit of its
existing relationship with enterprise customers on the client side, i.e., personal
computers, whereas Sun does not. Moreover, Sun has been on-again, off-again about
pursuing the blade market in recent years, which could present another hurdle with
customer penetration. Nevertheless, we note that Sun appears increasingly focused
about its re-entry this time.
Server theme # 3: Proprietary lock is not likely to go into extinction yet
While the server industry exhibited a major push toward commoditization with nonbladed
industry standard servers over the past decade, there remains a significant
level of proprietary features in both blade servers and back-end servers. This
proprietary lock can increase the switching costs for the end customer, as often blade
and back-end (“big iron”) servers are not fully interoperable with other vendor
systems.
As the figure below shows, the industry standard shift has resulted in slightly more
than 50% of the market running on more widely available standard operating
systems, i.e., Windows and Linux. Note: Mainframes can run Linux, but for
simplicity, we assume that the preponderance of Linux is utilized in more of an open,
distributed platform.