HP, SUN CONSIDER ECONOMIC LANDSCAPE

January 26, 2001

FEATURES AND COMMENTARY

Steve Swoyer reported: At the beginning of 2001, Sun Microsystems and Hewlett-Packard cast wary eyes toward an increasingly troubled economy.

That’s not to say things haven’t been good for the two computing giants. Sun, in particular, had a strong 2000 when the Unix powerhouse experienced a 33% spike in gross revenue and net income for fiscal year 2000 increased by an astronomical 80%.

While some of Sun’s growth can be attributed to the success of a storage division that came into its own during 2000, Al Gillen, a research manager for system software with analyst firm International Data Corp., acknowledges that the company also sold a lot of servers last year. “Sun is outgrowing the industry overall,” he confirms.

Going forward, Gillen says it will probably be impossible for Sun to sustain such explosive growth rates – even if the economy continues its trajectory of expansion and regardless of whether or not IT budgets swell beyond their customary levels.”Any time you have high growth rates, it’s very hard to have continued high growth rates because you’re compounding on top of your already high growth rates,” Gillen explains. “This isn’t a statement that Sun’s products aren’t great, it’s just a numbers thing that says that it’s unlikely they can maintain that rate of growth over the long haul.”

On the other hand, 2000 marked something of a flat year for longtime Unix kingpin HP, which posted lackluster financial results and an earnings warning in January for Q1 2001.

New from HP in 2000 was the eagerly anticipated Superdome server series, which the company hoped would compete with Sun’s own high-end ES10000 servers and the S80 “Condor” Unix server from IBM Corp. Superdome shipped with many of the essential features of a high-end Unix system, including the ability to partition multiple versions of an OS across clusters of processors on a single system, and also supported a variety of processor architectures, including not only PA-RISC, but also IA-64 and even SPARC.

In spite of Superdome’s features and performance, some industry watchers speculate that the success of it and of other high-end Unix servers will probably be contingent upon the long-term viability of the economy.

“If companies run into periods where they have stagnant growth, it’s probably going to mean that they’re not going to be deploying new high-end systems because they’re not going to be pushing the thresholds of the high-end systems that they have currently are running,” Gillen said. In this respect, veteran industry observer Rob Enderle, a research fellow with analyst firm Giga Information Group, thinks HP’s earnings warning could portend a general slowdown in the mid-market and high-end server sectors.

Which brings us to the ever-looming specters of Microsoft Corp.’s Windows 2000 and of the open source Linux operating systems – both continuing to grow at a healthy 20-plus% clip. Both are positioned as relatively inexpensive alternatives to Solaris and to HP-UX.

Sun has traditionally profited at the expense of other Unix vendors, Enderle notes, and has managed to dramatically expand its market share even as Windows and Linux have siphoned share away from other Unix vendors – including HP. Sun’s good fortunes may not continue, however.

If there’s an economic crunch, Enderle maintains, Sun-the-Unix-bigot could find itself as the odd man out without much of a Linux strategy and with no Windows strategy to speak of. “It’s kind of the expectation that an economic slowdown would do a lot of damage to Sun’s revenue source, because Solaris is a more expensive alternative than either Windows 2000 and certainly Linux,” Enderle said. It’s in this respect, he contends, that vendors such as HP and IBM – which have embraced dual Linux and Windows NT/2000 strategies – are more effectively poised to ride out an economic downturn than is Sun.

“At least these vendors both have initiatives that address the Linux and Windows markets,” Enderle concludes. “If there’s a crunch, IT organizations are going to look for cheaper solutions. Sun won’t have any products in this space.”

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