Unlike the previous year, FY 2003-04 started on a strong note. There were no wet blankets like a stagnant economy and CIOs expectation of huge discounts belied by a squeezed IT budget. According to the DQ-IDC Megaspenders 2003 survey, IT spending across various segments was expected to rise a modest 7.7% for FY 2003-04. This was against a backdrop of a 17% drop in FY 2002-03. So CIOs were ready with budgets and ready to spend. However, the 7.7% increase did not happen as predicted.

The DQ-IDC Megaspenders 2004 survey showed that IT spending increased only by 5.5%, but it was still music to the ears of server vendors. Here's why. Traditionally, CIOs have been allocating over 50% of their IT-spend to hardware. And like every year, the action was in the banking, financial, service and insurance segments (BFSI). According to the findings of the same study, half of the Top 20 Megaspenders in the country were banks and contributed as much to the total spending by the Top 20 Megaspenders. Again, no prizes for guessing that most of these banks were in the public sector. Server vendors had reason to celebrate-nearly 64% of the BFSI segment's spending was in hardware.

x86 Servers
The increased IT hardware spend by the BFSI segment was evident in both categories of servers. Banks purchased entry-level x86 servers for branch level automation. Further, increased focus on CRM by banks to deliver better customer satisfaction, use of knowledge management and business intelligence to analyze customer profiles and behavior besides the expansion of ATM networks and Internet and mobile banking continued to give the numbers to the vendors.

The big news on the x86 front in FY 2003-04 was the SBI deal. Acer was the clear beneficiary of the order and now supplies over 65% of SBI's x86 server requirements. With the SBI deal, Acer's share in the x86 space increased to about 10%. The BFSI segment accounted for over 35% of the total x86 market in revenue terms. Of course, Acer's traditional foes, IBM and HP, continued their stranglehold on this market.

In other segments like manufacturing and distribution, which, taken together, are as big as the BFSI segment, IBM and HP were in a neck-to-neck race and taking the top slots. IBM had a good year with significant wins in the BPO/IT segment.

While Dell continues to maintain its pace with its dollar accounts, HCL with key wins in the government space was among the other players who saw action in the market. An interesting facet of FY 2003-04 server performance was that HP over the four quarters put in a consistent performance, while numbers for Acer and IBM saw huge spikes based on four or five big deals like Acer's SBI deal. The segment saw dealing flowing in from SAP implementation, CRM, BFS, education and the SMB space. The x86 and the low-end non x86 servers continued to grow. The volume server (servers priced less than $25,000) market shows continued momentum not only in the SMB segments, but also in departmental and workgroup environments in larger enterprises, and slow but steady replacement of servers purchased in the 1999 and 2000 timeframe, when the worldwide server market had shown record revenues.

The other trend in this space was the double-digit growth in Linux servers, and the consequent nibbling away of Microsoft's market share. Of course, there is nothing new here, given that a similar trend is being witnessed across the globe. According to IDC data for first quarter of 2004, Linux server sales grew in terms of revenues at 56.9% and unit shipments at 46.4%, this being the seventh consecutive quarter of double-digit revenue growth, while Windows servers' revenues grew at 16.4% and unit shipments grew by 26.5% in y-o-y comparison.

With all the vendors, barring Dell, offering solutions and support for Linux, the OS is making rapid inroads in enterprises. Given the numbers, Linux is near the $1-bn-mark in worldwide sales, and it is evident that Linux servers are playing increasingly important roles in IT customers' computing infrastructure. They are taking on enterprise workloads now that more ISV applications are available for both technical and commercial workloads on the Linux server platform.

Non-x86 Servers
While the x86 servers have made considerable inroads into the market, India continues to be a Unix country. FY 2002-03's trend of server consolidation remained unbroken in FY 2003-04 as well. However, this year saw enterprises focusing on business continuity and application integration like extending the ERP network and getting dealers in the loop as well. In the nonx86 segment, Sun continued to shine in India. Sun Microsystems maintained its dominance in the Unix space with over 40% market share. Bagging the Reliance, Tata Tele and BSNL (North) orders, Sun continued to have strong presence in the Telecom space. Other areas where the Sun's shine was evident was in the software space, where it notched up repeat orders from companies like Texas Instruments and Veritas. HP, with Hutch and Bharti among its clients, also retained its number two position in this space. While IBM continued to struggle in the telecom space, with the Bharti outsourcing deal, we will see some action from IBM in this space in the current year. Barring telecom, IBM made its presence felt across the other verticals like BFSI with significant wins. It has arrangements with all the core banking solution vendors like Infosys, i-flex, etc, and saw much success in this space with about 40% market share. IBM repeated its performance in the high performance computing space with wins in the education segment, including the University of Hyderabad and TIFR. Manufacturing was another key area where IBM saw traction with wins like Maruti. IBM's success story for fiscal 2003-04 lay in its successful deployment of the pSeries range of servers, with most of IBM's major wins being driven by the pSeries; in fact according to DQ estimates, the pSeries range now accounts for over two-thirds of IBM's total Unix revenues. However, if market rumors are to be believed, there were significant discounts in the pSeries deals and that was one of the reasons why IBM lagged behind Sun and HP in terms of revenues.

Despite HP's announcement that all shipments for RISC systems will stop after 2006, and support after 2011, it saw significant wins in the Unix space. According to CIOs, this is not worrying because of HP's assurance about seamless compatibility with Itanium.

FY 2003-04 went by without any visible signs of loss of faith in HP. HP had a firm grip on the telecom market, with deals like the one with Hutch to consolidate billing. The other big HP story has been the Itanium, which, though too early in the day to talk about, has turned in a very good performance in the last two quarters of fiscal 2003-04. And more importantly for HP, it has started closing in on the high-end deals as well. According to DQ estimates, HP accounts for over 80% of Itanium revenues in India, the remaining being taken care of by SGI and other players.

Outlook
Given that India is one of the fastest growing server markets in the world, the upside will continue for the vendors. According to the DQ-IDC Megaspenders survey, enterprise spending for the current year is expected to ramp up to 26% from previous 5.5%. And like in FY 2003-04, enterprises are expected to continue to spend over 50% on hardware, a trend in line with the global scenario as well. According to IDC forecasts, the worldwide server market will achieve a compound annual growth rate (CAGR) of 2.8% over the next five years. Driven by smaller form factors and more incremental infrastructure capacity, server units are expected to achieve a CAGR of 12.7%, reaching 8.1 million new server sales in 2007.

Coming back to India, in terms of segments, finance and telecom will remain the keystones of the midrange server demand in India. Deregulation, consolidation among service providers and infrastructure expansion in the mobile telecom services segment will spur the demand for servers. Servers will continued to be deployed for BSS (Business Support Systems) applications such as billing, mediation, fraud management, and OSS (Operational Support System) applications such as enhanced network services and switching, etc.

While government, telecom, education and energy segment helped bolster the x86 server market in China, India saw demand from insurance, government and education on the x86 server side and strong telecom and BFS spending helped the non-x86 market to grow in India

Banks, too, will continue to step up them spend on IT. With most Real Time Gross Settlement (RTGS) systems and SEBI's Straight Through Processing (STP) for financial messaging and legal recognition of electronic contract notes expected to be implemented this year, we will continue to see action in the BFS segment. Happy days are very much here again for server vendors, as several new orders can be expected.

Global numbers
The global server market began the fiscal with a dismal year in the backdrop. However, the first signs of an upturn came at the end of the first quarter of the current fiscal as global research firm IDC announced the good news. According to IDC, the worldwide server systems market saw the end of a nine-quarter decline in y-o-y growth in the first quarter of fiscal 2003-04. The quarter's server revenues of $10.6 billion were just 0.2% higher than they were in the corresponding quarter a year ago. Given the growth rate, it was too early to say that the industry was out of trough sufficiently to pop champagne. However, the growth rate was, at 0.2%, above the IDC's projection of a 1.7% decline. Also the growth has a backdrop of a 3.3% decline y-o-y in the last quarter of fiscal 2002-03. Nothing much to raise a cheer about, but it is good news nevertheless.

The unit growth rate, however, rose by only 17.5%, clearly demonstrating that average sales prices in the worldwide server market have continued to slide. IBM was at the number one spot in the worldwide server systems market, with a 30.4% market share in factory revenues and 10% y-o-y revenue growth. HP, which had gained the number one spot in the first quarter of 2003 on the strength of its year-old merger with Compaq, fell to the number two spot in the second quarter of 2003, with a 27.7% share and flat y-o-y revenue growth. However, HP retained its lead in factory revenues in the Linux server and Windows server market segments. Sun Microsystems and Dell remain the number three and number four server vendors worldwide, respectively, followed by Fujitsu Siemens in the fifth spot.

Growth in the first quarter came primarily due to the x86 server market (comprising systems based on Intel and AMD microprocessors), which grew more than 21% y-o-y in terms of unit shipments, and 9% with respect to revenue. However, the Unix server market, with global revenues of $4.3 bn, showed a decline of about 5.2% in market share. But this decline was less that the 13% this segment registered a quarter ago. Sun, IBM and HP have monopolized this market and hold about 88% of the market share. However, it must be mentioned that even in the third position, IBM grew its server business by 20.4% y-o-y reflecting a strong effort on IBM's part to gain a larger share over time in this strongly contested market segment.

Interestingly, blade servers crossed the the $100 mn mark in this first quarter, while Linux servers grossed about $650 mn and grew faster than any other server segment. However, the penguin still has a long way to go before it can take on Microsoft which accounted for $3.1 bn of total server sales. Rack-optimized servers and server blades used in clusters and server farms are being increasingly deployed in data centers as effective alternatives to larger, RISC-based solutions. The good news though continued in the second quarter as well with server market revenue showing a 2% growth, with volume servers making the bulk of the growth as mentioned earlier. Also, the Unix servers market, which had been on a decline in the previous fiscal, showed signs of recovery by the third quarter-growing by 0.8%, the first growth in over 11 quarters. By the end of the fiscal, it was clear that CIOs were now spending and the market seems to be on a firm growth path.

The Asia-Pacific Market
According to global research and consulting firm Gartner, Asia-Pacific server vendor revenue totaled about US$5bn in 2003, recording a growth of 6.7% over 2002, and this despite adversities such as SARS and conflict in Iraq. While both the RISC and Intel-based servers showed single-digit growth, the latter grew in excess of 7% compared to the 5% growth rate for RISC-server space. According to Gartner, this clearly shows a continued shift to Intel-based architectures in the Asia Pacific region, and also highlights the fact that many organizations are getting Intel-based servers for mission critical applications and that organisations which have invested heavily in RISC/UNIX based systems are thinking of going over to Intel servers as they hit critical replacement cycle stages.

In terms of country ranking, China was clearly ahead of the other countries, bagging the No. 1 position for server vendor revenue in Asia/Pacific with a 32.4% market share. With a growth of 9.8% in 2003, China increased its market share from 31.6% in 2002. Low-end Intel-based servers propelled growth for vendors and business came from the SMB segment and the government, finance and telecom verticals.

Unlike China, South Korea, the second biggest server market in the Asia-Pacific region, showed a decline of 1.9% in server revenue. Delays and cancellation of big projects led to lower hardware spending in South Korea in 2003. However, the decline would have been higher but for consolidation initiatives in the BFSI and telecom segments.

Australia, on the other hand, grew 8.4% during the same period. According to Gartner, "Much of the growth in the Australian server market was driven by critical replacement cycle business and a genuine desire to ensure organizations are poised for the growth opportunities that 2004 is poised to bring."

In the Singapore market, server revenues grew 16%, making it the second fastest growing market in the region. However, India took the honors of being the fastest growing market in Asia Pacific, racing ahead with a growth of 31.9% in 2003 under her belt. According to Gartner, "Server deployments in the finance and banking and telecom sectors have been the main drivers in 2003. With more multinational companies looking to set up base in India and the outsourcing business growing by leaps, demand for both Intel and Unix servers is expected to increase steadily 2004."