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'Young' Servers Could Lead to Spending Freeze

A "young" install base on the computers that serve as the processing brain for legions of desktops could lead to a slowdown in spending on servers this year, according to a report by Merrill Lynch.

Analysts at the securities firm said in the report that the declining average age of the server installed base suggests replacement demand could soften until the base becomes older again.

Replacement machines, which usually feature more bells and whistles than their predecessors, drive money in the sector in lieu of wildly successful software applications.

"We continue to believe server revenue growth could slow towards zero from 2004's 6 percent rate as the echo of the Y2K boom fades into an echo of the bust," said Merrill Lynch analysts. "We believe unit growth may slow to the low-teens from near 20 percent despite the continued mix shift towards low-end Windows and Linux."

Server sales spiked before 2000 as corporations were girding for what became known as Y2K, a programming snafu many believed would kick in when the clock struck midnight on New Year's Eve. But the trauma of a global computer meltdown was never realized and companies had new servers to use to ferry and store data.

Sales of high-tech gear overall were miserable in 2001-2002 with the staggered economy, then came roaring back in 2003-2004 amid a flurry of new innovation like hardware virtualization and the increasing dependability of Linux as a viable operating system for business computing.

Going forward, analysts for the firm said they expect Dell and IBM to gain share, with HP improving after a sub par 2004 and a bright first quarter sales record in 2005. ML placed server market share at 32.9 percent for IBM, followed by HP with 26.8 percent, Sun with 10.4 percent and Dell with 9.7 percent.

Sales of Unix and Windows machines hit a consensus $4.2 billion in the first quarter 2005. Linux growth decelerated to 35 percent, outpacing Windows 11 percent and Unix's 3 percent growth.

Roughly 24 percent of worldwide server revenue comes from high-end systems costing more than $500,000. The midrange segment, defined as systems of $25,000-500,000, make up roughly about 27 percent of global sales.

Entry servers, coming in below $25,000, are the largest segment at 49 percent and are eating away at the midrange to high-end machines.

Linux is expected to continue to inch its way higher into enterprise computing. Though roughly 90 percent of current Linux sales come from servers priced under $25,000, the midrange represents 6.9 percent of Linux revenue share. High-end Linux is 3.2 percent.



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