Server Survivors

The low-end server space is a channel battlefield as major vendors battle for partner loyalty and fight to maintain decent margins.

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By  Andy Tillett Published  April 2, 2006

Moving for the margins|~|DSouzahp.gif|~|Ryan D’Souza, product manager, industry standard servers at HP Middle East|~|The server segment is hot property. As more resellers get tired of shifting low margin desktops, they are increasingly turning to the revenue they can generate from value-add sales in the server market. Vendors are putting more emphasis on this sector too, typified by a drive from AMD to leverage its strongest product offering, the Opteron processor, into more businesses across the region. A-brand manufacturers are also fighting their way into the entry-level server space, looking to take market share from this local assembler stronghold. Servers are an integral part of a company’s infrastructure. The data they store is often mission critical and the applications they run are essential to the day-to-day running of a company. In the marketplace, enterprises and SMBs have invested heavily into this infrastructure, but at the entry-level, selling servers to small businesses with few staff and low server requirements remains a largely untapped market. These customers see A-brands as expensive, and frequently favour offerings from local assemblers, but recently the tier one vendors have been re-assessing their product offerings to target this lucrative niche. “Where we lacked focus is at the absolute entry-level segment, which is the customers with five to ten users or less using desktops in a workgroup environment. HP has products to position, but we haven’t been able to bring to market something that adds value to these customers until now,” says Ryan D’Souza, product manager, industry standard servers at HP Middle East. Sun Microsystems has also added to its product portfolio, offering an AMD-powered server at US$2,000. Sun claims this server offers enterprise class performance and is a viable option for even small SMBs. Sun claims that sales of its entry level servers doubled yearly in the last quarter of 2005. IBM has also re-aligned its server team. “We restructured our organisation this year to address the entry level of the market. I have appointed a new distribution manager and we are appointing local reseller managers. We are actively going out and working with the tier two partners, going to the very small accounts and helping to develop our distribution model,” says Andy Parkinson, regional sales manager, e-server xSeries group Middle East and Pakistan at IBM.||**||Rebates a priority|~|AndyParkinsonibm.gif|~|Andy Parkinson, regional sales manager, e-server xSeries group Middle East and Pakistan at IBM.|~|Vendors have rigidly structured channel programmes for their partners, to make sure that they meet specific criteria and have a niche target to address in the marketplace. This is offset by a number of performance-related rewards. In listing the benefits that partners can gain, Parkinson at IBM stressed the priority of rebates. “The rebate has to be the most important thing, as this impacts the partner’s bottom line - how much money they are making,” he says. This is the area where Manoj Thacker, managing director at UAE based assembler Sky Electronics says that his value added reseller partners can gain an advantage over the programmes offered by A-brands. “By working with Sky partners get one and a half times the equivalent margins that they make working with vendors like HP or IBM. The pure hardware profit that they get is equivalent to any of the A-brands margins, and on top of that the second part of the profit is service. An A-brand will provide their services, whereas our partners do their own. We will back them up with support, but the partner will keep the margin. Between 15% and 35% margin is what a partner should make from supplying hardware and implementation,” explains Thacker. A-brands claim that their operations give resellers a number of advantages that local assemblers can’t offer, in terms of guaranteed security and warranty support, as well as access to spare parts and, vendors claim, their brand carries a seal of quality in the end users’ eyes that local assemblers cannot match. “When our customers buy a server, they are doing it to run an application, which is mission critical to their business. If their servers are not running, they lose business time. I think most customers will ask for reputed vendor parts only, because they know we build in all these sophistications,” says Rajesh Deepchandani, product marketing manager, enterprise products at Fujitsu Siemens Computers (FSC). Other A-brand vendors say that from their experience, offerings by local assemblers haven’t been able to compete. “Much local assembly is Intel-based and it’s all off-the-shelf products that go into the servers. I saw a locally assembled server at Gitex last year, the price point was about US$8,000, and it didn’t compare to our offering. Our box is cheaper, lighter, smaller and we have bought the components and put it together ourselves. If a customer is buying a server he should be asking where the chip inside is from, making sure that what he is buying is certified, and certified to run an operating system,” says Graham Porter, marketing manger at Sun Microsystems.||**||Certified local assembly |~|Thacker-Manoj.gif|~|Manoj Thacker, managing director at Sky Electronics.|~|Thacker at Sky Electronics counters this, saying the ‘Expression’ brand of servers Sky builds is developed, tested and certified alongside AMD and its certified vendor partners, in line with its partner scheme for assemblers. “We encourage all of our assembly customers to work with the products that we have tested and endorsed for use with our processors. 70% of our business goes through tier one vendors, 30% through local assemblers,” says Gaith Kadir, Middle East and Africa (MEA) area manager at AMD. “The way we see it, Sky is targeting a different area to HP. We are working with them purely to develop the SMB market with their Expression servers. The A-brands wouldn’t be interested in this sale of one or two servers per company,” he adds. AMD has been making an impact in the Middle East in 2006, boosting the resources it has in the region. In the Europe Middle East and Africa (EMEA) region it is widely accepted that AMD has a strong server offering, reflected by its sales figures, and this is also its strongest business area in the Middle East. The technology that AMD uses has helped leverage it into a number of high profile accounts and in particular allowed it to penetrate into the oil and gas vertical. Through strategic relationships, such as the one that it shares with Sun - whereby Sun offers AMD solutions on a range of its servers - AMD has broken into vertical segments such as telecommunications. The use and application of AMD technology has steadily filtered through the channel and vendors such as FSC, HP and IBM all carry offerings from AMD. Kadir estimates that AMD’s market share in the server space in the Middle East is now 25%. “We are there to partner with our customers, vendors and channel partners because we want to contribute to their success. It’s not about AMD, it’s about mutual success. We need to work together. We want them to make money as well as us - we both need to be making money to succeed,” says Kadir.||**||Key differentiator |~|Atassi-dtk.gif|~|Samer Atassi, sales manager at DTK computer Middle East|~|Partners are using AMD as a key differentiator. Kadir says more and more companies are enquiring about AMD solutions and say they see the market trending towards the vendor’s offering. Even Intel suppliers are seeing the value of AMD’s proposition, such as Samer Atassi, sales manager at DTK computer Middle East, which is introducing AMD servers to its portfolio next quarter. “AMD CPUs are gaining popularity worldwide. I know of some major corporate accounts in this region that have adopted AMD Opteron servers. We see demand will build up over time. We are trying to diversify our server portfolio to meet this demand, Intel are our principal partner but we are going the way we see the market going,” says Atassi. For all the buzz that AMD is creating, and although its investment in the channel is yielding growth, the Middle East remains an Intel dominated region. The chip giant is not sitting back while the competition grows. Intel recently embarked on a roadshow to create awareness and promote solutions to SMB channel managers, creating end-user pull for its products in the process. “We are trying to educate our channel partners, but also making sure the message is filtering down to the guys who are deciding within the organisations what to implement. We have a dedicated resource for servers, a field sales guy who is a server specialist who can go to a reseller and do training with their technical people. Together they can figure out what would be an entry level, mid range and high-end configuration that they can then take to their customers,” says Nass Nauthoa, reseller channel manager, Gulf countries and Saudi Arabia at Intel. The technology behind the two chip manufacturers differs and both vendors stake a claim as to why they have a better offering than the other. Parkinson at IBM points out that each CPU vendor has strengths in different areas when it comes to the pros and cons of their products. “The difference between AMD and Intel is all about the benchmark you run, whether it’s a CPU intensive or a memory intensive benchmark. Intel has very strong CPU speed and is best for CPU intensive applications, but AMD has different architecture, it does not use a front side bus, which makes it better suited to memory intensive applications,” says Parkinson. ||**||Clear choice for resellers |~|gaith-kadir.gif|~|Gaith Kadir, Middle East and Africa area manager at AMD|~|Resellers have a clear choice, they can tie up with an A-brand or a local assembler. Each has its advantages and disadvantages - local assemblers can help partners differentiate more and say they pass on more margin potential. A-brands have stronger guarantees on part availability and can help steer partners and train them to break into a specific area of the market. With the number of suppliers in the market growing so fast, vendors are becoming more stringent in who they accept onto their programmes and partners need a strong value proposition to get into a channel scheme. “The most important thing that a partner can have is a focus. We want partners who are ready to grow their business. Skill sets are very important, but most of all we look for partners that have expertise in certain areas. We also look at the customer base that they have, and their interaction with them. They need to have a specific area of the market that they are working in,” says Deepchandani at FSC. The economies of scale that A-brand vendors command is huge, and they are aggressively leveraging their offerings in the entry-level server space. This will undoubtedly put a squeeze on local assemblers’ margins. “I am working with both Intel and Microsoft to bring a bundle to the SMB market to help customers migrate from a desktop or workgroup environment. This builds a confidence in the customer because there are three big names behind one offer. It’s a misconception that A-brands are expensive and I have server products that should be available soon that are comparable in price to a desktop,” says D’Souza at HP. Local assemblers need to work with their principals closely and the key to success is in differentiating their offering to the market. They need to ensure the quality of their products and provide a comprehensive programme of training for their resellers in order to succeed and keep their heads above water against the offers that major brands are bringing to market. ||**||

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