Tech Report: Servers

There is industry shaking news that CISCO is going to enter the server market.

Both IBM and HP get a large share of their revenue from selling computer hardware to businesses. IBM took a big hit in the 1980s when businesses made the switch from mainframe computers to servers. Imagine a mainframe is a tractor trailer. You can load it up with all manner of things, in the case of computing the number of transactions. But along comes pickup trucks or servers. Businesses that could not afford the processing expense of buying a mainframe could afford a server or pickup truck. These pickup trucks could not carry the number of transactions of a mainframe and often you needed several of these pickup trucks linked together for your business. But costs and flexibility just about totally trumped mainframes. Especially as servers got more and more powerful, imagine super sized pickup trucks.

HP on the other hand had been a niche player in the large server market. But over the years it has gathered market share at the small server end. It took market share from the likes of SUN Microsystems.

CISCO is set to change the business economics of the sever business. CISCO is the 500 pound guerilla in the router business. Every network has to have a router to direct network traffic. You likely have a router in your home if you have DSL or you have a home computering network (LAN) connecting multiple computers. CISCO already has a business entry. Its routers are in most all Fortunate 500 companies, mid and small businesses and all over the world. It also has deep pockets.

Computers have become more and more powerful. This means that many have spare processing power. Virtualization software is the rage. It allows the spare processing power to be harassed to create in effect another separate machine by software using the same hardware. I downloaded the free virtualization software from Microsoft last week (have not decided to use it yet). If you recall when the MAC went to Intel processors people were loading programs like “Bootstrap” and “Parallel” on their machines. These programs allow MAC users to create a “virtual machine” so they could run both the MAC operating system and a Windows operating system simultaneously on the same machine.

CISCO has stated that its strategy will be to focus on providing server hardware that specifically targets the virtualization market. Businesses will likely jump on the band wagon in these economic times. Running more than one machine on the same hardware reduces costs. This puts companies like IBM, Dell, SUN and HP in a quandary. Their business models are based on the number of discreet machines sold. It also puts pressure on Oracle, the big database software company. The Oracle pricing model is based on a hardware calculus.

CISCO picked the right time to attack the incumbent server players. The economic situation in this financial downturn could be an industry changing moment.

Buy CISCO (if it executes well).