Manufacturers across the board are slashing prices even in the low-end servers-systems category. Does the slowing economy offer your ISP business any year-end holiday bargains?

by Steve Greenberg ARS, Inc. Server Analyst [December 5, 2001]

Following its lead in the mid-range server market, Dell Computer Corp. has made yet another aggressive stride to capture yet another market of significance: the market for low-end value-oriented server-systems, which is made up of servers priced $1,500 or less.

Manufacturers across the board have made clear efforts to push into this segment, but the early leaders in this race appear to be IBM Corp. and Dell, which have gotten into the lead by undercutting the rest of the competition. Of the top two leaders, Dell appears to have a clear advantage due significantly to price/performance superiority.

The low-end servers-systems category has drawn considerable attention due to two key reasons—one being the slowing economy and the second being the desire to stimulate growth in the small-to-medium-size-business (SMB) market.

As the economy has slumped and server sales of all types have slowed in general, this low-end segment continues to be a hot-spot growth area. The idea of offering the most bang for the buck has created a price war among manufacturers resulting in systems sometimes under-pricing desktop computers. In some cases, with promotions taken into consideration, low-end value servers, such as the Dell PowerEdge 500SC, have hit price levels as low as $529 USD.

True value
Value-oriented systems are basically systems designed to be an attractive solution for small-to-medium-sized businesses looking for efficient, low-priced servers. The systems are usually in tower form factors and are designed to be used as either a small workgroup server for up to 25 users or as non-mission critical platforms for tasks such as print and shared Internet access. Many systems in this category of ultra low-end servers are offered with hardware commonly found in higher-end systems, such as hot-swap hard drives and redundant power supplies. Processor options range from both single and dual processor machines powered by either Intel Celeron or Pentium 3 CPUs that range in clock speed from 800MHz to 1.26GHz. While the expandability and scalability of the systems is relatively small compared to midrange systems, it is not uncommon to see memory capabilities reaching up to 4GB as well as internal storage capacities reaching up to 438GB—thus many of these systems are anything but underpowered.

In addition to Dell and IBM, several other manufacturers, including Compaq Computer Corp., Hewlett-Packard, Inc., and Gateway, Inc. have introduced servers playing in this market niche. However, of the systems available, Dell has made the most aggressive strides, continuing to offer the most bang for the buck.

Dell has three low-end PowerEdge "SC" systems competing in the under $1,500 price bracket. At the lowest end, Dell's PowerEdge 500SC (pictured left) starts at $778 and is equipped with an Intel Celeron 900MHz processor, 128MB RAM, 20GB hard drive, on board NIC, and a 3-year parts and labor warranty. With current promotions in place, this system in its lowest configuration is priced at $529.

Dell also recently announced a revision to its already existing PowerEdge 1500SC system, which now offers higher-end features such as hot swap capabilities, redundant power supplies, dual processor capabilities with either P3/1.13GHz or P3/1.26GHz CPUs, all for a base starting price of $1,099.

Likewise, Dell's runner-up, IBM, also has three ultra-low end systems competing in this space, including its xSeries 200, xSeries 200VL, and xSeries 220 models. Base pricing on IBM's three systems ranges from $649 to $806. IBM's 200VL system (shown right), which competes directly with Dell's PowerEdge 500SC system, was introduced several months ago specifically for this niche.

Hewlett-Packard also has its own competing platform, the NetServer E800 (shown left), which starts at a base price at $899. Although HP has a product in this class, it is clear that the company has not challenged Dell and IBM with products reaching below the $700 barrier. All the same, HP bills the Netserver E800 is a perfect fit for small- to medium-sized businesses that operate with little or no in-house IT support.

Compaq's sub-$1,000 competing systems are its Proliant ML330 (shown right) and ML330e systems. Also trying to grab market share in the low-end market is Gateway, with its recently introduced server member, the 910. Base pricing for Gateway's 910 starts at $699. Although Gateway is not considered a major player in the server market, the company has put forth a considerable amount of effort to compete aggressively in the low-end server segment. Its 910 (shown below) is definitely a system to consider when evaluating systems for this price to performance bracket.

Server sortie
Battling head to head, IBM's value oriented xSeries 200VL and Dell's PowerEdge 500SC systems are extremely close in terms of hardware offered. However, taking other factors into consideration, such as expandability, Dell clearly has the advantage. For instance, while the IBM xSeries 200VL system offers a maximum of 1.5GB RAM, Dell's PowerEdge 500SC is expandable up to 2GB. Likewise, Dell's system offers a maximum internal storage capacity of 180GB, while IBM's system tops out at 160GB. Both are single processor tower systems. When compared side by side, both equipped with P3/1GHz processors, 128MB RAM, one 20GB hard drive, and 1-year parts and labor warranty, the Dell system prices out at $728 and the IBM systems price out at $729. Without taking the expandability factors into consideration, the systems are neck and neck. Both servers in this comparison do not include operating systems.

With prices reaching all time lows, many people wonder what the manufacturers hope to gain by offering such low-priced systems. Although margins are slimmer on these types of systems compared to mid-range systems, manufacturers have two key objectives. First, manufacturers are attempting to gain market share and sell volume. Second is the anticipation of making profits from supplemental service, such as warranties, consulting, systems integration, etc.

A third factor coming into play is the downward pressure on the economy. Many manufacturers have reported slowing sales of pricier mid-range systems compared to low-end systems, which have tended to be relatively stable. Low-end systems have come down in price so much that the prices continue to be attractive and affordable solutions for budget-conscious small businesses.

In the near future, a continued battle in this low-priced segment will likely become even more heated. As for now, in terms of price to performance, Dell continues to lead the pack with IBM trailing slightly behind. For the past several months, Dell has continued to promote its value "SC" line with rebates ranging from $100 to $200. In combination with its already low prices, Dell's systems clearly give the most bang for the buck right now.

Like Dell, IBM has continued to show a strong will to cut prices and compete head on with Dell. IBM's systems across the board have continued to fall in price, making the gap between market-leader Dell, smaller and smaller. Whether IBM can continue waging this brutal price/performance battle with Dell is a question which only time can answer.

—End

Based in La Jolla, California, ARS, Inc. provides business-to-business Competitive Market Intelligence. ARS specializes in the daily tracking and analyzing of the e-commerce, PC, and Networking markets. ARS is a comprehensive resource for competitive market intelligence about you company's products, pricing, margins, marketing activities, promotional campaigns, and channel programs.