Sun sees a future in server appliances

Sun Microsystems has made a dramatic statement of intent in the up and coming server appliance space by agreeing to pay $2bn for Cobalt Networks.

But the size of Sun's offer for a company that has about 300 employees and a global customer base of no more than 4000 has shocked many people - market analysts, rivals and customers alike.

Server appliances are tipped by many as the engine of choice behind tomorrow's ebusiness startups. They are targeted mainly at small to medium-sized enterprises (SMEs) that do not need the sort of muscle-bound servers Sun has hitherto specialised in, preferring instead something inexpensive and uncomplicated that will run their ecommerce and email applications with the minimum of fuss.

Server appliances offer an alternative to the patchwork approach of implementing a dedicated router, firewall, staff-intensive Windows NT or Unix server, along with all the rest of today's networking paraphernalia. Instead, everything you need is provided by a plug-and-play box.

Although the technology has only been adopted by a modest number of users as yet, its possibilities have excited many. Researcher IDC predicts that the server appliance market will be worth $12bn by 2004, which no doubt explains why Compaq, Dell, IBM and Hewlett Packard have all produced or acquired their own versions, and why many smaller operations such as Right Vision, Esoft, Extended Systems, Equiinet and, of course, Cobalt have also developed variations on a theme.

However, this alone does not explain Sun's keen interest in the sector. For starters, the supplier is famed for its stance as an industry maverick. Following the herd down unproven blind alleys is right out of character for a firm that has doggedly, and successfully, ploughed its own furrow for years in contented isolation.

But Cobalt represents a notable change of tack for Sun on other fronts, too. Its hardware is based around Intel-compatible AMD processors, a first for a vendor that has always relied on the mettle of its own Sparc technology. Furthermore, Cobalt is a big Linux supporter, a Unix variant that Sun has hitherto eschewed in favour of its own more mature Solaris operating system.

And while the Holy Grail of cracking the SME sector has been bedevilling other hardware vendors for years, Sun has so far shown little interest.

So what's happening and why is Sun going after this space now?

On the defensive
The Cobalt move is perhaps best seen as a defensive measure rather than a speculative gambit. Sun has begun to realise that, with more and more of its corporate customers looking for complete technology bundles that interact seamlessly, the time is running out for its 'We're the best, so stuff Microsoft and IBM' approach. This no longer a message that opens doors.

At the same time, Sun sees the very real possibility of server appliances eating away at the lower end of its server sales. Although the entry-level server market has been a weakspot for the supplier for a few years now due to the advent of Microsoft's Windows NT, this situation is only likely to get worse as its successor, Windows 2000, gradually matures, and Intel goes from strength to strength as its processors improve in performance.

But any further competition in this sector could see Sun needing to downsize and consolidate around its higher-end products - a grim prospect for such an ambitious and proud company.

Sun has also spent the past year or two riding on the crest of the ecommerce wave, selling its servers by the lorry load to hundreds of thousands of customers hungry for a bit of ebusiness action.

But the decline in new technology stock prices has depressed that market, and helped to ensure that the next wave of ebusiness startups is looking to keep infrastructure and IT costs to a minimum. So this means that cheap web devices could be right on the mark.

As Mark Johnson, software product manager for Ideal Hardware, Cobalt's UK distribution partner, said: "If Sun doesn't buy Cobalt now, how much might it have to pay in a year's time? Plus, Cobalt was definitely beginning to hurt its marketshare."

Cashing in
Bob Jones, chairman of rival server appliance vendor Equiinet, agrees that $2bn, while not a bargain basement price, is not all that unreasonable. "Cobalt's market cap has been around the $1.7bn mark, and Sun has to pay a bit of a premium on top of this to get shareholders excited. On price, it really didn't have much room for manoeuvre."

But as Jones points out, IBM made a comparable late entry into the market with its Whistle acquisition earlier in the year, so Sun's move has some precedent.

Sun's president and chief operating officer Ed Zander, meanwhile, has been bullishly talking up the purchase, which is likely to be completed by the end of the year, saying that Cobalt will help the vendor to "establish [Sun] in low-end server appliances and immediately jump into the marketplace with a proven, world-class product offering".

In truth, it is far too early to say whether server appliances will take off, or if they do, which market sectors they will prove successful in. After all, it is not so long since vendors and analysts were queuing up to endorse the network computer (NC) as an alternative to PCs. The NC is still with us, but remains a niche option, and if anyone had paid $2bn for a stake in the business, they'd now be looking stupid.

So far though, encouragingly for Sun, one of the important early adopters has been the ISP market, which is adding value to its own online application hosting proposition by offering server appliances to customers as part of a managed package.

This enables ISPs to charge more for a more comprehensive service and to lock their customers in at a time when many are seeing rapid churn in their customer bases.

A significant percentage of ISPs are also buying server appliances to use in their own operations, according to Equiinet's Jones. "Around 50 per cent of our sales are to ISPs who are reselling them, while Cobalt is selling more for ISPs' own use," he says.

With the ISP market continuing to consolidate at a rate of knots, however, Sun and everyone else with a stake in the server appliance game will be hoping that their appeal broadens into other areas sooner rather than later.