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Why Apple axed Xserve, and how it can reenter the server market

iOS Explosion: 2006-2010

When the iPhone was announced, Apple targeted a goal of taking 1% share of the phone market. That sounded like either a modest goal or a presumptuously aggressive one, depending on how much one knew about the mobile market.

More important than achieving some percentage of the overall phone market however, Apple targeted and successfully acquired a strategically significant chunk of the smartphone market; it was the most sophisticated and profitable segment, and the one where most growth was and will be occurring.

Sales of iPhones ramped up dramatically, followed by supporting sales of the iPod touch. Both were in fact Mac OS X devices, even if Apple chose to brand them independently. Apple also chose to count its existing iPod sales separately from iPhone sales, obscuring the fact that iPhone were adding to iPod sales, rather than growing along independently.

Seeking for something negative to report, pundits had fixated on the flat growth of non-iOS iPods, failing to realize that Apple had actually expanded the premium MP3 player market it had essentially invented, adding (in the most recent quarter) over 14 million iPhones and 4.2 million iPads to the flat 9 million iPods it sells in a quarter.

They also seem to have failed to realize that Apple not only ramped up its sales of Macs from 0.8 million computers per quarter in 2002 to 3.89 million Macs in the last quarter, but that it has also added nearly 25 millions new mobile devices that run a version of Mac OS X's Cocoa, albeit disguised as the iOS brand.

Evolving strategy and opportunity costs

Today, Apple's decade-ago investments in notebook design, consumer electronics, direct retail, and software development all seem prescient, and clearly paid off very well. In contrast, the company's efforts in servers haven't done very much at all, largely because Apple's core competencies in managing user experience don't translate well into the business of selling server hardware. Other companies do a much better job of selling server hardware, with service and support options Apple can't (or doesn't care to) match.

Somewhat ironically, Apple differentiated its server products largely by being inexpensive, such as using consumer grade SATA drives rather than more expensive, enterprise-tier SAS drives. The enterprise market is less cost sensitive, so in most cases they preferred better service over cheaper components. That's the complete opposite of what Apple is criticized for in the PC market, where rivals brand Apple as too fancy and too expensive and too focused on personalized service.

In the market the Xserve was attempting to address (rack mounted servers), nobody cares too much about how the equipment looks or how attractive the server software it run is. Most servers in such an environment are managed remotely and collectively rather than being navigated using a standard desktop GUI.

Xserve hardware briefly held a unique advantage in delivering better performance per watt compared to Intel's Pentium 4 servers, but that edge offered by PowerPC CPUs was erased both by Apple's transition to Intel and Intel's own leaps in providing much more performance and efficiency in its high end CPUs.

At this point, the only advantage offered by Xserve hardware is Apple brand affinity, something that is rarely expressed in corporate server closets. At the same time, Apple has made both its Mac OS X desktop clients and its new mobile iOS devices much better at accessing enterprise file, messaging, and VPN services, limiting the need for an Apple-branded server just to sell Macs.

Additionally, Apple is no longer trying to sneak into the enterprise market via the server room; today, it's being welcomed in the front door as a mobile device vendor. Continuing to focus on Xserve development because of a 2002 decision to sell Apple branded servers would be foolish given how much has changed since. Apple can drop the Xserve and continue to sell its Mac OS X Server product on its Mac Pro and Mac mini, meaning very little lost revenue but much lower development costs.

Who was using the Xserve?

It's often been said that Apple was the biggest client of the Xserve. The company doesn't break Xserve sales out of its "desktop" figures, but it's clear the number wasn't very high. This year, slightly more than half of all Mac sales were desktops rather than portables. The majority of those machines were iMacs and to a lesser extent, Mac minis. The Mac Pro is a relatively small market, and the Xserve is even tinier.

Apple does not use mass quantities of Xserves to run its own business; the online Apple Store and iTunes once ran on Apple servers, but the backend of MobileMe is Solaris hardware. There's little benefit in Apple using Mac OS X Server for any of its major online services, let alone unique Xserve hardware. The company's new server operations in North Carolina certainly do not use Xserve hardware.

The SproutCore front-end Apple used to build MobileMe is based upon web standards capable of running on any server platform, and the same goes for Gianduia frameworks used to build Apple Store web apps and the WebObjects app servers used to run iTunes, the App Store, and the online Apple Store. The backend email and messaging servers of MobileMe run Oracle's Solaris and its Java System Messaging Server software.

Outside of Apple, there were some interesting appellations of the Xserve. The company flirted with the hospitality industry in using Macs to serve on demand video to clients in hotel rooms and cruise ship cabins, all powered by racks of Xserves. Replacing these with Mac Pros would be rather difficult. Other users in conventional IT departments also deployed Xserves as an easy way to add Apple's own brand of network services to their existing server infrastructure.

However, while there is enough annoyance with Apple's discontinuation of the Xserve to sponsor a website petition, there does not appear to be enough of a market for Apple to continue to address with its own hardware. Apple does however have the capability to relax its Mac OS X Server licensing to allow partners to install it on third party hardware, which would be a bigger win at lower costs for the company than continuing to develop unique hardware at a loss.

On page 2 of 3: Another App Store, delegating server hardware.