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With economic downturn, Dell, HP cut U.S. server prices

The U.S. economic recession has prompted server vendors HP and Dell to reduce prices, but in international markets, currency fluctuations may drive price increases.

In a response to the U.S. recession, IT hardware vendors like Hewlett-Packard Co. and Dell Inc. have responded by reducing hardware prices. Conversely, Europe and other markets have begun to see server prices increase because of currency exchange fluctuations.

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Take, for instance, Dell; the company recently reduced its U.S. hardware prices almost across the board, according to Mason Reay, the vice president of Dell marketing operations. And during the last quarter, by cutting prices, Dell has exceeded earnings expectations .

"I would not expect to see any price increases in the U.S. given our model and our inventory," he said. "[In late November], we took a series of price reductions across the board on our servers, from racks to blades. The prices depend on the configuration, but some systems received a 10% or greater price decline."

Dell claims that in this case the price cuts are not the result of surplus supply, but rather of a strategy to increase sales in a tough economy.

"We watch demand signals in the market very carefully and we were able to call the downturn in the market early on. So from our supply-base perspective, we noticed a slowdown and responded," Reay said. "We will also be watching when the demand picks up again and respond accordingly. That said … when there is an increase in demand, that doesn't mean prices will go up, and if [demand] continues downward, I can't say prices will drop further. We may just take capacity out of the market to keep prices stable.

Though HP did not comment for this article, reports indicate that the company also reduced its prices to compete with Dell in the U.S.

Strike now or wait for better deals?
It's clear that most companies have reduced discretionary spending, and IT projects may be delayed or even canceled because of unsteady economic conditions. That suggests that prices for IT equipment should decline further, right? "The laws of supply and demand imply that with reduced demand, prices may fall. But when, and by how much, is impossible to say at this time," said Gary burgess, the senior vice president of research operations at Ideas International Ltd., in Australia. "I suspect that because the market is competitive already and margins are tight, vendors are more likely to focus on a deal-by-deal basis, and look at packaging and special offers, rather than making a major structural shift to cut prices across the board."

Without offering information on future price reductions, Dell's Reay said that now is a good time to invest in server hardware. "It is hard to say when the best time to buy is, because it depends on a number of factors. But right now is a fantastic time to buy [not only because of price cuts but] because you would be decommissioning old servers and implanting new servers that reduce infrastructure costs like power, cooling and space," Raey said.

It is hard to say when the best time to buy is. But right now is a fantastic time.
Mason Reay
VP of marketing and operations,Dell Inc.

"Downturns are always a good time to buy, assuming you have money," Burgess said. "So companies with cash to spend should be in a great position to get a good deal."

While prices do matter to companies, the main drivers in 2009 for IT investments should be based on business needs; improving it and cutting costs for it. "If a project is ready to go now, with these benefits already identified, it is Ideas' opinion that they shouldn't be delayed," Burgess said. "The cost of delaying and not realizing the project's benefits as quickly as possible, especially in a tough market, could far outweigh any benefits of waiting to see what happens with product prices."

Outside U.S., server prices on the rise
Meanwhile, IT buyers outside the U.S. may see price increases. The global financial crisis has triggered a sudden re-evaluation and re-pricing of foreign exchange cross-currency rates worldwide, resulting in some IT hardware pricing changes in markets across the globe, according to a recent blog by Chris Ober, a principal worldwide storage analyst at Ideas International .

Since the U.S. dollar appreciated against most major currencies (except the Japanese Yen) as of the last week in November, there has been short-term upward pressure on prices in countries where currencies have changed, like the United Kingdom and Australia, according to Ideas' Burgess.

Compared with the American dollar, currencies that have moved significantly include the Australian dollar, which has decreased 30%; consumers there have begun to see price increases in the range of 15% to 20% in some cases. The euro and British pound are down around 20%, so that will put some upward pressure on prices as well, Burgess said.

"We have already detected price increases in the order of 5% to 10% over the past few weeks," Burgess said, adding that changes are patchy and not all products or companies have made such changes. "But this could be because we are currently in the middle of the change cycle."

In November, HPincreased prices in the U.K. for its storage and server products between 3% and 5%, and over the past 60 to 90 days, competitors like Dell have adjusted prices in Europe and other markets accordingly.

While Ideas International has observed server and storage prices move upward in international markets, it has not seen equivalent changes in U.S. prices, Burgess said.

"In the short to medium term, we don't see the same upward drivers on price in the U.S. that we are seeing in some international markets, which are purely currency related," Burgess said. "Our pricing research has not detected any general structural shift in pricing in the U.S., up or down, since the financial crisis became apparent," Burgess said. "That is not to say that these changes are in the pipeline. However, it is Ideas' opinion that if such price changes were to occur, they would most likely be downward and as a result of local market conditions in the U.S. economy."

Let us know what you think about the story; email Bridget Botelho, News Writer.

Also, check out our data center blogs; Server Farming, Mainframe Propellerhead, and Data Center Facilities Pro.

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