The Server Market Struggles for Growth in Q2, Says IDC

The second quarter is never a particularly good one for the server business, and according to the latest statistics from IDC, server makers are having a hard time making up their revenues in volume. In the second quarter of 2006, worldwide server revenues across all types of servers rose by only six-tenths of a percent to $12.3 billion, and server volumes decelerated to a mere 8.3 percent growth, with just over 1.8 million units shipped. This is the third straight quarter of single-digit server shipment growth, and the eighth quarter of slowing shipments.

The growth in server sales was not, however, even across all geographies, which is good news of a sort. Growth was a lot higher in the United States, where revenues rose by 3.6 percent, and in the Asia/Pacific region, where they were up by 2.6 percent, according to the analysts who track servers on a quarterly basis at IDC. But sales were weak in Europe, the Middle East, and Africa as well as in Japan, and this was more than enough to offset the gains in the U.S. and the rest of Asia.

Not all vendors fared equally, either. IBM remained the top server vendor in terms of revenues, with $3.81 billion in sales, giving it a 31 percent share of the market. But its sales actually slipped compared to last year by 2.2 percent, and Big Blue seven-tenths of a point of market share. Hewlett-Packard was the number two vendor, as it has been since it merged with Compaq four years ago, with $3.42 billion in sales. HP also saw its revenues decline, by 1.7 percent in this case, and it lost share as well, capturing only 27.8 percent of the server dollars spent in the quarter. Sun Microsystems, after a slight revival in its Sparc-based Unix server line thanks to the UltraSparc-IV+ chips, increased interest in its “Niagara” Sparc T1 chips, and a technically elegant Opteron-based “Galaxy” server line, is back solidly in the number three position in the server market. Sun posted server sales of $1.59 billion, an increase of 15.5 percent, giving it a 12.9 percent share of the worldwide market and an increase in 1.7 points of market share compared to the second quarter of 2005. Dell dropped by 1.3 percent to hit $1.27 billion in sales, and the Fujitsu-Siemens partnership garnered $554 million in sales, growing by 0.5 percent. Other vendors comprised $1.65 billion in sales during the quarter, accounting for 13.4 percent of the market and growing at only 0.8 percent year-on-year.

In terms of platforms, the Unix server market declined by 1.6 percent to $4.3 billion and unit shipments of Unix boxes declined by 1.8 percent to 166,000 units. But, Unix still edged out Windows as the dominant platform–if only by a smidgen. The volume segment of the Unix server market–driven by Sun’s revival of Solaris on both Sparc and X64 platforms, HP’s aggressive marketing of Integrity systems and its HP-UX operating system, and IBM’s continuing price/performance improvements in its System p5-AIX platform, helped bolster Unix sales. If IBM, HP, and Sun were not delayed with their product rollouts and processors in the Unix space, it is reasonable to guess that Unix would have done a lot better. But Power5+, UltraSparc-IV+ and Opteron, and dual-core Itanium 9000 processors will all be shipping in the IBM, Sun, and HP Unix product lines in the third quarter, and Unix should see an uptick.

The Windows platform, which has been jockeying for dominance with Unix for the past several years in the server market, accounted for $4.2 billion in sales in the second quarter, according to IDC, and increase of 3.1 percent. Windows-based server shipments increased by 11 percent. IDC said in a statement accompanying the statistics that companies are beginning to deploy richer Windows server configurations, often as part of a virtualization and server consolidation initiative, and this is helping drive Windows sales faster than the market at large.

Somewhat surprisingly, Linux seems to be running out of steam a little. After nearly four years of double-digit revenue growth, the Linux server sub-market accounted for only $1.5 billion in sales in the second quarter of 2006, an increase of only 6.1 percent. IDC didn’t say this, but it could be that the mainframe market has saturated itself with Linux and is no longer consuming Linux MIPS like it has for the past several years. Linux server shipments grew 9.7 percent in the quarter, and most of the revenue and shipments were on X86 and X64 servers.

Matt Eastwood, vice president for server research at IDC, said that single-socket and high-end 32-socket and larger servers had sharp growth in the quarter. Single-socket boxes, which can now be equipped with dual-core processors, are starting to cannibalize the two-socket server market (contrary to what many server vendors said would happen a few years ago when dual-core X64 chips were on the horizon). Shipments of single-socket boxes rose by more than 12 percent in the quarter according to Eastwood, who also noted that two-socket shipments rose by only 9.3 percent and four-socket shipments increased by only 6.9 percent. Revenues for two-socket machines and four-socket machines declined in the quarter, in fact.

Volume server revenue–by which IDC means machines that use any processor or operating system but cost less than $25,000–rose by 6.2 percent in the second quarter of 2006, and shipments rose by 9.3 percent. However, this engine of the server market is showing some signs of fatigue, since this is the third consecutive quarter of single-digit revenue growth. Sales of midrange machines, which cost from $25,000 to $499,999, continued to slide, with revenues down 3.5 percent, and enterprise-class boxes declined even further, with sales falling by 6.9 percent compared to a year ago.

As has been the case for a very long time, X86 and X64 servers dominate both sales and shipments in the server space. Machines based on X86 and X64 processors from Intel and AMD accounted for $5.9 billion in sales in the quarter, up 3.3 percent. This was the lowest growth for the X86/X64 segment in the past eleven quarters. X86 and X64 shipments rose by 9.8 percent to 1.68 million units. IBM, HP, and Sun all grew their sales in this segment during the quarter. IBM grew slower than the market, HP outgrew it slightly at 3.6 percent growth, and Sun grew by 48 percent. Dell shrunk, only capturing 21.4 percent of the X86 and X64 server market, while HP captured 34.5 percent of this space. AMD was the Cinderella story in this segment, with $1.2 billion in server sales on Athlon and Opteron processors, accounting for 20.2 percent of all X86 and X64 server sales. In the four-socket space, AMD’s chips captured 40 percent of the revenues, according to Eastwood.

Itanium-based server sales, which are a separate category because Itanium machines run many operating systems, accounted for a total of $740 million in sales during the second quarter, up 36.4 percent and now accounting for 11.7 percent of all non-X86 and non-X64 sales.

Blade server sales continued to explode, with sales up 37.1 percent to $639 million and shipments up 29.7 percent. IBM had 39.5 percent of the sales, while HP has pushed hard to close the gap with IBM and got 38.9 percent of blade sales.

For the past several years, as server sales were booming and even when they started to slow, neither IDC nor Gartner have been espousing the idea that virtualization, multicore chips, and progressively more powerful and cheaper entry servers would cause a downdraft in server shipments and revenues.

I have said, and I continue to believe, that the advent of hardware-assisted virtualization and multicore processors will drive a new wave of server buying, boosting shipments in the near term–perhaps over two to three years. But at some point, the vast majority of the base is virtualization ready, and server consolidation has taken out lots of server footprints out of the worldwide installed base, and therefore the rate of refresh on new machines, in terms of footprints, slows. This happened to mainframe, Unix, and proprietary midrange server sales a few years ago, and it will happen to X64 servers going forward.

IDC is now admitting that these effects are starting to have an impact on the market, particularly in the X86 and X64 market. “The X86 server segment continues to be the growth engine for the overall server market as customers increasingly migrate workloads to industry-standard infrastructures,” explained Jed Scaramella, an enterprise server research analyst at IDC. “However, this growth has been tempered by the introduction of technologies such as virtualization and dual-core into the X86 server space. Enterprises are employing these technologies to increase the efficiency of their installed server systems, rather than deploying new systems.”

But, IDC’s forecasts may not fully weigh in these effects. IDC is forecasting that the server market will grow from $55 billion in sales and 7 million shipments in 2005 to $62 billion in sales and 11.8 million shipments is suspect. Those are very big shipment numbers.

It is hard to guess what will happen four years from now, and it is always possible that some new technology–such as I/O virtualization–will drive yet a new wave of server buying. But the undeniable trend in the IT industry is toward much more efficient use of servers. If the industry can generate $55 billion selling servers that run at maybe an average of 20 percent utilization, what happens when the industry sells machines running at 65 or 70 percent utilization thanks to virtualization and other technologies? It will take workload growth of a factor of three to four over five years to make up the difference, and that will be required just to keep revenues flat. What happens if Software as a Service (SaaS) and utility computing take off, as many expect, and companies start paying only for the computing that they actually use, not what they have on tap?

This story is far from over, and the future may not be as bright for server makers as IDC and Gartner might lead us to believe. And, as I have said before, I will be thrilled on this one to be wrong. I hope a whole new wave of applications and uses of computers comes along to prop up the server market. So, application coders, get your brains and fingers in gear. See whatever it is that I can’t, and create it.