Server Sales Perk Up a Little Bit in the Third Quarter

A bump in mainframe sales and the expansion of sales of blade servers were a big factor in a slight resurgence in server sales in the third quarter, according to market research from both IDC and Gartner. Both research firms tend to put out their numbers on the same day, and they take the pulse of the market in slightly different ways, but both agreed last Wednesday, when they put out their stats, that the third quarter was pretty good after relatively flat growth or declines in the prior several quarters.

According to IDC’s stats, which count the factory revenue of the vendors that make servers (and which does not include the revenue generated from the reseller channel), the worldwide server market in the third quarter of 2006 accounted for $12.9 billion in sales, up 3.5 percent from last year’s third quarter. This is the fastest growth rate in the server market for the past four quarters and the largest amount of revenue in a third quarter since 2000. Overall server unit shipments increased by 7.4 percent–the ninth quarter that server unit shipment growth has declined. This is a leading indicator for the virtualization crash that is yet to come, perhaps.

IDC reckons that the high-end server market, which consists of machines that sell for $500,000 or more, grew by 9.1 percent. IBM had a great quarter for mainframe sales in Q3 2006, with an increase in sales of 25 percent, and other makers of high-end machines have also seen an uptick in sales. Blade server sales were also up by 29.9 percent worldwide, to $738 million. Blade server shipments rose by 24.5 percent, according to IDC, and the blade server form factor now accounts for 5.7 percent of the overall server market and 10 percent of X86 and X64 server sales. IBM pulled away from Hewlett-Packard to take the lead in blade server shipments and sales in 2005, and Big Blue maintained that lead in the third quarter, with 42.3 percent of the revenue share compared to HP’s 35 percent share.

Mainframes and blades are not the only stories in the server racket in the third quarter, however. Undoubtedly, the move toward dual-core, virtualization-enabled servers is also accountable for some of the growth, as companies begin the process of virtualizing their server infrastructure to get rid of server footprints. Because the server installed base is so big–on the order of tens of millions of machines–the move to 64-bit X64 machines with virtualization built in is bound to cause an uptick in so-called volume server sales. The question is whether such a trend will continue in the long run, if companies can find sufficient new workloads to justify buying ever more server capacity after they have consolidated.

In short, while mainframes and blade servers get the credit for the modest growth of server sales in the third quarter, the real story is that sales of regular tower- and rack-based servers has not collapsed, thereby negating those gains. Also to be taken into account is that we are in the midst of a substantial technology upgrade cycle that will prop up sales for many quarters to come. As it is, IDC says that volume X86 and X64 servers grew by 3.8 percent in the quarter (including blade, tower, and rack form factors), only slightly outpacing the market. The midrange–by which IDC means servers that cost more than $25,000 but less than $500,000–saw sales decline by 2.3 percent, even after a resurgence in Unix system sales among a handful of vendors. The move toward X64 architectures that got underway a decade ago in earnest continues apace. Equally significant is the fact that midrange platforms were equipped with sophisticated virtualization technology several years ago. Sales are down, in part, because of the need to use virtualization to drive up system utilization.

By IDC’s math, Windows-based servers accounted for $4.8 billion in sales, up a little faster than the market at 4.6 percent revenue growth compared with last year. Sales of Unix-based servers dropped by 1.7 percent to $3.9 billion, considerably lower than Windows servers. Unless a lot of Unixes go open source on X64 iron, as Sun Microsystems has done with its Solaris Unix variant, the second quarter of 2006 could be the last time Windows and Unix were both vying for the top spot in the server market. Sales of Linux-based servers (including Linux partitions on mainframe and formerly proprietary servers) accounted for $1.5 billion in sales, up only 5.4 percent. Linux machines accounted for 11.8 percent of overall server sales, and its growth has moderated considerably. Linux is now mainstream, but it certainly has not taken over the server market as Unix and now Windows have in the past.

In terms of server architectures, sales of X86 and X64 servers based on processors from Advanced Micro Devices grew by 79.7 percent in the quarter, according to IDC, which gave AMD 19.8 percent of the X86 and X64 server market. The X86 and X64 machines represent the vast majority of shipments in the server market, and have for years. However, in the wake of its “Woodcrest” dual-core Xeon 5100 processors, which are the first credible alternative to AMD’s dual-core Opterons, Intel was able to recapture some market share in the third quarter, with 80.2 percent of X86 and X64 server spending. IDC calculates that X86 and X64 servers drove $6.6 billion in sales, up 4.8 percent, and shipments of 1.75 million, up 8.8 percent.

Sales of Itanium-based machines grew by 23 percent, to more than $700 million, the second quarter that this sales level has been attained. Obviously, the Itanium platform still represents a tiny fraction of overall server sales.

By vendor and revenue, IBM is still the top dog in the server market, with just under $4.3 billion in sales during the quarter, up 6.6 percent. HP is ranked number two, with $3.4 billion in sales, a decline of 2.1 percent from the year-ago quarter. Dell grew just a little bit faster than the market, with sales up 3.8 percent to $1.36 billion, while Sun grew a lot faster than the market, up 15.8 percent to $1.295 billion. Sun grew its X64-based server business by 46.5 percent in the quarter, which is why it was able to pull closer to Dell in the revenue rankings. The Fujitsu-Siemens partnership had a revenue decline of 9 percent in the third quarter, to $690 million, and the total of all other vendors grew faster than the market to hit $1.93 billion in sales.

And Now, Gartner’s Take

Rather than count factory revenue, Gartner estimates the actual amount of revenue that end users spend on servers, including the portion of sales that go to the channel. Like IDC, Gartner says the combination of X86 and X64 servers in general is the growth engine in the market, and that the blade form factor in particular is experiencing high revenue and shipment growth rates.

Gartner reckons that worldwide server revenues in the quarter were up 4.4 percent to $13 billion, and that shipments increased by 9.1 percent to just over 2 million units during the third quarter. Gartner says that sales of RISC-based and Itanium-based Unix servers fell by 0.6 percent on the revenue front, with shipments down 6 percent. IBM apparently took the lead in the Unix racket this time around, according to Gartner, with Sun slipping to second place and HP coming in third. Sun made a big deal about HP losing revenue share in the Unix space, but with the Itanium-based Integrity servers being much less expensive than the HP 9000s and offering much better virtualization, it is very difficult for HP to keep increasing Unix server sales without growing its Unix business. And HP is platform agnostic on the Integrities–it just wants to sell iron, and if customers choose Windows or Linux. (This is not necessarily the best strategy for HP in the long run.)

In terms of worldwide server revenues, Gartner agrees that IBM came out on top in the third quarter, with $4.38 billion in sales, up 7.4 percent. Gartner says that HP’s sales fell by 6 percent, to $3.29 billion, and Dell’s increased by 10.9 percent to hit $1.41 billion. Thanks to big gains on the X64 front and on the stabilization of the Sparc front (with both “Niagara” Sparc T1 machines at the low end and the dual-core UltraSparc-IV+ in midrange and high-end machines), Sun was able to pull off a 24.7 percent sales growth rate in the third quarter, hitting $1.31 billion in sales. Rounding out the top five was Fujitsu-Siemens, with $634 million in sales, down 8.6 percent. Other vendors accounted for just under $2 billion in sales, up 6.5 percent and growing faster than the market at large thanks to some innovative but smaller vendors.

In terms of shipments, HP came out on top in the Gartner rankings, as it has since acquiring Compaq many years ago. HP pushed 540,609 servers out the door in Q3, an increase of 7.2 percent and giving it 26.5 percent of all servers shipped worldwide. Dell is the number two shipper, with 459,950 units shipped, increasing by 10.5 percent since last year’s third quarter. IBM grew shipments by 7.7 percent to 322,777, and significantly for Sun, shipments grew by only 6.4 percent to 83,018 in the quarter. If Sun wants to be solidly profitable as a server company, it is going to have to grow shipments by a lot more than this. Fujitsu-Siemens pushed 65,171 server units in the quarter, down 5.9 percent. Other vendors seem to be doing better as a broad category, with shipments up 13.4 percent to 560,913 units. There is still room for innovation and competition in the server market, apparently.

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