Midrange Boxes, Big Iron Drive Server Growth in Q4 2006

March 5, 2007 Timothy Prickett Morgan

The server market watchers at IDC have built their models of the business for the final quarter of 2006, and this time around, some interesting things seem to have been a-foot as last year drew to a close. IDC reckons that for the first time in a long time, the midrange and high-end server markets are outgrowing the volume server space (which is mostly X64-based machines these days). Moreover, revenue growth far outpaced shipment growth in the fourth quarter of 2006, which is a reverse of the usual trend.

IDC has been tracking the quarter-by-quarter slugfest in the server market for a decade, and the last quarter of 2006 was the first time in that 10-year history of the Server Tracker service that both midrange and high-end servers grew faster than the volume server market.

Matt Eastwood, program vice president of IDC’s worldwide server group, said that the midrange server space (which means machines that cost between $25,000 and $499,999, including frames, processors, memory, base disk drives, and operating systems) had revenue declines for four straight quarters from Q3 2005 through Q3 2006, but that in Q4 2006, revenues for this class of machines actually rose by 5.4 percent.

And on high-end boxes that cost $500,000 or more, aggregate revenues rose by 11.5 percent. This is the second quarter of revenue growth for big iron, which grew 9.1 percent in Q3 2006. In both quarters, IBM’s resurgence in mainframe sales (moving it close to the record levels it set in 2004 and largely recovering from a decline in 2005) was a key driver. An uptick in high-end server sales among the Unix customers of Hewlett-Packard and Sun Microsystems is also bolstering the high end of the market.

This growth stands in stark contrast with the relatively meager 2.1 percent revenue growth that the volume server market–meaning machines with a price tag below $25,000–exhibited in the fourth quarter.

When you add it all up, the combined server market across all vendors, all types of machines, and all geographies amounted to $15.2 billion in sales, up 5.2 percent from the fourth quarter of 2005. Unit shipment numbers were the same as last year–just under 2 million units. No unit shipment growth, after 10 consecutive quarters of declines in shipment growth.

“It is clear that both large and small organizations across the world are investing aggressively to simplify and virtualize their IT infrastructures,” said Eastwood in a statement accompanying the market share report. “For the first time in more than 10 years, average selling values in the quarter increased year over year as IT managers move to consolidate IT workloads. This shift towards a shared compute infrastructure is driving additional scalability, memory attachment, and I/O needs, which in turn, lead to higher ASVs. For technology suppliers, this inflection point represents an opportunity for the vendors best equipped to innovate their systems, software, and services offerings and meet these challenges.”

In other words, you better have boxes that can host virtualized server environments. And you better not count on unit volumes to prop up sales and reduce unit manufacturing costs.

In terms of server architectures, sales of X86 and X64 servers grew by 7 percent to hit $7.2 billion, the fastest revenue growth rate this section of the market has had in five quarters. The volume market, as the name implies, accounts for the vast majority of server shipments. In this case, it was 94 percent, while X86 servers a decade ago only accounted for about three-quarters of shipments. Unit shipments of X86 and X64 servers grew by only 1.1 percent in the quarter, to 1.85 million units.

In the X86 and X64 segment, IBM grew sales by 7.8 percent, HP grew by 8.2 percent, and Sun grew by a stunning 85.8 percent. HP had $2.4 billion in sales, or 33.9 percent of the X86 and X64 server pie, with IBM and Dell tied for second place with $1.44 billion in sales each and 20 percent of the pie. While Sun had the highest growth of any X64 server vendor, it is starting far behind in this market and will have to hold this pace–or exceed it–for many years if it ever hopes to catch IBM and Dell. For the third straight quarter, machines using Advanced Micro Devices‘ Opteron processors accounted for 20 percent of server revenue share in the X86-X64 segment.

Sales of Itanium-based servers grew by 71.5 percent in the fourth quarter, pushing sales across a dozen vendors to $1.1 billion; HP is the largest seller of Itanium-based machines and will likely remain that way unless something radical changes in the server space.

In terms of operating system type, Windows-based servers once again just edged out Unix boxes, according to IDC’s estimates. Windows server sales grew by 9.4 percent to $5.3 billion, on unit shipment growth of 5.1 percent. Clearly, companies are deploying bigger and more expensive Windows boxes. But Unix is not far behind, with sales up 2.8 percent to $5.1 billion in the fourth quarter of 2006. And if you consider Linux a type of Unix–and that is a fair argument to some ways of looking at it–then Unix is still winning. Linux server sales grew by 15.3 percent in Q4 2006 to hit $1.8 billion in sales. Interestingly, Linux server shipments actually declined by 0.8 percent in the quarter, according to IDC.

Virtualization and consolidation are starting to work their black magic on shipments, after 18 quarters of consecutive double-digit shipment growth in the Linux server space. So if you think that virtualization can’t have a very fast impact on the market, it would appear that you are wrong.

IBM’s mainframes, which have been virtualized for years, have already undergone a massive contraction in footprints–there are about half as many mainframe footprints now as there were a decade ago. But because companies that like mainframes are doing different things with them–and therefore are adding engines so they can get rid of outboard X64 and RISC servers–mainframe sales are growing smartly. Sales of mainframes that run IBM’s z/OS operating system grew by 5 percent, hitting $1.7 billion in the fourth quarter of 2006. This is the highest sales level for mainframes in eight years, and mainframes accounted for 11.2 percent of all server sales in the quarter.

By vendor, IDC reckons that IBM is the top seller of servers, with $5.77 billion in sales, or 37.9 percent of the total market for the final quarter of 2006. But IBM actually lost ground because of poor System i5 sales and weaker than usual System p5 Unix server sales, which means IBM only grew at 3.8 percent against a market that grew by 5.2 percent. HP came in second place, with $4.09 billion in sales, up 5.1 percent and giving it 26.8 percent revenue share. (About the same as last year’s fourth quarter.) Sun definitely won the most-improved vendor award, growing by 24.4 percent and knocking Dell out of the number three position. Sun had an aggregate of $1.47 billion in server sales in Q4, compared to Dell’s $1.43 billion. Dell only grew by 2.4 percent. The Fujitsu-Siemens collective grew sales by 2.8 percent in the quarter, posting $623 million in revenues. Other vendors combined sold $1.85 billion worth of server gear, a tiny bit more than a year ago.

In the blade server market, HP’s new c-Class machines seem to be finding traction just as the blade market is starting to cool. Blade server sales accounted for $788 million in sales in the fourth quarter of 2006, or about 5 percent of the total server market. That amounted to a revenue increase of 18.2 percent compared to a year ago, against an increase of 16.9 percent in blade server shipments. HP had $330 million in blade server sales in Q4, according to IDC, giving it 41.9 percent of sales and putting it in the number one position for the first time in a long time against IBM, which had $292 million in sales and 37 percent of the space. Dell, Sun, and a few other vendors had the remaining scraps of sales in the blade space.

For the full 2006 year, IDC says that server sales were up 2 percent to $52.3 billion. X86 and X64 servers may have accounted for most of the boxes sold–6.9 million units were pumped out using Intel and AMD chips, an increase of 7.4 percent over 2005–but these boxes only accounted for $25.8 billion in sales. That said, X86 and X64 server sales grew by 5.2 percent for the full year–twice that of the market at large. Which means the non-X64 part of the market, in aggregate, is up only a bit for the year.

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