U.S. Drags Down Server Sales in Q1, But Weak Dollar Helps

June 2, 2008 Timothy Prickett Morgan

Depending on how you want to look at it, the United States both helped and hurt sales in the global server market in the first quarter of 2008, according to statistics compiled by the box counters at IDC. The jittery economy in the United States has caused companies large and small to pull back on server spending, but at the same time the weak dollar compared to currencies in overseas markets that are experiencing decent growth in server sales as their economies build up and are amplifying the revenues as those sales are booked back in the States for the major server players.

This is not a new idea, of course, but it is something you always have to be aware of when you are analyzing global sales stats in any market. That’s why IBM, formerly the largest IT supplier and arguably the most global and data center focused of the IT players, has always shown growth rates as reported (when sales are converted into dollars) and in constant currency (as booked in local currencies). More IT vendors should do this, in my opinion, since it gives a better measure of real IT spending growth or decline in the economies of the world.

In any event, IDC’s reckoning of server sales in the first quarter of 2008 follows a few days behind those presented by Gartner, which we reported on in last week’s issue. IDC and Gartner dice and slice the server markets a little differently and provide different data publicly, so if you really want to have depth perception on the market, you need to look at what both companies say each quarter. IDC says that on a worldwide basis, the server market accounted for just under $13 billion in sales in the 13 weeks from January 1 through March 31, an increase of 3.5 percent compared to the first quarter of 2007. While this is the eighth consecutive quarter of growth and is the highest revenue level that IDC has seen the server space hit in Q1 since 2001, probably the peak of the dot-com boom, the growth rate in server shipments and sales continues to slow. Still, everyone is pretty peppy in the server space, with more than 2 million units shipped, up 7.8 from shipment levels in the year-ago quarter.

I have been pretty vocal that I think that the widespread adoption of virtualization will eventually cause a downdraft in server shipments to be followed by a severe crunch in server revenues. This obviously has not happened yet, and will take years to unfold as server virtualization hypervisors mature and become less expensive and are therefore more widely deployed. But it might just be that the first virtualization effects are hitting the so-called volume server space, which means machines that cost under $25,000 and usually these days that means machines that use X64 processors.

Check it out. The midrange server space (machines that cost between $25,000 and $250,000), which first started getting hit with virtualization contraction in 1999 with the AS/400 and in 2001 with Unix boxes, saw an aggregate revenue decline worldwide of 7.2 percent in the first quarter of 2008, the fourth quarter in a row for revenue declines despite the fact that customers are buying beefier boxes and virtualizing them. The reality is, customers then have fewer boxes, and they don’t buy a new box to add capacity, they usually turn on latent capacity that ships as part of the machine. (Virtualization and capacity on demand are a kind of one-two punch for new box sales.) The enterprise server space, machines that cost in excess of $250,000, were driven by mainframe and high-end Unix server sales and consolidation/virtualization projects customers are deploying on these machines. The virtualization whammy has already long since hit the high-end mainframe space–like decades ago–and is still hammering big Unix, Windows, and Linux boxes, but demand for these expensive machines has driven up sales by 9.7 percent in the quarter. But now let’s look at volume servers, which saw revenue growth of only 5.4 percent in the first quarter of 2008. That, says IDC, is the lowest revenue growth rate since the fourth quarter of 2006.

“The server market continues to experience solid growth as businesses of all types focus on expanding and refreshing their IT infrastructures for both traditional and emerging cloud-based workload,” explained Matt Eastwood, group vice president of enterprise platforms at IDC, who puts together the numbers each quarter. “Geographically, the Americas was the weakest region with an overall revenue decline driven in part by a slowing U.S. economy. However, it is also clear that positive exchange rates are helping drive positive server revenue growth in EMEA and Asia/Pacific. Technology suppliers will need to be careful not to become too dependent on this short-term economic boost.”

No kidding. But what choice do they have, really?

The blame for deceleration of server sales can be laid squarely on the X64 platform, which saw growth of only 4.4 percent in Q1, to $7 billion in sales; IDC says this is the slowest growth rate for X64 server shipments in the past seven quarters, despite shipment growth of 8.5 percent to 1.9 million units.

“The efficiency advantages of virtualization in enterprise servers is apparent across the industry and has led to continued demand for capable X86 solutions,” says Daniel Harrington, a research analyst with IDC’s enterprise server group. “Geographically, the growth in the market was driven by the EMEA and Asia/Pacific regions, while the U.S. actually showed negative revenue growth in the X86 segment for the first time since the dot-com bust of the early 2000s.”

(When IDC says “X86” it means both 32-bit and 64-bit processors; IT Jungle says X64 these days because no one is shipping a 32-bit Xeon or Opteron processor in a production server, which we always called X86.)

By IDC’s reckoning, servers based on other processor architectures–various RISC, Itanium, and mainframe processors–accounted for the remaining $6 billion in sales, up 2.5 percent. Within that group, IBM’s System z mainframes raked in $1.1 billion in sales, up 10.4 percent–the highest first-quarter sales IBM has posted for the mainframe in three years, all the more remarkable considering that everyone knew that the four-core z6 processor and their z10 mainframes were expected to be announced in early 2008. IBM’s share of the non-X64 platform sales in the quarter came to just over $2.5 billion, which means that the company sold just over $1.4 billion in Power servers in the quarter. (Big Blue doesn’t really sell Itanium kit or other kinds of RISC iron besides Power.) Hewlett-Packard is by far the dominant seller of Itanium-based systems and brought in $1.36 billion for Itanium and RISC server sales in the first quarter, according to IDC. Sun Microsystems doesn’t sell Itanium machines, but its Sparc products accounted for $1.17 billion in sales in Q1.

While blade servers have experienced good growth in the quarter and far exceeded the growth in the market at large, nonetheless the growth blades are seeing is far from the triple-digit growth that would be necessary for blade servers to become mainstream. The key blade server makers–HP and IBM–have finally understood that they need to have smaller blades that run on regular 110/120 volt wall current if they want blades to be adopted by small and medium customers. And that could help get blade growth up again in the stratosphere. But in the first quarter, blade server sales rose by 53.7 percent (the fastest growth rate in 10 quarters and no coincidence given the launch of the SMB blade products last fall) to hit $1.2 billion. Blade server sales are also being bolstered by Itanium, Power, and Sparc blades, which accounted for more than 5 percent of total blade sales, twice that of the year-ago quarter. If blades mimic the overall server market, then these blades should account for about 45 percent of the market in the coming years. There is a lot of growth left here.

By operating system platform, Windows servers accounted for $5.1 billion in sales in the quarter, up 4.2 percent and gaining 2/10ths of a percent of share to a total of 39.2 percent of all servers sold. Unix machines saw an 8/10ths percent decline in the quarter, to $4 billion; sales of volume and enterprise Unix boxes did well, but the midrange continues to be hit by Moore’s Law and pricing pressures from competition between Unix players and with other platforms. Linux server sales grew by 8.4 percent in the quarter, to $1.8 billion. The “Others” category, not counting mainframes, accounted for just under $1 billion in sales with sales essentially flat.

Like Gartner, IDC pegged HP as the market share leader for the quarter. IDC reckons that HP brought in $3.77 billion in total server sales in Q1 on a global basis, with 4.2 percent revenue growth that exceeded the growth of the market at large. IBM, by contrast, only grew by 2 percent to hit $3.65 billion in sales, bringing down the class average a little. Dell, which dominates the entry server space in North America, posted sales of $1.59 billion in the quarter, up 9.4 percent, while Sun had sales of $1.36 billion, with the vast majority of that (86 percent) coming from Sparc-based platforms, which are being hit by the virtualization downdraft and competition. Fujitsu-Siemens ranked fifth among server sellers, with $821 million in sales in the quarter, up 7.8 percent, while other vendors accounted for $1.8 billion in sales, up 2.6 percent.

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