X64 Servers See Pricing Pressure in Q2, Big Box Sales Grow

September 8, 2008 Timothy Prickett Morgan

The urge to virtualize servers and a resurgence in mainframe sales has helped buoy overall server sales in the second quarter, according to statistics compiled by IDC, which reckons that the corporations and organizations of the world bought an aggregate of $13.9 billion worth of iron. Compared to the prior year’s quarter, sales rose by 6.4 percent, hitting the highest revenue level in a second quarter since 2000, the peak of the dot-com boom. Server shipment growth in the quarter rose by 11.1 percent, driven substantially by 2 million X64 servers that went out the door in the quarter–a rise of 12.4 percent.

While there is always much excitement about how many X64 server boxes go out the door, since this has been the dominant platform (in terms of numbers) for nearly two decades, sales in the X64 space have been decelerating in recent quarters. And that means there is a price war under way in the X64 server racket, which already has razor thin margins. If server virtualization on X64 iron–which drives customers to buy richer configurations as they consolidate boxes for economic and operational reasons–did not exist, it would have been necessary to invent it. Luckily, a lot of different companies have invented it, and this is helping mask the price war for raw X64 iron that is under way. IDC believes that X64 server sales only rose by 3 percent in the quarter to $7 billion, and that is the slowest growth rate in this part of the market since the third quarter of 2002.

“While all the major vendors exhibited strong unit growth, there was significant price competition throughout the quarter,” explained Jed Scaramella, senior research analyst for datacenter trends at IDC in speaking about the X64 market segment. “Low-end volume servers, such as one- and two-socket systems, are somewhat viewed as commodities and experienced the most pricing pressure. Additionally, the quarter was made noteworthy by the fact that several of the tier-one vendors began shipping their new systems targeting large-scale datacenters. Typically, these are stripped down servers that are designed to operate at maximum power efficiency. All components and features that are not essential, including server redundancy, are eliminated to reduce the capital expenditure of these datacenter customers.”

Significantly, this is the first time since the end of 2000 when revenue growth for X86 and X64 servers was lower than for the rest of the market. Virtualization may help average selling prices on X64 boxes and there may be a massive refurbishing of data centers under way, pushing volumes of cheap boxes, but virtualization is also helping RISC/Unix and proprietary server makers, too.

“The refresh cycle we’re currently seeing in the midrange and high-end segments is part of the IT transformation cycle that is continuing as older, scalable systems (with four sockets, eight sockets, or more) are being replaced, either by new scale-up servers or by groups of scale-out servers,” said Jean Bozman, a research vice president in the enterprise platforms group at IDC. “The growth in midrange and high-end servers this quarter shows that customers still see value in leveraging these scalable servers, with built-in high availability and RAS features, for some of their most mission-critical workloads and for workload consolidation.”

When dicing and slicing the server space by pricing band (not by operating system or architecture), IDC figures that the volume server space (machines that cost $25,000 or less) grew by only 2.1 percent in the quarter, underperforming the overall market for the first time since the fourth quarter of 2006 and driven by the pricing pressure in the X64 space in particular. Sales of midrange servers ($25,000 to $500,000) rose 1.5 percent in the quarter, while the high-end of the server space (servers that cost more than $500,000) saw an incredible 22.1 percent increase in sales, helped largely by big Unix and mainframe boxes as well as a smattering of Windows and Linux iron.

IBM‘s System z10 quad-core mainframes were shipping volume in the quarter, and IDC believes that Big Blue sold $1.6 billion in mainframes in the second quarter of 2008, an increase of 31.7 percent. This was not an easy compare for the mainframe, by the way, since Q2 2007 was pretty good for IBM in terms of mainframe sales. Mainframes sold in Q2 running the z/OS operating system accounted for 11.8 percent of the server pie.

If you don’t think of Linux as a variant of Unix, then the Windows server platform continued to be the revenue leader (and has long since been the volume leader) in the second quarter. Windows boxes accounted for $5.1 billion in sales globally in Q2, an increase of 1.7 percent and accounting for 36.5 percent of total server sales in the quarter. Unix servers saw their sales increase by 7.7 percent in the quarter, to hit $4.6 billion, while Linux server sales rose by 10 percent to hit $1.9 billion. If you think of Unix and Linux as different representations of an open systems operating system (and I certainly do), then Unix/Linux accounted for $6.5 billion in worldwide sales in Q2, up by more than 8 percent. That’s more than four times the growth for the Windows server platform in the quarter and is a reflection of the level of sophistication of virtualization and workload management on Unix boxes as well as the powerful inertia of legacy workloads in the data centers and data closets of the world. What IDC did not say is that sales of other platforms–mostly proprietary midrange iron–fell by around 34 percent to somewhere around $740 million. (I am estimating this based on the numbers IDC gave for other servers, and there are some rounding issues.) Some of that decline is the result of IBM segregating its System i sales into two bits–Power6 iron that is counted like Unix and Power5 and Power5+ that is not–and some of it is based on real declines in proprietary server sales, such as AlphaServers running OpenVMS and HP3000 minis, just to name two. As far as I can tell, Power iron running i5/OS or i 6.1 actually had a sales increase in the second quarter. (See IBM’s Q2 Server Sales: Let’s Do Some Math for more on that.)

The IDC numbers are factory revenue at the vendor level, including direct and channel sales, as well as servers, base storage, cabinetry and cabling, operating systems, and any bundled software on the iron. That’s why IDC’s mainframe numbers are much larger than my estimates for mainframe sales in Q2, which I pegged at $1.05 billion and by which I meant literally mainframe hardware sales and upgrades, including memory, channels, and so forth. Ditto for Power Systems i sales and other platforms.

Blade servers, which have been growing steadily in popularity since their advent in the commercial arena in 2000, saw a deceleration just like the X64 market, with only 40.8 percent revenue growth to $1.2 billion across all architectures. Blades accounted for 8.8 percent of sales in the quarter, and were helped by pricing RISC and Itanium blades from IBM, Hewlett-Packard, Hitachi, and Sun Microsystems. HP held a commanding 53.3 percent revenue share for blades, followed by a relatively weak 24.8 percent share for Big Blue; IDC said that Dell and Sun increased their market shares in the blade space, and their growth seems to have come out of IBM’s hide.

Still, IBM maintained its leadership status in terms of worldwide server sales in the third quarter, with $4.63 billion in sales, up 13.8 percent and giving the company 33.2 percent of the server pie. HP held the number two spot, and has a long way to go to catch IBM (once again, after closing the gap some in recent quarters). HP had $3.82 billion in server sales worldwide in Q2, up only 3.1 percent and giving it a 27.4 percent share of the server pie. (You can see who has been hit hardest by the price erosion in the X64 server racket, eh?) Dell had the number three position, with $1.74 billion in sales, up 14.1 percent and giving the company a 12.5 percent slice of the server space in Q2. If Sun and Fujitsu-Siemens would just merge and get it over with, Fujitsu would be the number three vendor ahead of Dell (at least for a year or two until Dell caught up), but alas that has not happened. Which means Sun takes its now-traditional fourth slot in the server stackup, with $1.56 billion in sales, down 7.2 percent, follow by Fujitsu-Siemens, with $531 million in revenues, down 2 percent. Other vendors accounted for an aggregate of $1.65 billion in sales, up 4.8 percent.

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