Server Sales Slumped As 2008 Stumbled to the Holidays

March 2, 2009 Timothy Prickett Morgan

Unfortunately for server makers, the box counters at IDC had a bit less work to do in the fourth quarter of 2008 as the server market took a big dip. The company said last week that it believes that server sales worldwide fell by 14 percent in the final quarter of the year to $13.5 billion. Shipments declined by 12 percent, which means average selling prices were on the decline as companies moved to lighter configurations and vendors cut prices to try to move product.

Thanks to the global economic crisis–and yes, I am getting tired of saying that phrase and hearing about it, but there is no avoiding it–the server racket had already been slowing in the third quarter of last year, and it is hard to imagine that the first quarter of this year is going to be anything short of miserable. Still, it will have to be a pretty bad quarter to match the third quarter of 2002, when sales dropped 28 percent. In Q3 2008, sales were off 5.2 percent to $12.6 billion with shipments rising 2.8 percent. I think it will be difficult for server makers to the hit sales levels they were able to make as the U.S. economy was getting jittery back in the January through March quarter last year; at that time, worldwide server sales rose by 3.5 percent to just under $13 billion, with shipments rising 7.8 percent to just over 2 million units.

We have been averaging around 2 million units per quarter since early 2008, and the revenues have bopped up and down because of the different mix of servers companies have been investing in as they go through their IT budget years. In the year-ago first quarter, the weak U.S. dollar masked relatively weak sales globally because overseas revenues were brought back to the States, where the major server makers are located, amplifying the sales they derived from overseas customers. In the second quarter of last year, server buyers were shopping like it was 1999, hitting numbers that we hadn’t seen in a decade. All seemed wonderful, unless you looked at currency effects carefully. In the final two quarters of last year, the dollar strengthened against other currencies even as the U.S. economy weakened. Moreover, all of the economies of the world are downshifting as it is now apparent that U.S. demand for their products is slacking. Globalization means economies all catch the same cold. It really means there is only one economy, but don’t try to tell the central banks of the Western world that, or the citizens of nations, for that matter. We all think we have more degrees of economic freedom than we really do have.

“The server market experienced its sharpest decline since the middle of the dot-com slowdown nearly seven years ago,” says Matthew Eastwood, group vice president of enterprise platforms group, who puts the server numbers together each quarter at IDC. And he didn’t offer any better of an assessment looking ahead than I just did. “All server vendors, geographies, and technology segments were impacted significantly as the global recession gained momentum and market conditions weakened as the quarter progressed. It now appears the slowdown will worsen before any improvement is seen in late 2009 or early 2010. In the near term, IT customers will increasingly look for IT optimization projects with strong ROI potential and extend virtualization, consolidation, and migration programs in order to lower capital and operational costs while improving efficiencies.”

Having said all that, because of two good quarters in the first half of the year, 2008 was not terrible, and certainly not the worst year the server market has seen, with $53.3 billion in revenues worldwide, down 3.3 percent, and shipments of 8.1 million units, up 2 percent. For the year, IDC reckons that IBM held the lead position, with just under $17 billion in sales, down 2 percent compared to 2007’s sales levels. Hewlett-Packard declined 1.8 percent in 2008, with sales at $15.75 billion, while number three Dell declined only 1 percent for the year, to $6.2 billion in sales. Struggling Sun Microsystems, which looked poised to pass IBM to become the number one server maker during the dot-com boom (and before HP bought Compaq), has not managed to catch up, much less pass, Dell. In 2008, Sun booked $5.38 billion in server sales, down 8.4 percent. Number five is Fujitsu (which just took over the Siemens half of the Fujitsu-Siemens partnership), with $2.57 billion in sales, down 4.1 percent. Other vendors, including a lot of niche players chasing efficient, hyperscale data center customers as well as myriad whitebox vendors, had a very hard time in the quarter. Added together, the remaining vendors comprised $6.45 billion in sales, down 7.2 percent.

And the Others had a fourth quarter that was just awful, with a sales drop by 23.5 percent to $1.42 billion. That was a dot-com bust crash for them. Thanks to Power Systems and System z mainframe sales, IBM was able to offset some of the declines in its X64 server business (that’s System x and most BladeCenter sales), but the company’s Q4 revenues across all servers still declined slightly faster than the market overall, down 15 percent to $4.9 billion. HP slipped by 10.1 percent to $3.91 billion, Dell dropped 9.9 percent to $1.42 billion, Sun skidded 14.1 percent to $1.25 billion, and Fujitsu fell by 14.9 percent to $567 million.

By product category, blade servers were a bright spot, with $1.4 billion in sales (up 16.1 percent and pushed by a 12.1 percent shipment increase). Blades represented 10.4 percent of overall server sales in Q4, but in the X64 area, blades have an 18.5 percent share. (The rest of the server architectures have some catching up to do.) HP had 54.8 percent of blade server revenues in Q4, more than twice IBM’s 21.7 percent share. Dell, Sun, and Fujitsu all had blade server revenue growth in the quarter in excess of 60 percent and seem to be driving a lot of the growth as they steal some market share from HP and, it looks like, a lot from IBM. It wasn’t that many years ago that IBM had dominant market share. Competition does this sort of thing, and it is healthy. I think this is more like the blade market expanding unevenly than IBM losing sales, but it is hard to tell from these IDC numbers.

X64 servers accounted for 1.8 million server shipments in Q4, according to IDC, down 11.7 percent from the year-ago quarter, and drove $6.5 billion in revenues, down 17 percent. As you can see, average selling prices dropped a lot, and you can bet profit margins on X64 boxes dropped two or three times faster than the ASPs did. Revenues for volume systems, which IDC characterizes as machines that cost less than $25,000, fell by 16.8 percent, which means ASPs and shipments for other entry machines aside from X64 boxes were also under pressure to compete. Midrange machines (which cost between $25,000 and $250,000) were hit hard, too, with revenues across all architectures in this category down 14.5 percent. The high-end of the server space did a little better in Q4, with sales only off 7.5 percent compared to the fourth quarter of 2007. Notably, this is the first time since 2002 that all price band categories of servers tracked by IDC were all pointing south at the same time.

By operating system platform, Unix servers held up a lot better than Windows and a little better than Linux. IDC says that Unix systems only declined by 6.2 percent to $4.9 billion. Linux server revenues in Q4 2008 hit $1.8 billion, down 7 percent. For the first time in years, Windows servers took a big hit, and significantly, the Windows market contracted so hard and so fast that Unix machines in aggregate accounted for more revenue in a quarter. Windows servers fell by 17.8 percent to $4.8 billion, against a 10 percent shipment decline. So you can do the math and see where the ASPs really took a haircut. Other platforms including IBM mainframe and Power Systems i boxes, HP AlphaServers and Integrity-OpenVMS boxes, and a handful of others accounted for $1.98 billion in revenues in Q4, down 26.2 percent, contracting at nearly twice the rate of the market as a whole and echoing the kind of decline we saw in the dot-com crash. What I have not been able to ascertain yet from IDC is if Power Systems i boxes were all dumped into the Unix category since the p-i platform merger. I presume not, but I am checking.

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