Server Sales Breakdown Bigtime in the First Quarter

June 1, 2009 Timothy Prickett Morgan

If the server business had a flat tire in the in the fourth quarter of 2008, when the economic meltdown was in full blaze, then two tires went flat and the muffler bracket broke, leaving metal scraping down the highway, with sparks a-flying and making a terrible racket, in the first quarter of this year. It’s a tough market right now, which makes it a buyer’s market to a certain degree. But companies are nonetheless hesitant to spend budgets.

According to the box counters at IDC, which tracks factory revenue coming out of the server makers, $9.9 billion in servers were sold either directly to companies, governments, and other institutions or into the channel in the first quarter, a 24.5 percent decline over sales in the first quarter of last year. Server shipments in the quarter were $1.485 million units, down 26.5 percent. This, according to IDC, is the worst quarter for server sales it has seen since it began tracking the market on a quarterly basis 12 years ago.

“Market conditions worsened in all geographic regions during the first quarter as customers of all types pulled back on both new strategic IT projects and ongoing infrastructure refresh initiatives,” said Matt Eastwood, group vice president of enterprise platforms at IDC in a statement accompanying the figures the market researcher released. “Most enterprise organizations are deferring new IT procurements and instead focusing on extending server lifecycles and improving existing asset utilization. IDC believes that while these strategies are effective in the near term, server demand will begin to improve in the second half of the year as customers begin to rebuild their IT capabilities in advance of a meaningful economic recovery in 2010.”

As you can see from the table below, none of the top five server makers were immune to the effects of the downturn, but some were hit harder than others:

	Q1 2008	Q1 2008	Q1 2009	Q1 2009	Percent
	Revenue	Share	Revenue	Share	Change
Hewlett-Packard	$3,946 M	30.0%	$2,913 M	29.3%	-26.2%
IBM	$3,624 M	27.6%	$2,904 M	29.3%	-19.9%
Dell	$1,590 M	12.1%	$1,093 M	11.0%	-31.2%
Sun Microsystems	$1,367 M	10.4%	$1,018 M	10.3%	-25.5%
Fujitsu	$821 M	6.2%	$667 M	6.7%	-18.8%
Others	$1,799 M	13.7%	$1,329 M	13.4%	-26.1%
All Vendors	$13,147 M		$9,924 M		-24.5%
Source: IDC

Hewlett-Packard was able to maintain its top position in terms of revenues in the first quarter, but only just barely. HP and IBM are basically in a statistical tie in Q1 2009, but HP beat IBM handily in the year-ago quarter. This time around, HP’s ProLiant X64 and Integrity Itanium businesses took bigger hits than IBM’s mainframe and Power server businesses, and the two companies basically drew to even. Dell, which only sells X64 boxes, was slammed the hardest as enterprises basically limited X64 server acquisitions to those that were desperately needed and had fast return on investment. Sun Microsystems is seeing a big decline in large Sparc server sales and its X64 business went flat in the quarter, too. But Dell and Sun are pretty much drawing to a tie. Fujitsu, which in March ate the other half of the Siemens server business in Europe that it didn’t own, did the best among the top five server makers by only declining 18.8 percent in the quarter. All the other server makers added up did a little more poorly than the market as a whole, and that is because they are almost exclusively X64 server suppliers.

“X86-based volume servers, historically an area of growth for the industry, posted another quarter of significant weakness during the first quarter of 2009,” explained Dan Harrington, research analyst in IDC’s enterprise server group. (Many of us in the industry call servers based on X86-64 chips Intel, Advanced Micro Devices, and other makers “X64” to distinguish them from 32-bit X86 chips. IDC does not do that.) “However, while it may be easier for IT departments to suspend purchases of commodity boxes as opposed to more mission critical RISC- or CISC-based servers, IDC expects X86 systems to rebound faster than the overall market in the coming quarters.”

By IDC’s reckoning, worldwide X64-based server sales fell by 28.8 percent in Q1 2009, to $5.1 billion, and shipments of X64 boxes dropped by 26.3 percent to 1.421 million servers. This is the lowest revenues for X64 and X86 boxes since the third quarter of 2003, when the economy was still struggling to come out of the IT recession. IDC says that HP had a compelling 36.5 percent revenue share of the X64 pie in the first quarter, followed by Dell with its 21.4 percent slice of the pie. In an interview, Harrington told me that because of the drop off in enterprise spending on X64 boxes, tower servers actually gained share in the quarter while blades and racks lost share for these types of machines. With SMBs, the server they have is often their only server, and if they need a new one, they have to buy it. Enterprise can–and did–defer a lot of X64 server spending. And X64 channel partners, facing new chip introductions from Intel (the quad-core “Nehalem EP” Xeon 3500s and 5500s from late March) and from AMD (the updated quad-core “Shanghai” Opterons from April and the impending six-core “Istanbul” Opterons due any day now), did less buying of new inventory and tried to burn down older machines.

It is significant to note that, by the way, that the blade server segment of the market decline for the first time since commercial blade servers were introduced at the beginning of the new century. IDC believes that blade server sales dropped by 14.4 percent to $1.1 billion in the quarter, and shipments fell by 18.1 percent. (IDC didn’t give out a number for shipments.) While these declines for blades were far less drastic than in the overall market, it just goes to show you that nothing can defy economic gravity. It is also worth mentioning that shipments of non-X64 servers fell by 30.6 percent, to 64,450 units, in the quarter. Even though there were a lot fewer Itanium, mainframe, Power, and Sparc servers sold than a year ago, revenues did not decline as far. This means average selling prices are rising, which in turn suggests to me that virtualization-enabled server consolidation is still happening in a big way.

I also think, as I have said about a ga-zillion times now, that once this server consolidation wave is done, footprint counts and revenues will drop like a stone, much as happened to mainframes, AS/400s, and Unix boxes when they all got virtualization capabilities. And I think that the X64 footprint and revenue decline will be just as dramatic once companies virtualize the servers they can. We have another two to three years before this happens, of course. But once that does, and the effects of Moore’s Law kick in, I can’t imagine any server makers in the X64 racket being able to make money unless their machines are made in China–or maybe even Africa, the last bastion of potential cheap labor on Earth.

In terms of platform sales, IDC said that IBM’s mainframes accounted for $889 million in sales in the quarter, down 18.9 percent, and its AIX-based Power Systems sales were just over $1 billion, down 11 percent. (The company would not provide a breakout for i-based Power Systems sales.) But if you take IDC’s public figures for Unix, Windows, Linux, and mainframe sales and carve out everything else, you get an Others category (which includes Power Systems i, OpenVMS, NonStop, and a bunch of other proprietary system sales) that saw sales collectively drop by 41.3 percent to $635 million in the quarter.

Across all Unix platforms, IDC believes that sales came to $3.3 billion in the quarter, down 17.5 percent. IBM is joyous in that it had a dominant 33.1 percent share of the Unix server pie in Q1, and HP and Sun were tied at 27.7 percent share each. Windows servers accounted for $3.7 billion in sales, down 28.9 percent, and Linux servers accounted for $1.4 billion in sales, down 24.8 percent. Linux, it would seem, looks like Unix but sells–or rather doesn’t–like Windows. (No surprises there.)

By platform type, the volume server market–machines that cost under $10,000–took the biggest hit in Q1 2009, with sales down 30.5 percent. Midrange boxes, which IDC categorizes as costing between $10,000 and $250,000, did relatively better, with sales only down 13.6 percent. (This is driven by virtualization and some form factor downshifting as companies cram more performance into midrange boxes than they could get into them two or three years ago. Companies that might have bought an enterprise-class box can get by with a cheaper midrange box.) The enterprise servers, which cost more than $250,000, did OK, through, with sales only down 19.5 percent. Incidentally, this is only the second time in the past seven years that all three platform types had revenue declines, just to give you an idea of how bad it is out there.

And it will stay bad, by the way. Harrington says IDC is expecting a bad Q2 for 2009, particularly because the second quarter of 2008 was not all that weak. The compares in Q3 and Q4 are going to be a lot easier, but IDC is still projecting declines in Q3 and maybe flat sales in Q4. Growth could happen in the first quarter of 2010, but again, this would be growth against the worst quarter in 12 years. Not much to brag about, really.

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