Unix, Other Servers Still Wobbly in Q4, Says IDC

March 8, 2010 Timothy Prickett Morgan

In last week’s issue of The Four Hundred, I drilled into the quarterly server sales and shipment stats from Gartner, and this week, it is time to take a look at the similar, yet different, set of stats coming out of Gartner’s rival, IDC. The latter companies cuts up and talks about the server racket a little differently from Gartner, and by looking at both, you get a better sense of what is going on.

By IDC’s reckoning, server revenues fell by 3.9 percent to $12.95 billion in the fourth quarter of 2009, with shipments actually up by 1.9 percent to 1.9 million units. (IDC counts factory revenue and shipments out of the server makers, not the servers sold and revenue gained through sales by vendors and their resellers within the quarter.) For the full year, server sales fell by 18.9 percent, to $43.2 billion, and shipments were down almost the same rate at 18.6 percent, to 6.6 million units. This is not just the worst year in server sales in a long time as reckoned in terms of annual declines, but represents a winding back of the clock, a whiplash, to somewhere around 2003 in terms of revenue levels and to 2004 in terms of shipments.

That server sales picked up in the final quarter of 2009 can be attributed mainly to a rebound in X64 server sales, and a decent rise in blade server sales, as both contracted severely in the final quarter of 2008, when the global economy went on the rocks. The questions now are: is this sales rate sustainable, and will the other parts of the server market recover?

“Market conditions improved significantly in the fourth quarter as the marketplace transitioned from recent stability to growth in several critical server segments,” said Matt Eastwood, group vice president of IDC’s enterprise server group in a statement accompanying the quarterly server stats. “Customers are actively re-evaluating their IT needs and refreshing their infrastructures, and the fourth quarter represents the beginning of a market inflection. While many customers sat on the sidelines during 2009, significant innovation continued as server vendors prepared for an expanding market opportunity in 2010 and beyond. Optimal conditions for market inflection occur only once a decade and IDC believes that market shares could shift dramatically as the winners and losers of this new market cycle are determined, with those who are best positioned to meet increasingly sophisticated IT needs across the market gaining share.”

X64 servers did particularly well in the quarter, with sales up 12.6 percent to $7.3 billion and shipments up 3.8 percent to 1.9 million boxes. All of the top five vendors have revenue growth in their X64 lines in the final quarter of 2009, and IBM shot up like a bottle rocket by 19.6 percent, gaining 3.5 points of market share. But, of course, IBM had a truly awful second half of 2008, so this was a relatively easy compare. This may say more about who IBM’s X64 customers are (and who they are not) than it does about the relative strengths and weaknesses of any of the X64 products sold by the top five. When the economic meltdown hit in the summer of 2008, IBM’s System x sales were already weakening, and that, I think, is because IBM tends to sell to the largest 5,000 or 6,000 enterprises on the planet, and these companies felt the bust first. They couldn’t stop big Unix and proprietary server projects, which take forever to finance and coordinate, but they could slam the brakes on X64 spending and make do. Dell and Hewlett-Packard sell mostly to small and medium businesses (HP has a pretty big proprietary and Unix biz, but IBM’s utterly dwarfs it), and there are always some SMBs who need to buy stuff now because what they have is junk. And that, I think, is what happened. At any rate, because the first half of 2009 was so awful, X64 server shipments fell 17.8 per cent for all of 2009, to 6.4 million machines, and revenues were off 14.6 percent, to $23.7 billion. Average selling prices rose thanks mainly to server virtualization.

Taking a look at server sales by platform type, as estimated by IDC, Windows was the big beneficiary of the X64 recovery in Q4. (And one wonders if Windows is driving X64 sales or X64 sales are driving Windows installations.) Windows platforms accounted for $5.4 billion in revenues in the quarter, up 13.7 percent. Linux, which runs on everything but my coffee pot but which is mostly sold on X64 iron with a chunk of mainframes, had a tinier 6.1 percent increase, to $1.9 billion. The Unix market that IBM has been obsessed about for the past decade had a sharp 18.1 percent decline, to $3.9 billion, leaving other platforms–such as mainframes and other proprietary gear and presumably also Power Systems machines running i5/OS and i–had a somewhat steeper decline, falling 19.5 percent to $1.75 billion.

IBM, of course, is thrilled about its Unix market share and how it has gone from a joke to the dominant player. Kudos to IBM. Really. But, let’s get real here for a second. To put it bluntly, how hard is it to sell against HP and Sun when both of these companies have issues with their respective Itanium and Sparc platforms? How hard is it when no Itanium chip has come out on time and with the performance expected, and when people have been questioning (and rightly so) the long-term viability of Sun itself for the past two years? That IBM has a dominant 40 percent market share of the Unix racket is not a surprise. The real surprise is why IBM’s share is not north of 50 percent, and maybe, just maybe, how well or poorly Power Systems running the i for Business operating system is a real test of how well or poorly Big Blue is doing. In that case, I would give IBM a much lower grade than it is giving itself for its Unix performance and applying that to all Power Systems. As if i and AIX operating systems were the same thing. One is Vulcan, the other is Klingon.

IBM sometimes forgets itself in its own enthusiasm and marketeering. For every bonus people at Big Blue got for adding an AIX customer in a Sun or HP shop, they should also get a pay reduction for every OS/400 and i5/OS shop they lost to Windows, Linux, or another platform. I’d even accept for those bonuses and dockings to be scaled along company revenue size or employee count at the companies using AIX and i. Just so there would be some sense of importance beyond crushing Sun and HP. Keeping a customer is a hell of a lot cheaper than getting a new one–that’s the first thing they teach you in marketeering school, right?

Not to get all Biblical on you, but this is a Lutheran computer we are talking about here, this AS/400, and this pearl of wisdom also rings true: For what is a man profited, if he shall gain the whole world, and lose his own soul?

By platform type, the key markets where the Power Systems machines play–midrange and high-end machinery–took the biggest hits, according to IDC. Big iron boxes, by which IDC means machines that cost more than $250,000, took a 23.6 percent revenue hit, in aggregate, during the quarter, and midrange machines, which cost between $25,000 and $250,000, had a more reasonable decline of 5.3 percent. However, volume systems, which cost under $25,000 and which are dominated by X64 boxes but also includes a smattering of Power, Itanium, and Sparc boxes, had a 9.9 percent revenue bump in the quarter. As I have been saying for months, there are issues with product transitions with Power, Itanium, and mainframe machines in the last quarter and the current one, and Sparc had issues because of the uncertainty about the future of Sun as the Oracle acquisition dragged on for an extra seven months. Some of these issues have been resolved or will be resolved in the coming months. Which is good.

The thing I wonder now is will the midrange and high-end market rebound to even 2008 levels, or will they just hit a new equilibrium against 2009’s levels. In other words, is 2009 the new normal for anything that is not based on an X64 chip of some sort? If the hardware platform is driving the software platform sales, then IBM, HP, and Oracle have some tough choices to make.

IDC also gave some snippets of information about blade servers during the quarter and for the year. The analysts at IDC say that blade server sales were up 30.9 percent to $1.8 billion, with shipment growth only rising by 8.3 percent. (This number includes all blade servers, not just those based on X64 processors.) About 86 percent of the revenues for blades was for X64 boxes, and more than a fifth of all X64 servers that ship are in a blade form factor. For the year, blade server sales rose by 2 percent, to $5.4 billion, and was the only form factor to see growth for the year. HP is still kicking the tar out of IBM in blades, with 52.4 percent of revenues in the final quarter of 2009, but IBM is getting some traction and is pushing back with a stunning 64.1 percent blade server revenue growth compared to the year-ago quarter, giving Big Blue 28.4 percent share of blades in Q4. (Yes, IBM had a truly awful Q4 2008 in blades.)

Ranked by revenues, however, IBM is still the king of systems and wannabe Cisco Systems is not even noise in the data yet. In the quarter, IBM had $4.59 billion in server sales (down 6.5 percent), compared to HP’s $3.95 billion (up eight-tenths of a percent), Dell’s $1.49 billion (up 4.5 percent), Sun’s $1.03 billion (down 17.3 percent), and Fujitsu‘s $595 million (surprisingly up 7.2 percent). Other server makers collectively accounted for $1.3 billion in revenues, a decline of 8.9 percent compared to Q4 2008.

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