Hardware Spending to Lead the IT Recovery

June 7, 2010 Timothy Prickett Morgan

With so much bad news in the economy for so long, everyone is looking for a little good news. Well, the server business is perking up, and if you think server spending is a leading indicator of IT spending (as I do) and that IT spending is now a key component of all capital spending and therefore a pretty good indicator of how the economies of the world are doing (as I do), then maybe the Great Recession is receding. Maybe things are leveling off and perhaps there is some room for growth, allowing the IT economy in which we all make our livings to crawl its way back to early 2008 levels.

The latest statistics coming out of market researcher IDC indicate that IT spending is on the rise this year and is continuing to strengthen, but don’t expect a gain that makes up for the losses during the recession. That ain’t gonna happen, says IDC. But, when reckoned in local currencies in the countries of the world, global IT spending is now projected to rise by 3.8 percent (in what is called constant currency) to $1.47 trillion; at current exchange rates for the U.S. dollar, the growth is closer to 5.6 percent. Last year, IT spending (in constant currency) fell by 4.2 percent, which converted to a decline of 7.3 percent in U.S. dollars.

Hardware took the big hits during the downturn, and there is pent-up demand for new server, storage, and networking gear at many companies, and ditto for new PCs and laptops for end user desks. And thus IDC believes that hardware spending will rise by 6.4 percent in 2010 (reckoned in constant currency), while spending on software will only rise by 3.1 percent and services will be relatively flat at 1.5 percent compared to 2009.

“IT spending growth in the U.S. and emerging markets has been strong during the past two quarters,” explained Stephen Minton, vice president of worldwide IT markets and strategies at IDC. “Some of this is down to easy comparisons with the same period a year ago, but it also reflects very real pent-up demand for infrastructure spending, including investment in solutions such as virtualization and information management. Just as capital spending on hardware is the first thing to fall in a recession, it’s also the first thing to come back up for air when IT budgets are surfacing above water.”

IT shops are skittish, however, focusing on short-term projects with bigger paybacks, and Western Europe is a bit jumpy given the deteriorating state of the economy in Greece and the spillover into Italy, Portugal, and Spain. Total IT spending in Western Europe was down 6.5 percent in local currencies (13.5 percent when converted to U.S. dollars), and is expected to climb back to flatness in 2010. You may be thinking that Western Europe is no big deal, but it accounts for a third of worldwide IT spending. Japan is still weak, and after an 11.1 percent decline in IT spending in 2009, IDC is projecting a 2.2 percent decline there in 2010. (Those are constant currency figures.) China is expected to boost IT spending across hardware, software, and services by 13.7 percent this year, and India will grow by 13.8 percent.

Assuming a gradual recovery in Europe and Japan, IDC is tentatively forecasting a 5.5 percent increase in IT spending in 2011.

Servers Lead the Way

While The Four Hundred was on vacation for the Memorial Day holiday, IDC put out its latest quarterly statistics for the server racket, in this case covering sales for the 13 weeks ended in March. IDC counts revenues at the factory level coming out of the vendor, not at the end user level, which includes sales directly from the vendor and out of inventories pushed through the channel.

By IDC’s reckoning, worldwide server sales rose by 4.7 percent in the first quarter, to $10.42 billion, and shipments were up 23.3 percent. A heck of a lot more cheaper X64 boxes went out the door in the first quarter then perhaps many would have expected, but with the Power, Sparc, Itanium, and IBM mainframe processors all in transition this year, it is no wonder that spending on these boxes–which tend to be expensive midrange or high-end machines–all fell in the first quarter. Had all of these new chips come out in the fall last year, perhaps in September, this might have been an absolutely killer first quarter, perhaps even one good enough to get us back to the $13.15 billion in revenues server makers enjoyed in the first quarter of 2008. But that didn’t happen, so the recovery was really in X64 boxes, which were refreshed in March (and had been shipping out of vendors into their channel partners earlier than that).

For the first time in the history of the server/systems market, at least if you don’t count the first quarter of 2008 figures from Gartner that said and then unsaid Hewlett-Packard was the top server dog, IBM was not the revenue leader in the server racket for as long as IDC and Gartner have been keeping tabs in system and server sales. Back in 2000, when HP bought Compaq, that should have happened instantly, but it didn’t because the recession caused server sales to tank and HP’s Unix and proprietary businesses never recovered even when X64 server sales did. Had a recession not happened in 2001, HP would have probably accomplished this considerable feat many years ago. It took another recession and declines in both IBM’s Power and mainframe businesses and a huge upsurge in X64 sales to give HP the top spot.

By IDC’s estimates, HP pushed out $3.39 billion in servers, an increase of 16.3 percent compared to the first quarter of 2009, but well shy of the $3.95 billion HP raked in during the first quarter of 2008 as the Great Recession was just starting to roll. IBM, by contrast, pulled in only $2.87 billion in server sales, and somebody at Big Blue, whose last name begins with P, is probably not too happy that a Power and mainframe transition were happening at the same time. Still, thanks to a big jump in System x and BladeCenter server sales, IBM’s revenues in Q1 2010 were only off 1.2 percent. Clearly, it could have been worse. Imagine if IBM had waited until May to ship the first Power7-based servers, for instance, or the company had fell down on the job in the X64 server space, as it did a few years back, getting hit a lot harder than other vendors. Two years ago, in Q1 2008, IBM sold $3.62 billion in server iron, by IDC’s reckoning.

Dell, which was hit particularly hard by the Great Recession because of a lot of different issues, some of which had to do with how it was peddling products and running its business, actually made up for lost ground in the first quarter. Dell’s server revenues were up an astounding 51.9 percent in Q1, to just a tad under $1.7 billion, coming in even higher than the $1.59 billion Dell did in the first quarter of 2008.

What can we say about Oracle is it is a company in transition, having acquired Sun Microsystems early in Q1, and it still doesn’t have its server act together. And the numbers show it painfully. Oracle’s server sales were off 31.9 percent, to $683 million, and two years ago the company had nearly twice this revenue level, at $1.37 billion, and that was when Sun’s management thought things were tough. Oracle is chasing profits and appliances with its Sun buy, and really only wanted Sun’s intellectual property, Solaris, and Java anyway, as far as I can tell. It will be a systems vendor precisely as long as it suits Oracle and not one second longer. Oracle Sparc partner and X64 competitor Fujitsu posted a 2.2 percent revenue spike in the first quarter, with $677 million in revenues, almost catching Sun. Other vendors only captured $1.1 billion in sales, suffering an 18.5 percent decline and showing just how hard the top five vendors are fighting for business.

X64-based servers accounted for 1.8 million unit shipments in Q1, up 25.7 percent, and drove $6.8 billion in revenues, up 33.6 percent. Basically, X64 machines represent nearly all server shipments and now nearly two-thirds of revenues. Non-X64 servers, including mainframes, Itanium machines, and various RISC and CISC boxes, accounted for $3.6 billion in revenues, declining 25.9 percent compared to an awful Q1 a year ago, when sales for these machines as a group dropped by 19.4 percent to $4.8 billion.

I can’t help but wonder if the transition to X64 has just entered a new phase and if these Q1 2010 numbers are the new normal. The rebound that many are expecting for RISC, Itanium, and mainframes may not materialize, and that means vendors pushing those products will stop competing and start price gouging to customers with legacy applications. I sure hope that doesn’t happen.

By operating system, IDC reckons that Windows platforms had the best growth, with revenues up 33.6 percent to $5.1 billion. Linux had more modest growth, up 20.4 percent to $1.7 billion. Unix platforms were hit the hardest, with a 29 percent decline to $2.3 billion. It would be easy to blame proprietary platforms, but they did a lot better than Unix systems in Q1–thanks in part to Unisys getting new mainframes out the door last fall and seeing good sales in Q1. Other systems–which IBM, Unisys, NEC, and Fujitsu mainframes, HP OpenVMS machines, and IBM AS/400s are part of–only had an 11.3 percent decline in the first quarter, to $1.3 billion.

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