The Server Biz Stalls In The First Quarter

June 3, 2013 Timothy Prickett Morgan

The combined effects of server virtualization, cloud computing, a grumpy global economy, transitions in major server processors, and a shift in form factors for certain kinds of workloads have all combined to make first quarter server sales a little less than they might otherwise be. But, it must be remembered, companies still consumed millions of machines and spent billions of dollars on shiny new iron in the three months ending in March.

By the counting and estimating done by the server geeks at Gartner, the world’s companies consumed some 2.33 million machines of all makes, models, shapes, and sizes in the period, only seven-tenths of a percent fewer machines than a year ago. The shipment decline is not surprising given the state of the economy in some parts of the globe–particularly in Western Europe–and the ongoing penetration of server virtualization in the data center. What was remarkable, however, is that among the top five shippers in the world, Hewlett-Packard, IBM, and Fujitsu all had shipment declines that were roughly 20 times as large as the market overall. Whoops. Dell, on the other hand, grew its shipments by 2 percent and Cisco Systems boosted its shipments–albeit from a relatively small number–by 33 percent.

On the revenue front, IBM continued to be the top vendor, but as you can see in the table below, Big Blue and HP dropped their revenues a lot faster than the overall market, which shrank by 5 percent to $11.83 billion in the first quarter.

Dell and the other vendors–Cisco in the United States and Europe, Lenovo and Inspur in China, and a slew of companies that make machinery directly for the hyperscale data centers of the world as well as those who build their own–collectively held this market up in terms of sales. Basically, if you sold a Unix or proprietary server, your revenues shrank.

“The first quarter of 2013 was certainly not a strong period for the server market on a global level,” said Jeffrey Hewitt, research vice president at Gartner, in a statement accompanying the statistics. “The only regions to post increases were Asia/Pacific and the United States, with Asia/Pacific showing the strongest growth with shipment and revenue increases of 7 percent and 1.7 percent, respectively. While these two regions grew in both shipments and revenue, it was not enough to offset the declines of the other geographies–all of which declined in server shipments and revenue for the quarter.”

Sales of X86 servers were up 1.8 percent to $9.12 billion, with Dell, Cisco, and the custom and homegrown server makers seeing even more growth even as the average selling prices of these “vanity-free” servers are typically around $2,600 compared to around $4,000 for X86 servers outside of these special machines. HP ranked first among X86 system sellers, with $2.65 billion (down 10.9 percent), followed by Dell with $2.12 billion (up 14.4 percent), and IBM at $1.21 billion (down 9.1 percent). Cisco, like Dell, only sells systems based on X86 processors and saw its revenues pop by 34.3 per cent to $450m, and the self-builders and original design manufacturers (ODMs) who do the work for Google, Facebook, and others collectively generated $434m in sales, up 34.5 percent. A lot of Dell’s business is custom iron as well, so you can reckon where the growth really is, right? And it is growth in low-margin, high-volume machines that have their designs dictated by the customer more than by the supply chain of the vendor.

Gartner doesn’t break out server sales specifically by operating system in its public data, but it has a habit of looking closely at the Unix systems market because Unix iron used to be the bomb during the dot-com wave. It has been a long time since Unix comprised half of the revenue from systems each quarter, but these machines linger and IBM i shops should be thanking their lucky stars that Big Blue converged OS/400 and AIX onto the same platforms. Because without that, there would be no IBM i platform at all.

The Unix market running on either RISC or Itanium processors accounted for $1.42 billion in revenues, but only a scant 27,973 machines shipped in the quarter from five key vendors, and really, IBM, HP, and Oracle are the only ones who matter in the Unix racket these days. Everybody in Unix did awful, and shrank by anywhere from 24 to 40 percent. IBM had $841 million in Unix system sales (down 32.3 percent). Oracle can boast all it wants, but it is most assuredly not stabilizing its Unix business even with some pretty decent machines in the field, not with sales down 38.3 percent to $280.1 million. HP’s Superdome and Integrity Itanium-based server business has been shot down by Oracle’s claims two years ago that Itanium is a dead platform walking. The irony is that Oracle may have been caught in its own crossfire. The difference is that Oracle has a wickedly profitable and large software business and HP has a small and unprofitable software business. It sucks to be HP a lot more right now. So, no surprises, Larry Ellison wins again.

Machines not based on X86 processors and not running Unix–what we call Others–accounted for the remaining $1.29 billion in sales, which actually rose by 1 percent in the first quarter. This includes IBM i iron as well as System z mainframes from Big Blue, mainframes from Unisys, Fujitsu, Bull, and others, and OpenVMS and NonStop machines from HP.