Server Refresh Cycle Begins Anew

September 8, 2014 Timothy Prickett Morgan

It looks like we are on the cusp of the next big server refresh cycle, and hopefully all boats will rise with the water level. We could even break a $50 billion year for system sales (that is my estimate, not that of IDC), which is a number we have not seen in many a year in the IT market. Judge for yourself how significant server sales are to the overall health of the IT market, but I have always thought of servers as a bellwether for the overall health of IT given the insatiable desire for more computing capacity.

According to IDC, which published its latest server statistics just before the Labor Day holiday, the world consumed 2.2 million servers in the second quarter of 2014, a 1.2 percent increase over the shipment levels set in the year-ago period. Revenues rose 2.5 percent to $12.57 billion. The shipments were up despite a massive amount of server consolidation among enterprises, who are collapsing their server footprints and using virtualization and the every-increasing core counts on X86, Power, and other types of servers to cram their workloads into fewer machines. And the reason they were up is because the hyperscale datacenter operators and public cloud builders who together account for somewhere around a fifth of server shipment in any given year are continuing their massive buildouts.

“The server market is experiencing the beginning of a cyclical refresh cycle as systems deployed shortly after the financial crisis are retired and replaced,” explained Matt Eastwood, general manager of enterprise platforms at IDC in a statement accompanying the figures. “IDC expects this refresh cycle will continue well into 2015 and be further accelerated by Microsoft’s announcement that it is ending support for Windows Server 2003 coupled with Intel’s forthcoming release of the Grantley Xeon EP and a significant number of related server platform announcements. At the same time, IDC is also seeing early stage enterprise investment in 3rd Platform workloads that leverage Webscale architectures typically seen in hyperscale environments. These workloads will drive additional interest in software-defined environments that will further enhance the need for servers deployed as the infrastructure underpinning these next generation datacenters.”

That said, the density-optimized server segment that IDC tracks separately and that includes the kind of machines that the hyperscale companies like Google, Facebook, and Yahoo and cloud companies like Amazon Web Services, Microsoft, Rackspace Hosting, and SoftLayer tend to use, had a tough compare this time around. Revenues for density-optimized machines fell 7.6 percent to $768 million in the quarter ended in June, and shipments fell by 16.1 percent to 216.314 machines. Blade servers continue to do well among enterprises and some supercomputing facilities, and saw a 7 percent increase in the quarter to $2.1 billion in sales. Hewlett-Packard held the top revenue share in blades, with $886 million in revenues (a 42.2 percent share), followed by Cisco Systems with $529 million (a 25.2 percent share) and IBM with $288 million (a 13.7 share).

Sales of machines based on X86 processors rose by 7.8 percent in the June quarter to $9.8 billion and unit shipments rose by 1.5 percent. Customers are buying more heavily loaded machines to support larger databases and more virtual machine images. Servers not based on X86 motors saw revenues drop by 12.8 percent to $2.7 billion, and now account for only 21.8 percent of overall server revenues. (The X86 iron accounts for close to 98 percent of shipments already and doesn’t have a lot of room to increase.) This is the twelfth quarter in a row that non-X86 iron saw a decline year-over-year, and it will take a refresh in the System z mainframe, a stabilization of Power server sales, some jump in Sparc sales, and a tidal wave of ARM-based systems to reverse this trend. None of these is out of the realm of possibility, by the way. IDC reckons that IBM’s mainframe and Power machines together accounted for $1.87 billion in sales in the quarter, 69.1 percent of the non-X86 revenue stream. That is nearly as large as Dell‘s entire PowerEdge business, in terms of revenues, and is more than two and a half times as large as the server units of both Oracle and Cisco, just to put that into perspective.

By its calculations, IDC figures that HP was the top server seller in Q2, with $3.19 billion in sales, up 4 percent and growing 60 percent faster than the market at large. (Another way of saying that is that HP’s growth, by virtue of its size and market share, sets a market pace that is hard to move.) IBM had a 10.2 percent revenue decline in the second quarter, to $2.97 billion, with transition issues with its Power8 platforms and a stall caused by its sale of the System x division to Lenovo Group, which should close soon. IBM is also at the tail end of the System z12 cycle and is working on a new z13 line, probably coming out next spring if I had to guess. Dell posted $2.08 billion in server revenues in the second quarter, down 6.5 percent. Oracle, with $737 million in server sales and 3.9 percent growth that also outpaced the market, edged in front of Cisco, which had $727 million in revenues but which grew at 35.4 percent. IDC is carving out the original design manufacturers who build machines on behalf of the large hyperscale operators and cloud builders, and these vendors accounted for $835 million in revenues in Q2, up 24.7 percent. All told, the remaining vendors accounted for just over $2 billion in sales and saw 16.4 percent growth as a group.

Significantly, the Chinese server market rose by 19.4 percent in the quarter, hitting $1.8 billion, and the top four server makers in the country–that’s Inspur, Huawei Technology, Lenovo, and Sugon–all grew by more than 35 percent in the quarter. You can guess who is not seeing growth in China from this: All of the tier one vendors who used to enjoy so much money sloshing around the Middle Kingdom. IBM’s Power Systems business was one of those big sellers in China that has come up against the Great Wall of Non-Indigenousness.