The Server Refresh Cycle Loses Steam

June 13, 2016 Timothy Prickett Morgan

With one way of looking at it, the server market that drives the IT business is very mature and relatively flat, which shows demand for compute (and in some cases storage) remains steady and healthy. But in another way of looking at it, in a world obsessed by growth and often demanding it to drive revenues, profits, and stock prices, the server market has taken a dip and this is bad news.

Which way is it? Like an electron, perhaps, it is neither and both at the same time.

What we can tell you is that the box counters at both Gartner and IDC concur that demand for systems among hyperscalers and cloud builders, which have been driving growth in recent quarters over the past several years, has slowed and the enterprise server refresh that kicked off in 2014 has petered out, and therefore the overall market took a bit of a dip in the first quarter of this year.

The Gartner analysts reckon that end users bought $13.1 billion worth of machine, down 2.3 percent from the year ago period, and shipments worldwide to end users came to 2.72 million machines, up 1.7 percent. Gartner is measuring machines as they go into user datacenters, data closets, and under desk spaces, which may be one reason why its shipment numbers are so much larger this quarter compared to the figures from IDC, which show shipments out of OEM and ODM factories dropping along with revenues.

Here is how Gartner breaks down the revenues for the first quarter of 2016 by vendor:

Hewlett Packard Enterprise, as the datacenter portion of the former Hewlett-Packard is now called, remains firmly in the lead when it comes to server revenues, and managed to grow its revenues and market share in the first quarter, according to Gartner, kissing $3.3 billion in revenues. Dell took a bit of a fall, according to Gartner, to $2.27 billion in revenues, and IBM took a big hit, with revenues down 32.7 percent to $1.27 billion with the System z13 mainframe cycle coming to a close after a pretty good run for the past two years. Lenovo and Cisco Systems, both server upstarts, held back the market, too, as sales tapered in Q1 2016. The collection of other vendors, which includes various ODMs in China and Taiwan as well as fast-growing Chinese OEMs, grew sales as a group by 9.1 percent to $4.54 billion, attesting to the intense competition out there in Server Land and the ability to innovate and compete for business. (We would add, it also shows the increasingly nationalist nature of server buying, particularly in China.)

The Others group also grew its shipments more than twice as fast as the market as a whole, as you can see here:

After exiting the X86 server business last year, IBM no longer makes the top shippers list–not even close. It sells a relatively small (but growing) number of scale-out systems and a very small number of scale-up systems that are very pricey indeed by comparison. For instance, Gartner believes that the entire Unix server space, including RISC or Itanium systems, accounted for 19,496 server sales in Q1 (down 10.3 percent), and IBM as the top shipper accounted for 8,278 machines (down 22.7 percent). Oracle sold nearly as many machines and grew shipments by 2.6 percent to 7,933, but only drove $223 million in sales from its RISC/Unix boxes compared to IBM’s $508.3 million. HPE sells a third of the boxes of Oracle and gets a little more than half the revenue by comparison. The overall Unix system market fell by 20.2 percent to $916.4 million. By contrast, the X86 server market drove 2.69 million shipments, up 1.8 percent, and revenues hit $11.19 billion, up 4.2 percent.

“The real driver of global growth continues to be the hyperscale data center segment,” explained Jeffrey Hewitt, research vice president at Gartner, in a statement accompanying the figures. “The enterprise and small or midsize business segments remain relatively flat as end users in these segments accommodated their increased application requirements through virtualization and considered cloud alternatives.”

The shape of the data describing the revenues in the server market was essentially the same according to IDC, with factory revenues dropping 3.6 percent to $12.38 billion in the first quarter. But IDC believes that server makers only shipped 2.2 million machines, a drop of 3 percent year-on-year. IDC sees a continuing shift from tower servers to cloud services by SMBs as one factor slowing server sales, as well as slightly slowing enterprise investments and a slowdown among hyperscalers (who buy in lots of machines in the 10,000s) as Gartner is seeing.

The gap between X86 and non-X86 servers continues to grow, as it has since the Great Recession, and the very rough correlation between IBM’s overall sales and that of non-X86 iron continues. This was a bit surprising when IBM sold X86 machinery, as it did through early 2015, and absolutely stands to reason as it is the dominant seller of mainframes by far and the revenue leader in RISC-based machines, too. At least until the ARM collective starts selling iron in droves, should that come to pass. We think that could happen in earnest in 2017 and 2018, if the several ARM chip makers get their expected products to market and get some traction.

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