Servers Hit The Skids Last Year, This Year Might be No Better

March 6, 2017 Timothy Prickett Morgan

As the first building block of any system is the server, and watching how these are acquired, managed, and disposed of tells you a lot about what is going on with applications in the datacenter and who is making money off of them. It has been a long time since the Power Systems division at IBM has been an economic powerhouse in the server space, but now even the X86 platform, long dominated by Intel, is starting to show some signs of losing its luster.

It stands to reason. In the final quarter of this year, X86-based machines accounted for 2.53 million units shipped, according to researchers at IDC, and that amounted to a stunning 99.2 percent of the 2.55 million servers that were pushed out of OEM and ODM factories in the 13-week period ending in December 2016. And X86 iron, with an aggregate of $12.2 billion in sales, accounted for 83.5 percent of the total server revenues in the world for Q4 2016, which hit $14.61 billion. Overall server revenues across all architectures were off 4.6 percent in the quarter, and shipments fell by 3.5 percent, too; the X86 platform was not immune, with revenues off 2.4 percent and shipments down 2.7 percent.

There are a lot of things happening in 2017, including renewed competition from IBM with the Power9 processor, a handful of credible ARM server chips coming to market from Qualcomm, Applied Micro, and Cavium, and perhaps even more significantly for Intel’s Xeon processors, a reinvigorated AMD coming to market with tis “Naples” Opteron processors. This will be the first time in nine years that AMD has fielded a credible Xeon alternative, and frankly, the Naples chip won’t hurt IBM or the ARM collective anywhere near as much as it will hurt Intel. The question then becomes: Will the AMD X86 alternative suck all of the oxygen, anger, and money out of the room so Power and ARM chips can’t see an uptick?

We are not sure. What we can tell you is that non-X86 platforms are not doing well. In the quarter, according to IDC, non-X86 machines saw a 14.5 percent drop across all vendors to a total of $2.41 billion, and for the full 2016 year, sales were off 25.9 percent to $7.4 billion, and X86 machinery saw a 1 percent rise to $45.6 billion. And even more alarmingly, if you go back to 2009, in the belly of the Great Recession and before the bottom dropped out of the RISC and Itanium server markers, vendors sold a stunning $19.45 billion in iron compared to $23.67 billion in X86 machinery. The rise of the hyperscalers and cloud builders has accounted for a big chunk of that revenue shift, to be sure, but so have small, medium, and large enterprises who have embraced Windows Server and Linux and moved away from IBM i, z/OS, AIX, Solaris, and HP-UX platforms.

This transition has hurt IBM the hardest, and in two ways. First, it sold off its System x server division to Lenovo two years ago, so it is no longer a supplier of X86 iron. Moreover, as companies have shifted away from proprietary and Unix systems, IBM’s own sales have shrunk, even as it has maintained dominant market share. IDC reckons that for all of 2016, IBM’s sales for servers fell by 28.4 percent, to $5.1 billion. If you go back to 2009, when mainframes, Power Systems, and System x iron were all doing better, IBM posted $14.15 billion in server sales, making it the market leader and pretty far ahead of Hewlett Packard Enterprise, which posted $12.89 billion in sales that year.

Rather than ditching its System x business and cutting back on promoting its Power Systems line, perhaps IBM should have figured out a way to be a low-cost manufacturer of these machines and got more aggressive, rather than less so, to be true to its own name: International Business Machines. HPE might still be only slightly bigger in terms of server sales in 2016 than it was back in 2009 – it had $13.4 billion in revenues from servers for all of last year – but it is still in the game. Perhaps IBM went in exactly the wrong direction, and even the top brass there has to admit that the profitability of the IBM Systems group has not really improved since it ditched System x – the very reason for selling out to Lenovo. A smarter move might have been to acquire Lenovo and be a master of the entire X86 supply chain and get back into engineering and manufacturing in a big way. This is working for ODMs like Quanta Computer and Wistron and upstarts like Sugon, Huawei Technologies, Inspur, and to a certain extent Lenovo, too.

IDC does not give out statistics for server sales based on chip architecture, but Gartner does. In its quarterly server report, Gartner’s box counters said they believed that the market for RISC and Itanium servers running a variant of Unix had $729.3 million in revenues, down 37.8 percent compared to the final quarter of 2015. IBM had more than half of the market, with $430.1 million in sales, but fell 41.5 percent. Gartner believes that IBM only shifted 6,390 machines in Q4 2016, and that was off by 42.3 percent compared to the year ago period. The whole market had a decline of 41.7 percent, to 13,575 machines. For the full year, Gartner believes the RISC/Itanium Unix market accounted for $3.17 billion in revenues, down 29.2 percent, and IBM brought in $1.73 billion of that, but fell by 33.6 percent compared to figures in 2015. IBM used to bring up the Unix market, and now it is dragging it down.

IBM’s Power Systems servers running Linux and IBM i were not in these figures, so we have no idea how they did. We have no idea if AIX system sales are a good proxy for IBM i system sales, but we sure hope not. IBM has said that Power Systems machinery running Linux is on the rise, and that is good news for IBM i shops that want IBM to stay in the Power chip game to Power9, into Power10, and beyond.

The real question is whether 2017 will be any better than 2016, not just for Power Systems, but for all server platforms, particularly with intense competition coming into play within and across processor architectures. We have no idea, and we don’t think IDC or Gartner have a very good one, either. There is only one way that we can find out, and that is to live through it.

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