The State Of Systems In The Second Quarter

September 18, 2017 Timothy Prickett Morgan

The server refresh cycle that we have all been expecting in 2017 is well under way, and in fact, it looks like it is better than expected by some measures.

The box counters at IDC said in releasing their server shipment and revenue numbers for the second quarter of 2017 that they had been undercounting the number of machines made by original design manufacturers (ODMs) and sold directly to the big hyperscalers and cloud builders to the tune of an average of $1 billion per quarter since 2013. Looking back a year, to the second quarter of 2016, the amount of uncounted machines added up to $1.3 billion alone, just to give you a sense of the magnitude, and at an average selling price of around $2,800 per machine in the first quarter of this year, that undercounting amounts to around 470,000 machines in that quarter alone. If you do the math and assume that the average ODM machine sells for a mere $2,700 – about half of the industry average, just so you understand – then the ODMs sold nearly 1.3 million machines in the second quarter of 2017 to generate $3.5 billion in revenues. (We have to estimate this because IDC has not yet revealed ODM shipments in Q2 2017.) That is 52 percent of worldwide server shipments, against 22.6 percent of worldwide revenues. The hyperscalers and cloud builders are not just building minimalist systems; they are getting a hell of a deal on iron, and they are charging a premium for cloudy services or making a fortune peddling advertising against their free services and keeping the difference – and then some – as profits. The ODMs as a group had a stunning 48.1 percent revenue growth, to that $3.55 billion level, and it is likely that total sales to the hyper/cloud crowd were more on the level of $5 billion, or about a third of sales worldwide, because Dell, Hewlett Packard Enterprise, Lenovo, Inspur, and others sell special gear to the same customers and are not counted as ODMs even though, in this regard, these sales are exactly the same.

This is the kind of indirect competitive pressure that the IBM i platform and indeed any platform that gets installed in customer datacenters these days is up against. The hyper tail is wagging the enterprise dog, and these customers are calling the tune to Intel, AMD, IBM, and the ARM collective. And they are, as the architectural choices show, dancing largely to this tune even though it is hard to believe that anyone is making any money selling components and chips to the Amazon, Google, Facebook, Microsoft, Baidu, Tencent, Alibaba, China Mobile, and a few other major players.

They better all hope the enterprise business doesn’t tank and that everyone doesn’t just go en masse to the cloud. Ironically, Intel would be the one most hurt by such a happening. So you might hear the hoping and praying loudest in Santa Clara and Portland, the centers of Intel’s Chipdom.

In the second quarter, IDC reckons that server revenues grew by 6.3 percent to $15.72 billion and that shipments were up by 1.9 percent to 2.45 million units. X86 servers, as the chart below shows, continue to dominate, and IBM accounts for most of the non-X86 server revenues:

IBM and Lenovo continue to shrink, with sales down 20.8 percent and 13.9 percent, respectively. HPE is down, Dell is up, Cisco is essentially flat, and other vendors as a group seeing 10.2 percent growth. Here is the IDC table of the top five vendor ranking plus the ODMs and Others:

There was a rebound in the midrange system market, which IDC characterizes as machines that cost between $25,000 and $250,000, the lower end of which is the core of the IBM i market. But don’t get too excited. The jump, I think, was because some hyperscalers and cloud builders are installing fat memory machines with four sockets and terabytes of main memory. We won’t see a Power Systems – excuse me, Cognitive Systems – uptick until IBM ships more of its initial HPC-focused Power9 machines and until the Power9 starts rolling out in earnest throughout 2018.

Over at Gartner, the analysts think a lot more iron is going out the door, but there is less dough coming in per machine and in the aggregate. (This is the first time in such a long time that IDC and Gartner data has diverged so much.) Garter thinks that server revenues worldwide rose by 2.8 percent to $13.94 billion and that shipments rose by 2.4 percent to 2.82 million machines. Here is the Gartner revenue rankings, which do not break out the ODMs – Quanta Computer, Inventec, Wistron, Foxconn, and others based mostly in China and Taiwan – separately:

Neither Gartner nor IDC provide figures for IBM i server shipments, but Gartner does provide a breakdown of sales for RISC/Itanium systems running Unix, which is a proxy of sort for IBM i sales. Garter figures that there were only 13,231 such machines sold in the second quarter, down 21.4 percent, and that they generated $652.9 million in sales, down 24.9 percent. IBM continues to be the market leader here, with 5,474 units sold, which seems a bit low to me, but which was only down 3.6 percent, bucking the market pretty hard. Those Power Systems running AIX sales generated $383.9 million in revenues, down 10.1 percent. IDC did not provide any figures for Power iron that shipped with IBM i or Linux, but it is our guess that both contribute to IBM’s overall sales of $963.3 million in the second quarter. It is hard to reckon how much was System z, and therefore how to back out IBM i and Linux on Power.

If I had to guess, based on these numbers, IBM might have sold several thousand IBM i boxes. If it was 5,000 machines at an average price of $50,000, that is $250 million. My guess is it is somewhere around $150 million to $200 million in sales across 3,000 to 4,000 machines, and there is a multiple of 2X to 3X that which comes from software and support sales. I do not think this is a unicorn worth $1 billion at this point, but I do believe that there surely is a way to get it back there again. I remember when IBM sold 70,000 to 80,000 AS/400s a year, or something close to an order of magnitude more boxes and drove much more than an order of magnitude – call it 20X – more in base system sales and another 5X that in ancillary sales of peripherals, support, PCs, printers, networking gear, terminals, and application software. I have a long memory, I guess, and a longing for IBM to do something that engages those 125,000 IBM i and OS/400 shops worldwide.

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