Server Sales Up a Bit in 2006, But Q4 Looks a Bit Weak

February 26, 2007 Timothy Prickett Morgan

Sometimes, it is not what people say that matters, but what they don’t say. The analysts at Gartner and IDC usually race to call each past quarter’s server sales by revenue, shipments, and platform type. But this time around, only Gartner has thus far released numbers, and as it did last year at this time, the company is talking about all four quarters of 2006 instead of singling out the fourth quarter.

Uh-oh. It looks like the multi-core processors and integrated virtualization features in modern server platforms might be starting to have the constricting effects on the server revenue stream that some people (including me, for many years now) have been predicting it would have.

Gartner said that server sales actually rose in 2006, up 2 percent to $52.7 billion. While server makers will be happy about this news, the server market is continuing to slow. In fact, that growth in 2006 includes a revised global server sales figure that was shifted down a bit. A year ago, Gartner said that 2005’s worldwide server sales amounted to $51.7 billion, up 4.5 percent from the $49.5 billion level in 2004. With the slightly revised figure for 2005, that means sales actually increased by only 4 percent in 2005. In 2004, server sales grew by 7.2 percent to hit that $49.5 billion figure, and that was only possible because of a technology upgrade cycle that forced companies the world over to replace aging equipment from the dot-com boom, driving up server shipments in 2004 by 20.5 percent to hit 6.7 million new units. We are still in this replacement cycle, and the continuing rollout of distributed Web applications is fueling the use of new servers, too.

Still, crunch time could be starting, even as shipments boom because companies are upgrading to virtualized, multicore platforms so they can consolidate physical servers and multiple workloads to remove server footprints from their data centers. As I have said many times before, virtualization will probably give an initial burst to the server market as the base churns from single-core, unvirtualized platforms to multicore, virtualized platforms, but after that, companies will be able to swap out processors to add performance and they won’t churn their boxes as often. Moreover, in a virtualized environment, companies will move workloads around to fill in peaks and valleys in CPU, memory, and I/O capacity before adding additional resources to an individual server. And only after that will they go all the way to buying a new box.

As amazing as it may seem, Gartner reckons that the world consumed an incredible 8.23 million server units in all of 2006, up 8.9 percent from the 7.56 million units consumed in all of 2005. But the fourth quarter–which Gartner did not detail separately within the server revenue and shipment numbers in its announcement late last week–seems to have thrown a splash of cold water on some faces.

“The fourth quarter of the year exhibited slower growth in X86 servers than we have seen in most recent years, which constrained the results for the year as a whole,” explained Jeffrey Hewitt, research vice president at Gartner. “Most of that slowdown seems to be attributable to a lengthening of the sales cycle due to the anticipated introduction of quad-core X86 processors with some lesser impact from X86 server virtualization.”

Hewitt also said that Unix servers based on RISC and Itanium processors were weak in 2006, with shipments down 1.6 percent and sales down 0.8 percent. While that is not great news for Unix vendors, it is better than the situation in 2005, when Gartner said that Unix server shipments were down by 5.3 percent; however, in 2005, Unix server revenues also climbed by a tiny 0.5 percent.

Hewitt said in his statement that mainframes did pretty well. “Mainframes had the strongest revenue growth of any segment for the year, pushing ahead 3.9 percent over 2005.” That might sound like a revenue comparison between 2005 and 2006, but it is actually a statement about revenue market share point gains for mainframes. According to Hewitt, IBM’s mainframe revenues were up 10.3 percent in 2006. This more than offset the 9.5 percent revenue decline IBM had in 2005 for mainframes, which fell compared to 2004’s record sales levels. (Well, 2004 was a record for the 2000s, but nowhere near the $11 billion to $13 billion in mainframe sales that IBM had in the early 1990s.)

IBM, with $16.9 billion in server sales worldwide and 32.1 percent of the server revenue pie, was still the largest server maker by revenue ranking in 2006 according to Gartner’s statistics, but growth did not happen on all fronts. While IBM’s System x X64-based rack, tower, and blade server platforms had 7 percent revenue growth in 2006, the company’s two Power-based server lines, the System p boxes (which mainly run AIX) and the System i boxes (which mostly run i5/OS) saw revenues decline by 1.2 percent and 14.1 percent, respectively, for the year. IBM’s Unix business has been growing like gangbusters for the past decade, and it has pulled even with Hewlett-Packard and Sun Microsystems in the Unix space. But growth is tough there as the IBM customer base awaits the Power6 processors for new servers later this year and with both HP and Sun having revamped and revitalized HP-UX and Solaris platforms that compete well with IBM’s Power-AIX platform on price and performance. The System i platform, like the mainframe a decade ago, is falling victim to the virtualization crunch. Customers are consolidating footprints and using the very good logical partitioning inside the i5 platform, and that means they are buying fewer boxes and smaller increments in upgraded processing capacity.

HP was the second-largest server maker in 2006, with $14.2 billion in sales, down 2.3 percent and giving it a 27 percent share of the server pie. X64-based ProLiant server shipments rose by 8.5 percent and Itanium-based Integrity shipments rose by 30.1 percent, according to Gartner’s estimates. Obviously, AlphaServer and PA-RISC shipments had to decline by more than Integrity sales rose for HP’s overall shipment growth to come in at 8 percent.

Sun finished third in the revenue rankings, with sales up 15.4 percent, hitting $5.7 billion and giving it a 10.8 percent share. Sun, as you might imagine, is thrilled to show such revenue growth and to get back into the third position in the Gartner rankings for 2006, jumping ahead of Dell largely because of the good value of its UltraSparc-IV+ servers and the innovation embodied in its “Niagara” Sparc T1 entry servers and the “Galaxy” Opteron servers. Still, Sun is a long way from the $9.7 billion in sales it had in 2000, when Dell was less than a third of its size–not nipping at its heels even after 15.4 percent growth. The analysts at Gartner said that Dell was right behind Sun in 2006, with $5.4 billion in server sales (up only 0.4 percent) and having 10.3 percent of the market. The Fujitsu-Siemens partnership finished fifth in the revenue rankings, with $2.5 billion in sales, down 7 percent. Dell and Fujitsu clearly have some issues, with their respective meager growth and decline.

Other vendors combined posted sales of $7.9 billion, up 6.7 percent and strongly outpacing the market as a whole and all of the top five vendors except Sun. This reverses a trend in the market for the past seven years where whitebox vendors were losing share by the handfuls. But don’t get too excited. Whitebox vendors face some pretty tough compares, too. Back in the 2000 boom year, the server market amounted to $55.6 billion in sales. The combined HP-Compaq accounted for $15.37 billion in sales, IBM brought in $13.9 billion, followed by Sun with $9.7 billion and Dell with $3.52 billion; all other vendors (including the Fujitsu-Siemens partnership) got $13.1 billion in sales. That means all vendors not in the top four accounted for 24 percent of the server revenue stream in 2000. In 2006, even with decent growth, the aggregate base of vendors not in the top four (again, including Fujitsu-Siemens) accounted for only 20 percent of the market. Rackable Systems is noteworthy for its 68 percent revenue growth in 2006, but it is still too small to pull up the average of the whitebox market by all that much.

In terms of server shipments, HP still rules the high seas and the ProLiant server is still the king. HP shipped 2.26 million servers in 2006, according to Gartner, up 8 percent from last year and giving it a 27.5 percent share of the 8.2 million servers shipped during the year. Dell was the second-largest server shipper, with 1.78 million units, up 4.8 percent. IBM came in third, with 1.29 million units and a 15.7 percent share; the company grew shipments almost as fast as HP, at 7.8 percent but still, like HP, grew slower than the market as a whole. While Sun was able to outpace the market in terms of growth in server revenues, it did not do it on the shipment side, with shipments in 2006 up only 7.6 percent to 368,603 units, according to Gartner. Fujitsu-Siemens saw shipments decline by 2.3 percent to 256,794. Collectively, those whitebox vendors most certainly outpaced the market, with shipments up 15.9 percent to 2.27 million units. In aggregate, whitebox vendors just barely outshipped HP. But, alas, they rake in half as much dough per box, on average, which means they have to fight for every dollar, euro, yen, ruble, and yuan.

Finally, blade servers. Everybody always wants to know how blade servers did. Gartner said that blade servers are still a high-growth market, with sales up 36.5 percent in 2006, driven by blade server shipments up 33 percent compared to 2005’s levels. Any time revenue growth outpaces shipment growth, it is fair to assume vendors are happy and making profits, so you know they love it. And given the vendor lock-in that blade servers allow, you can bet that IBM and HP are loving blades a whole lot. Gartner says that IBM ended 2006 with 41.1 percent of blade server revenues, compared to HP’s 32.5 percent revenue share. HP’s new c-Class machines helped it close a pretty big gap with IBM–but just a little bit. HP has a lot of lost ground to make up in the blade server space, and you can bet that Sun and Dell are not interested in making that task any easier.

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