The Economy Gives the Server Biz a Flat Tire in Q4

March 9, 2009 Timothy Prickett Morgan

If IT departments are not being given the green light to attack the backlog of application development and infrastructure modernization projects they have on their to-do lists, the one thing they most definitely do not do is buy new server capacity. And that is why the fourth quarter, according to the analysts at Gartner, was not a particularly good one for server makers. Thankfully for them, though, a lot of projects are already funded and there is always basic capacity requirements driving some sales.

Gartner figures that in the fourth quarter, server makers were able to push out 2.14 million machines, down 11.9 percent from the year ago quarter, for a total of $13.1 billion in revenues, down 15.1 percent.

Considering that the economies of the world went into a bit of shock in mid-September thanks the crisis in the mortgage markets in the United States and the United Kingdom bleeding over into banks and their sophisticated derivatives, toppling some banks and forcing many other mergers, the fact that server sales were not lower shows just how much momentum there is for IT projects, even in a bad economy. (IT Jungle bought some new iron in the quarter, and I wasn’t too happy about having to spend any money then, let me assure you. But sometimes, you just ain’t got no choice.) A few hundred thousand fools like us kept the wheels on the server cart in Q4, even if one of them went flat. Now, where are we going to find the next couple of hundred thousand fools in the first quarter of 2009? (Which only has three weeks to go, really.)

“The weakening economic environment had a deep impact on server market revenues in the fourth quarter as companies put a hold on spending across most market segments,” said Heeral Kota, the senior research analyst at Gartner who does server box counting. “Almost all segments exhibited similar behavior as users sought to reduce costs and spending, deferring projects where possible. Blade servers were one of the few segments to achieve any growth at all in this challenging environment.”

IBM‘s System z platform, by Gartner’s math, was the only one of Big Blue’s system lines to grow. Gartner did not elaborate further, but as I have been saying, I think Power Systems accounted for just under $1.6 billion in sales, down 14 percent, including machines running all operating systems (AIX, i, and Linux) as their primary. I think System z sales declined by 6 percent to just under $1.1 billion, but Gartner thinks it was up. (I think Gartner is adding in base operating systems, and I am not.) My model shows System x and BladeCenter sales dropping by 32 percent to $950 million.

In terms of overall sales worldwide, IBM took a slightly bigger hit than the market at large by Gartner’s numbers, falling 17.4 percent to $4.38 billion and costing Big Blue one point of market share. (Ooops. Someone isn’t getting a bonus.) Hewlett-Packard, which sold like crazy, only saw a 10 percent slump in sales, to $3.94 billion, and the company therefore gained 1.7 points of revenue market share in Q4. (That’s who got the bonuses, just before HP started a blizzard of pink slips because it thinks most if not all of 2009 is going to look more or less like the final quarter of 2008.) Dell similarly gained a little market share in the revenue pie, with sales down only 11.2 percent to $1.4 billion, and Sun Microsystems only beat the market by a tiny bit, with revenues off 14.9 percent to $1.26 billion. Fujitsu-Siemens, which used to be a partnership but which will soon just be Fujitsu because industrial giant Siemens said auf wiedersehen to the IT market, had a 9 percent decline to $560.4 million. Other vendors were hit almost as hard as the entire market was during the dot-com bust, with sales down 24.7 percent to $1.57 billion.

Considering the double-whammy of a down economy and virtualization, both of which reduce footprints, you might think an 11.7 percent decline in server shipments, to 2.14 million boxes, was not so bad. But I think shipments are only holding up in the mid-term because there are tens of millions of boxes out there in the world that cannot be properly virtualized because they are 32-bit chips with no on-chip virtualization assistance (which Intel and Advanced Micro Devices cook into their X64 processors). It will take many quarters to replace that aging iron, and even early generations of X64 chips need to be dumped because they lack virtualization features and they run too hot. You can buy maybe a dozen quarters for this transition. But, as this transition gets fully underway, each successive quarter is going to see a decrease in sales unless by some miracle a killer workload comes along to make up for the vast increase in efficiency that comes from virtualization. I have never believed, and still do not, that you can virtualize 30 million servers that are running at 5, 10, and 20 percent of capacity and still end up selling 8 million servers a year. The same virtualization waves that compressed mainframes, AS/400s, and Unix boxes are going to put the revenue and footprint crunch on X64 servers, and there is just no escaping this fact.

And that was my attitude when the economy was good! It is hard to gauge if a bad economy slows or speeds up this virtualization compression. No matter, Gartner is not especially cheery about how 2009 is shaping up for the server racket.

“The outlook for 2009 is a very challenging one, with the pattern of the fourth quarter more indicative for the level of demand in 2009 than that seen in 2008 as a whole,” Kota explained. “The continued weak economic environment will cause users to be extremely cautious with levels of expenditure which will make for a particularly challenging environment for vendors. The server market already has high levels of vendor consolidation but the conditions expected during 2009 will increase the threat of further consolidation.”

For the full year, Gartner says that the server makers of the world sold some $53.1 billion in machinery, down 4.1 percent. Shipments rose by 2.6 percent to 9.07 million units, setting a new high for the industry. And perhaps, the all-time high until we start colonizing other worlds.

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