Midrange Server Sales Spike Big Time in Q1

June 6, 2011 Timothy Prickett Morgan

The low-end of the server racket came out of the Great Recession first, followed by IBM mainframes and then a push for big Unix boxes as 2010 came to a close. And in the first quarter of 2011, it was the midrange server makers turn to rake in some money, according to the server box counters at IDC. And the rebound couldn’t have come soon enough for vendors, resellers, and customers alike. The latter have been eager to upgrade their systems, and the former have been egging them on for a year or two.

IDC measures the factory revenue at the server makers rather than the end user level, which includes the overhead from reseller channels; IDC shows machines going into the channel as well as directly out of vendors to customer sites and is more closely tied to the quarterly financial reports that IT vendors make. Gartner, by contrast, looks at server spending at the end user level as they buy new gear each quarter. Sometimes their numbers line up, and sometimes they don’t, depending on what the vendors are doing in terms of pumping their channels and what the economy is doing and how end users demand new gear.

In the first quarter, IDC believes that server spending was $11.9 billion at the factory level, an increase of 12.1 percent compared to the year-ago quarter. Shipments rose by 2.5 percent to over 1.9 million units.

Sales of volume servers, which by IDC’s definition cost under $25,000, were up 8.7 percent, lagging the overall market a bit but understandably so considering the very large number of X64-based systems that have been consumed in the past four quarters since the Great Recession abated and became The New Normal. High-end servers, which cost more than $250,000, saw a slightly better bump, with sales up 14.2 percent compared to Q1 2010, thanks in large part to sales of IBM mainframes and big Unix boxes, all of which were upgraded last year across IBM, Hewlett-Packard, and partners Oracle and Fujitsu goosing their products with new chips. But the midrange, which was updated across RISC, Itanium, Xeon, and Opteron processors, saw the biggest bump in the first quarter of this year, with revenues up a very healthy 28.3 percent.

This was the first time in two years that all three segments of the server racket were rising at the same time, according to IDC.

The company did not provide specific revenue breakdown for the volume, midrange, and high-end segments. But it does talk about sales for servers by processor and operating system. In the first quarter, IDC reckons that X64-based machines rose by 12 percent, to $7.9 billion, accounting for 1.9 million units. The rest of the server racket is a tiny fraction of shipments–which annoys Intel and Advanced Micro Devices no end. Revenues for non-X64 servers–CISC mainframes, RISC and Itanium machines, and a few other oddities in the supercomputer space–rose by 12.3 percent to over $4 billion. This is the second quarter in a row when non-X64 iron grew and the first time in two years that X64 iron grew more slowly than other gear. Not by much in Q1 2011, mind you.

By operating system platform, Windows continues to hold the dominant revenue position, as the Unix collective did more than a decade ago during the dot-com boom. Windows-based servers accounted for $5.8 billion in revenues in Q1, up 10.1 percent and growing a few points slower than the market at large. Unix-based system revenues rose by 12.5 percent, to $2.6 billion. While the growth was good, the first quarter of 2010 was pretty awful and it is instructive to remember that in the first quarter of 2008, when the Great Recession was just building up steam, Unix server revenues were down a smidgen (seven-tenths of a percent) to $4 billion and Windows platforms only accounted for $5.1 billion. Unix may be recovering, but it has lost a lot of ground that it may never make up again.

Part of the reason, of course, is that Linux is a poor man’s (or perhaps also a smart man’s) Unix. Linux sales were $1.8 billion three years ago, and in the current quarter they grew by 16.6 percent to $2 billion, more than making up for the Great Recession chasm. And while the Unilinux hodge-podge had 14.2 percent aggregate growth (that’s Unix plus Linux, and a valid way to think about the market in some ways), the Unilinux racket accounted for $5.8 billion in revenues three years ago and was ahead of Windows. It seems unlikely that Unilinux will ever catch Windows again, no matter how much Linux grows. And part of the reason this is the case is that a shift from Unix to Linux usually means cutting back on hardware spending by moving to much less expensive X64-based gear from RISC or Itanium machinery.

Servers running other operating systems accounted for $1.53 billion in revenues in the first quarter, rising 13.7 percent and lifted substantially by IBM’s System z mainframes, which had a very nice 41.1 percent revenue jump in the quarter, to $1 billion. If you take IBM’s mainframes out of the picture, those Other platforms (not Windows, Unix, or Linux) actually had a revenue decline, falling 17 percent to $529 million. It is not clear where IDC puts the IBM i platform, but I know from talking to IBM that Power Systems machines running IBM i showed good growth in the quarter, so don’t blame the AS/400 this time around.

Despite IBM’s rebound in Power Systems and mainframe sales and its steady System x sales, the company was not able, in IDC’s reckoning, to catch and pass rival HP for the top server seller spot. HP brought in $3.75 billion in server sales in the first quarter, up only 10.8 percent against a market that grew at 12.1 percent. IBM was able to boost revenues across its three lines by 22.1 percent, to $3.49 billion. Dell ranked third, as it has since knocking Sun Microsystems off its third place pedestal a decade ago, with $1.86 billion in sales, up 9.7 percent. Oracle has been paring back Sun’s server business since taking the company over in January 2010 to get it back to profitability. Oracle has basically stopped trying to be a volume X64 server player and has focused on selling Exadata database and Exalogic Web middleware clusters using Intel processors alongside its Sparc-based midrange and high-end platforms. In the quarter, Oracle was able to boost sales by 13.6 percent to $773 million, but that’s still a far cry from the $1.36 billion Sun had in the first quarter of 2008 three years ago. Fujitsu, with only $578 million in revenues in Q1 2011, is also significantly contracted compared to three years ago and its sales were actually down 15.6 percent this past quarter.

Interestingly, networking giant and server wannabe Cisco Systems was able to bring in $190.9 million in revenues with its “California” Unified Computing System blade and rack servers, putting it in the number seven slot in the IDC rankings. Cisco actually passed Dell to become the number three shipper of blade systems in the first quarter. It looks like Cisco took a little bit of out the hides of HP, IBM, Dell, Oracle, and Fujitsu, in fact. Cisco pushed $169.2 million in blade servers in the quarter, and accounted for 9.4 percent share of this $1.8 billion segment of the server racket. IBM, by contrast, had 20.2 percent share, and HP had exactly half and Dell had 8.4 percent.