Server Sales Slow As Buyers Await New Processors

September 4, 2012 Timothy Prickett Morgan

No one was expecting for the server market to turn in a particularly strong second quarter, with so many different chips for systems either just entering the market or about to enter the market in the summer and fall. New processors always mean price/performance improvements in systems, so some customers buying now insist in price kits on current iron and others defer purchases entirely so they can get the shiny new boxes. Either way, sales in the current quarter have to go down.

And that is precisely what the box counters at IDC have figured out as they cases the server racket for the period running from April 1 through June 30. Server revenues on a global basis contracted by 4.8 percent, to $12.6 billion, and shipments were down 3.6 percent, to 2 million boxes.

With revenues falling faster than shipments, that means average selling prices across all server types shrank a bit, but you have to remember that IBM was readying its Power7+ chips for AIX, IBM i, and Linux servers and the z12 engines for its System z mainframes, Hewlett-Packard is waiting for Intel to launch its eight-core “Poulson” Itanium 9500 processors, Oracle is readying its 16-core Sparc T5 processor, and Fujitsu is talking up its sixteen-core Sparc64 X engine. With Intel’s Xeon partners only ramping up Xeon E5 machines through May and June and all high-end customers wondering about all the new engines coming out before the end of the year, it is a wonder that server sales didn’t collapse a heck of a lot more, if you think about it.

This was the first time in three years that server market took a shipment decline, and everyone is wondering if this is the start of a new trend or just a temporary blip. I know what I hope, but I don’t have a crystal ball that ensures the future. If I had to guess, I would say that IBM mainframe sales and Power System sales will perk up considerably in the fourth quarter and Unix system sales might even stabilize instead of collapsing overall. Windows server sales are probably not particularly tied to the launch of Windows Server 2012 this week, but that could be affecting X86-based server shipments a little. Linux just keeps chugging along since revenues are tied to support, not to OS release uptake and upgrades.

IDC says that midrange systems, which cost between $25,000 and $250,000, had an 11.2 percent revenue decline in the second quarter, and high-end machines that cost $250,000 and higher had a 7.6 percent decline. The volume systems segment, which is dominated by X86 gear and which includes machines that cost under $25,000, had a 2.5 percent revenue decline.

“Worldwide server revenue declined for the third consecutive quarter in 2Q12 as the market continued working its way through a number of technology transitions impacting customer demand for X86, Unix, and mainframe class systems,” concurred Matt Eastwood, general manager of enterprise platforms at IDC. “That said, it is also clear that economic uncertainty is weighing on the market and the sales cycle is lengthening. Regionally, server demand in Western Europe and Japan was particularly soft while server revenue in the U.S. and Asia/Pacific managed to grow modestly. It is important to note that IDC believes that server demand will begin to improve in the second half of 2012 following a number of critical product refreshes which continue to be announced.”

Windows servers continue to dominate by both shipments and revenues. Windows-based machines drove $6 billion in revenues in the second quarter, up three-tenths of a point and allowing the Microsoft server platform running on X86-iron to gain 2.4 points of market share, to 47.9 percent of the revenue pie. Linux-based machines had 1.7 percent increase in server hardware sales, to $2.8 billion and will likely never catch Windows but could very well eventually displace Unix system sales completely. Speaking of which, Unix-based systems as a group had a 20.3 percent decline in Q2, to $2.3 billion and giving Unix-based machines only 18.4 percent of the worldwide server revenue pie. IBM’s Unix system sales shrank by 10 percent in the quarter, which means Oracle and HP had much steeper declines that 20 percent for the whole Unix market to be down 20 percent.

If you do the math, then other systems running other operating systems accounted for $1.5 billion in revenues, only off 6.8 percent. A lot of this revenue is IBM mainframe customers turning on cores inside of existing machines. Some of it should be Power Systems iron running IBM i as well, but IDC has not broken out OS/400 and IBM i server revenues for a long time, so it is not clear if it is lumped into Unix or lumped into Others. All told, non-X86 machines accounted for $3.9 billion in revenues, off 19.4 percent.

In terms of vendor rankings, IDC thinks that HP just beat out Big Blue, with $3.73 billion in server sales in the second quarter and only a 5 percent decline, more or less keeping pace with the overall market. IBM took a high-end hit for sure, and its overall sales were down 8.2 percent to $3.68 billion. Dell sold just over $2 billion in machines, a 5.9 percent increase and was the only vendor in the top five to see a revenue increase in the quarter. Oracle was down 20.1 percent top $752 million, and Fujitsu was off 42.1 percent against a tough compare since this time last year it was building the 10.5 petaflops K supercomputer for the Japanese government. Other vendors, including a surging Cisco Systems, accounted for $1.93 billion and collectively had a 20.2 percent increase.