The Server Racket Strengthens in Q2, But Will It Hold?

September 7, 2010 Timothy Prickett Morgan

Just after The Four Hundred went on hiatus for the Labor Day holiday, the box counters at IDC and Gartner put out their dicing and slicing of the server space for the second quarter of 2010. The news was generally good, but not so much for the high-end systems at IBM and Hewlett-Packard that are undergoing product transitions. The Sparc and X64 servers at Oracle took some hit points, too, thanks to the uncertainty surrounding Oracle’s plans for its servers.

Gartner and IDC count up the market slightly differently and provide different sets of data for subsets of the server market, so when you look at both you get a better sense of how the market is doing. (It is not quite the same as a 3-D view, mind you, more like a fractal dimension somewhere between 2- and 3-D.)

IDC kicked out its server stats first this time around, so I’ll start there. By IDC’s math, the factory revenue at the server makers added up to $10.9 billion in the second quarter, up 11 percent from the pretty awful year-ago quarter and $1 billion higher than levels set in the first quarter. But it is nowhere near the $13.9 billion of server revenues from the second quarter of 2008, which was not only at the front end of the global recession and before the economic meltdown caused by the financial/housing crashes, but which is also at the front-end of the virtualization wave on X64-based servers. Things are better, to be sure, but let’s not kid ourselves. The water level has gone down some thanks to the virtualization effect. And even when big boxes start moving again in the third quarter of this year, it is a fair guess that we’ll look back at 2008 as a peak second quarter for the post-dot-com era.

Unless something really cool happens, like we discover a lost continent with hundreds of millions of people who work at midrange and large businesses that have not yet computerized. If there were only a northwest passage to such a place. . . .

By IDC’s reckoning, Windows-based servers accounted for $5 billion in sales, up 36.6 percent against unit shipment growth of 28.2 percent. Yup, Windows shops are buying fatter machines as they are virtualizing, and yup, if there was no virtualization the shipments would have been growing a lot faster than the revenues but would have been tempered mightily by budget constraints, so they would have been less anyway. (Yes, that was circular reasoning. Welcome to my world.) Windows-based machines gained a 46.5 percent share of the $10.9 billion server pie in the second quarter, roughly the peak that Unix-based machines hit a decade ago during the dot-com boom. Speaking of Unix, machines running Unix as their primary operating systems accounted for $2.9 billion in sales, falling7.2 percent against a pretty easy compare. Two years ago, in Q2 2008, Unix machines had 7.7 percent growth, to $4.6 billion, just for comparison’s sake. Linux-based servers sold in the second quarter of 2010, says IDC, added up to $1.8 billion, up 30 percent.

If you do the math, then, Others–meaning IBM, Unisys, Fujitsu, and NEC mainframes, Itanium boxes running OpenVMS, and Power Systems machines running IBM i–comprised $1.17 billion in sales, down 27.9 percent. In the second quarter of 2008, just to give you a sense of how far this part of the market has fallen, IBM’s System z mainframes alone showed 31.7 percent growth, hitting $1.6 billion in sales. All Others combined posted $2.34 billion in revenues, basically flat from the second quarter of 2007. (You can see my analysis of the quarter two years ago here.)

There’s a real question about what the sustained revenue level from high-end Unix, mainframe, and proprietary systems will be.

“The server market is at a crossroads,” explained Matt Eastwood, group vice president of enterprise platforms at IDC, in a statement accompanying the server sales figures for the second quarter. “This is the fourth consecutive quarter of improving server market demand and the fastest quarterly server revenue growth IDC has reported in more than five years. IDC continues to see widespread infrastructure refresh occurring across all geographies. While much of this refresh is occurring first in x86-based servers, IDC expects the recovery to extend to Unix and mainframe platforms in the second half of 2010. That said, it is clear that a wave of migration is also occurring as customers broaden their deployment of x86-based servers to a wider range of workloads.”

X64-based machines comprised $7 billion in revenues, up 35.3 percent, and X64 server shipments rose by 25.8 percent, to 1.8 million units, in the quarter. Sales on non-X64 machines fell by 16 percent, to $3.9 billion, the fifth consecutive quarter of decline here.

The volume server segment, as you might expect given the $25,000-and-lower price tag of such machines, did well, with sales up 32 percent across all processor architectures. Midrange machines–which means gear that costs between $25,000 and $250,000 the way IDC carves up the market and which is where most of the Power Systems sales relating to the IBM i platform fall–had a 6.9 percent boost in aggregate revenues across all vendors and processor types, while high-end machines (which cost more than $250,000) posted a 23.6 percent decline in Q2.

Blade servers might be growing nicely, with sales up 30.9 percent to $1.5 billion, but they are still niche products. Racks and towers still make up more sales, despite all the benefits that come through blades.

By vendor, IDC places Hewlett-Packard at the top of the heap, with $3.53 billion in revenues in the second quarter, growing by a very healthy 26 percent. IBM, which used to be the king of the server hill, has had its crown knocked off for the second quarter in a row, with sales down 3.2 percent in Q2 to $3.24 billion. Big Blue will probably have a decent Q3 and a fabulous and maybe even record-breaking Q4 (unless the economy goes back on the skids), grabbing the top spot from HP again, but over the long haul, it is probably a safe bet they will be fairly close. Dell, which was hit first and hardest by the economic meltdown, has rebounded first and strongest as X64 server buying has accelerated, and reported revenues of $1.69 billion in the second quarter, up 39.1 percent according to IDC. The bleeding at Sun Microsystems has nearly stopped, with Oracle dipping 5.9 percent to $938 million, and Fujitsu posted $368 million in sales, up 8 percent. Other vendors sold $1.1 billion in machines, up 1.3 percent.

And now, for another slant on the server picture

Over at Gartner, the analysts say that server makers generated just over $11 billion in revenues in the second quarter, up 14.3 percent, with shipments of 2.15 million units, up 27.1 percent. If you do the math, the average selling price of a server has actually dropped from $5,733 to $5,154. Here’s how Gartner ranked the vendors in the second quarter, in terms of shipments and revenues; I did the math to calculate ASPs across all server types within a vendor:

	Q2 2010	Percent	Q2 2010	Percent	Q2 2010	Percent
	Shipments	Change	Revenues	Change	ASPs	Change
HP	644,172	23.3%	$3.54 B	26.7%	$5,500	2.7%
IBM	267,614	18.1%	$3.06 B	-2.7%	$11,441	-17.6%
Dell	542,799	35.0%	$1.80 B	39.5%	$3,323	3.4%
Oracle	47,968	-26.0%	$0.93 B	-10.9%	$19,357	20.4%
Fujitsu	60,974	24.9%	$0.35 B	9.9%	$5,799	-12.0%
Others	581,512	37.7%	$1.36 B	27.1%	$2,346	-7.7%
Total	2,145,039	0.0%	$11.05 B	14.3%	$5,154	-10.1%

You can really see in the ASP calculations how dwindling high-end server sales and, presumably, lots of price cutting on older Power6 and System z10 iron cut back on Big Blue’s average selling prices. And you can also see how Oracle’s decision to get out of the commodity X64 server racket and to focus on selling a more limited set of X64 machines has helped boost its ASPs. HP and Dell, which are the X64 volume leaders, showed ASPs up around 3 percent across the two of them. While this is a richer price thanks to virtualization, it’s not a 30 percent premium.

Gartner reckons that Unix machines, based on RISC or Itanium processors, had sales of $2.51 billion, down 8.8 percent, and shipments of only 48,248. That’s an ASP of $52,103, which rose 9.3 percent compared to last year. X64-based machines, says Gartner, accounted for $7.36 billion in revenues (up 37 percent) and just under 2.1 million machines (up 28.9 percent), which yields an ASP of $3,519, up 6.3 percent compared to a year ago. Whatever Others is in the Gartner world, it accounted for only 4,216 machines (which almost certainly means it cannot include Power Systems machines running IBM i, which also means IBM i is being counted as a kind of Unix by Gartner) for a total of $1.18 billion. ASPs for the non-Unix and non-X64 machines rose by 11.9 percent, to $280,517.

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