Servers Sales Swoon A Little From April Through June

September 9, 2013 Timothy Prickett Morgan

With so many transitions going on in the server racket these days, it is hard to say if the ups and downs of revenues for each quarter are a leading indicator for the overall IT market anymore. But a lot of people believe server sales do portend future budgets in data centers, and so when the numbers head south, as they did again in the June quarter according to IDC, people take notice.

It is best to keep perspective. There is a lot going on in Server Land, to say the least. And the pace of change is not going to abate any time soon is my guess. Here’s just a sample of the forces at work. New processors are either just out or on the horizon, and that often causes some pause in purchases. Virtualization is compressing sales. New form factors, including microservers and so-called “vanity free” designs from upstart manufacturers, are getting traction and some parts of the market are shifting away from proprietary and Unix systems based on RISC or Itanium processors and toward Linux and Windows machines running on X86 systems. And then there is the whole converged systems movement, too, and ARM servers on the horizon.

In the quarter ended in June, IDC’s system gurus think that revenues dropped by 6.2 percent to $11.86 billion, and perhaps more distressing, server volumes fell by 1.2 percent to 2 million units.

The volume drop is not surprising with everyone in the world knowing that Intel is set to launch its next-generation “Ivy Bridge-EP” Xeon E5 v2 processors in the third quarter, and most likely during its Intel Developer Forum being hosted in San Francisco this week. Intel has already been shipping these 12-core processors to selected HPC and cloud operator customers, and enterprises and channel partners downstream from the main server makers are no doubt eager to see the performance and bang for the buck of these chips. The “Sandy Bridge-EP” Xeon E5 v1 chips are so last year, although you can probably negotiate a good price on current inventories. The point is that Intel’s product cycle, more than anything else, has an effect on server shipments. The wonder, really, is why server shipments didn’t decline a lot more given the impending Ivy Bridge announcements.

“Mainstream SMB and enterprise server customers around the world continue to focus on consolidation, virtualization, and migration initiatives aimed at increasing efficiency and lowering data center infrastructure costs,” said Matt Eastwood, general manager of enterprise platforms at IDC, in a statement accompanying the server sales stats for Q2. “At the same time, challenging economic conditions are dampening demand for new IT projects necessary to grow the server market globally. It is clear that the competitive dynamics in the server market remain fierce as the leading server vendors work to offset weak demand for generally higher margin Unix and blade servers with lower margin rack and density optimized servers.”

As you can see from the table above, IBM managed to hold onto the top spot in the server revenue rankings, despite a 10 percent drop in sales. Dell has been very aggressive in marketing its PowerEdge blade and rack servers, as well as customized machines coming out of its Data Center Solutions unit against ProLiant alternatives from Hewlett-Packard. Dell is no doubt giving IBM’s System x, BladeCenter, and Flex System lines some grief, too. Dell is growing, and Cisco Systems is growing, albeit at about half the rate of this time last year. Cisco is finding its natural position in the market and should probably settle in with around 5 percent market share.

It is hard to imagine Dell catching up to either IBM or HP any time soon in terms of overall server sales, but if IBM sells off its System x and BladeCenter business to Lenovo–or maybe even Dell if CEO Ginni Rometty needs the cash that badly–then over the next few years that could happen. A lot depends on how IBM’s efforts to build up the Power Systems business pan out, and to be honest, Big Blue has played its Power hand in the midrange and high-end server spaces about as well as anyone could. It has dominant share of a declining market, and that is the real problem.

Cisco will never get the utterly dominant 65 percent or higher market share in servers that it enjoys in networking. Cisco will, however, continue to boost sales at service providers and enterprises that like an all-Cisco approach and it will have a respectable and we presume a profitable systems business. Cisco is not leaving the field.

And it looks like Oracle‘s systems business is stopping its collapse and finding its footing, too. It would not be surprising to see Oracle’s server sales actually grow in either the third or fourth quarter this year, something that has not happened in the more than three years that Big Larry has owned the former Sun Microsystems.

By platform type, IBM mainframes and Linux machines were up, Unix and Windows machines were down. IDC estimates what the final operating system is on the boxes that come out of server maker factories each quarter. The company reckons that IBM mainframes accounted for $1.2 billion in sales in the quarter, up 9.9 percent compared to a relatively weak second quarter last year when Big Blue was getting set to launch its zEnterprise EC12 machines. Linux server sales, puffed up by all those cloud builders, rose by 1.5 percent to $2.8 billion. Windows server sales were down 5.1 percent in the June quarter to $5.8 billion, but because the overall market decline faster, Windows still gained revenue market share and now accounts for 49.3 percent of overall global server revenues. This is more or less where Unix was in 1999 at the peak of the dot-com bubble in terms of revenue share. Unix systems collectively accounted for only 15.1 percent of server revenues after declining 21 percent to $1.8 billion in Q2. If you do the math, that leaves Others, which includes IBM i and other so-called “proprietary” operating systems as well as IBM’s System z mainframes platforms (z/OS, z/VM, and z/VSE) as generating $1.46 billion, down only 2.4 percent. If you assume that 80 percent of System z sales are for capacity using those proprietary operating systems, then the proprietary pie is probably around $1.2 billion in total, down about 4.5 percent.

I don’t like any of this terminology, of course. Each of the remaining Unix vendors has a tight grip on their respective operating systems, and z/OS and IBM i both support POSIX and Unix APIs and can basically be branded Unix if IBM was so inclined.

By chip type, X86 server revenues fell by 1.3 percent to $8.7 billion, but all other chip architectures together accounted for $3.16 billion in sales, off 17.5 percent.

One other interesting tidbit. Blade server sales fell in conjunction with the market at large, with revenues falling 6.2 percent to $2 billion. But those density-optimized hyperscale boxes had 26.6 percent revenue growth to $735 million in the second quarter, and unit shipments rose by 13.8 percent to just under 200,000 machines.