Higher ASPs Help the Server Racket Perk Up a Little

December 7, 2009 Timothy Prickett Morgan

Virtualization and the heavier server configurations that are necessary to take advantage of it are simultaneously helping and hurting the server racket. According to statistics released last week by Gartner, worldwide server revenues continued to slide in the third quarter, falling by 15.5 percent to $10.7 billion as shipments fell by 17.1 percent to 1.92 million machines. This is a far cry better than the more than 30 percent drop in both sales and shipments in the second quarter of this year, and represents the first time in five quarters that there was sequential growth in server sales.

The server business is not, however, out of the woods yet. While virtualization is driving up average selling prices–mostly thanks to the costly main memory required for hypervisors to virtualize servers in an efficient manner–shipments are still falling faster than the price increases, and thus revenues (and very likely profits) are falling. It is debatable as to whether the server business will be sustainable as an ongoing profitable concern at a $45 billion-ish annual sales volume. We are about to find out over the next few years, I suspect, as the virtualization effect continues to reduce footprints faster than ASPs rise.

I picked apart Gartner’s numbers to get a better handle on this. When you do the math comparing this year’s and last year’s third quarters, the changes are stunning. While shipments are down 17.1 percent, average selling prices across all server types and brands rose by 2 percent in the quarter, to an average of $5,550. Across all X64 boxes, which accounted for 1.86 million machines (or 96.9 percent of all machines sold in Q3), the average selling price was $3,399, up 5 percent compared to last year. But check this out. If you look at the top five X64 server suppliers–Hewlett-Packard, Dell, IBM, Fujitsu, and NEC–the average selling prices are not only higher at $3,865 a pop, but they grew 9.7 percent compared to a year ago among these top five players in the X64 racket. The virtualization effect is playing into the hands of the top-tier distributors, who obviously buy more components and get better prices. Across the remaining X64 suppliers, ASPs actually dropped by 12.9 percent, to $2,101 per machine. You can see who is under price pressure big time.

Gartner provides a look-see to the press into RISC and Itanium servers running a flavor of Unix, too. When you do the math here, the average sale price of a Unix box rose by 25.1 percent in the third quarter, even as shipments declined by 37 percent to 54,533 units. The ASPs on IBM’s Power Systems/AIX boxes rose by 18.4 percent to $58,047 apiece, and while HP’s Unix boxes saw ASPs drop by 5.6 percent, it is getting an average of $78,452 per box. Sun, which was always more of a midrange player, saw a 29.6 percent increase in ASPs in the third quarter of this year, to $26,193, but unfortunately its shipments fell by 49.7 percent, which means revenues were down to $628.3 million for boxes running Solaris. IBM’s AIX gear generated $1.06 billion in sales, down 11.5 percent, and HP’s HP-UX iron brought in $762.8 million, down 17.4 percent.

Here’s where it gets interesting. If you take X64 and Unix boxes out of the picture, what you get is that category called Other. And presumably, Other is mostly AS/400 and mainframe style boxes as well as various gear, such as OpenVMS midrange stuff. Anyway, the Other category did not have a good quarter by some measures, but shipments were up 140.1 percent to 23,986 boxes although ASPs fell by 66.7 percent to $72,351. This is the exact opposite of the virtualization effect, and I wonder what the heck is going on here.

Significantly, IBM’s share of the non-X64 and non-Unix part of the market did comparatively well. Even though shipments were down 32 percent to a mere 3,595 machines, revenues only fell by 21.1 percent to $1.2 billion, and that means ASPs for IBM’s proprietary iron actually rose by 16 percent, to $333,232 per box. If this data includes both Power Systems i and mainframe boxes–as I think it does–I would guess that a few hundred those boxes were mainframes, worth on average millions of dollars a pop–and the remainder were Power Systems i boxes selling for more or less around $50,000. (Those are my estimates of ASPs for the i and mainframe boxes, not Gartner’s.) In the year ago quarter, to make the numbers work and nearly match the 26 percent decline IBM said it posted in mainframe sales, IBM had to have sold around 3,400 Power Systems i boxes and close to 2,000 mainframes, most of which with more modest configurations. Heaven only knows what IBM really sold because it doesn’t say.

But my hunch from these numbers is that the Power Systems i business was around $170 million in Q3–up a few percent in real numbers, year on year, with ASPs up a few percent, too. Neither Gartner nor IDC break out Power Systems i sales as a separate item, and won’t tell you if you ask (as I do).

The important things to note are this. Fifteen years ago, the AS/400 business was five times as large as the RS/6000 business, and now, their relative positions seem to have reversed. Provided my estimates based on Gartner’s numbers are even close to reality, of course. The other thing to note is that as the history of the RS/6000 shows, no trend is irreversible. There are ways to revive the AS/400 business, which I explore elsewhere in this issue of The Four Hundred.

And if sales for the Power Systems i platform were up even a little bit in this awful down market, then for heaven’s sake, Big Blue should be crowing about that.

Putting Q3 Into Perspective

You might think that the server market dropping by 15.5 percent to $10.7 billion in sales would be something to be pretty upset about, but Gartner wants you to look on the bright side.

“It is important to put the yearly declines into perspective,” said Jeffrey Hewitt, a research vice president at Gartner, who put out the figures. “Looking at the third quarter results from the sequential perspective, they showed an increase of 13.8 percent in shipments and 10.2 percent in revenues when compared to the second quarter of this year. That suggests that the market as a whole is showing signs of stabilization as we move toward the end of 2009.”

Breaking revenues down by vendor, IBM still came in at the top of the revenue list, with a 12.3 percent decline for $3.38 billion in sales in the third quarter. HP was close on Big Blue’s heels, as it often is, with $3.22 billion in sales, down a more steep 15.1 percent and more or less in line with the overall market decline. (Given that HP ships just under a third of the boxes in any quarter, it sets the pace for the belly of the market, so this stands to reason.) Dell ranked fourth with $1.42 billion in sales and a remarkable 5.1 percent decline as its server business is on the rebound. Sun Microsystems, the once cocky dominant Unix player and a company that looked like it would unseat IBM at the top of the server heap during the dot-com bubble, took a haymaker to the jaw, watching its server sales plummet by 32.3 percent, to $784.6 million in Q3. (Most of this decline above and beyond the general server market decline can be blamed on the held-up Oracle acquisition of Sun and confusion in Sun’s Sparc product line.) Fujitsu ranked fifth in server sales, with $550.3 million in revenues across its Itanium, Sparc, X64, and mainframe lines, down 10.8 percent.

It will be interesting to see if the fourth quarter brings sequential server growth. With so many new chips coming next year, it is a tough call.

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