Server Sales Decline in the Third Quarter

December 8, 2008 Timothy Prickett Morgan

Well, it didn’t take much of a crystal ball to figure out that this was going to happen. With the torrent of bad news coming out of the financial, banking, manufacturing, and retail sectors of the North American and European economies, and stock markets around the world freaking out, it will come as no surprise to most of us that server sales were off a bit in the third quarter as vendors slashed prices to try to move boxes.

The box counters at Gartner and IDC released their stats for server sales and shipments for the third quarter last week, and as usual, Gartner came out first with one set of public numbers diced and sliced one way, while IDC gave some details that Gartner doesn’t typically talk about. Both companies have models that let their customers see the server market by platform, server size, vendor, architecture, operating system, geography, and myriad other metrics, but you only get to see that data if you spend big bucks.

Let’s see what Gartner had to say first. The company estimates that on a worldwide basis, shipments of servers of all kinds and sizes rose by 4.4 percent to 2.32 million units, which is an awful lot of boxes. (I am getting old, I guess, because I can remember when they were called systems and putting 2 million boxes in the field for a year was a big deal.) That sounds good, particularly when you consider the state of the global economy lately, particularly in September, which was the last month of the quarter. But because of pricing pressure and delays in big iron purchases, aggregate server revenues globally fell by 5.4 percent to $12.72 billion.

Blame it on a slowdown in x64 and RISC-Itanium Unix boxes. “Server shipments grew in the third quarter, but the specter of constrained economies and tightened credit was felt in the revenue area,” explained Jeffrey Hewitt, a research vice president at Gartner who put out a statement accompanying the firm’s market stats. “What we’ve seen is larger system purchases in the Unix area put in check. At the same time x86 servers were able to maintain some shipment momentum, but lower overall average x86 server selling prices resulted in a drop in revenue in the quarter for this server type as well.”

The top five server makers, who accounted for just under 86 percent of total sales, all had revenue declines in the quarter. Some, because of shipment slumps (as was the case with IBM and is X64 and blade sales), and others, despite significant shipment increases (as was the case with Hewlett-Packard, which jacked up its shipments by 11.4 percent to more than 724,000 boxes in the quarter).

Gartner believes that IBM managed to edge out HP as the top breadwinner in the server biz in Q3, with $3.86 billion in total sales (down 4.2 percent) compared to HP’s $3.79 billion (down 3.9 percent). Dell was the number three supplier, and considerably behind these two with $1.5 billion in total server sales, a decline of 5.2 percent compared to the third quarter of 2007. Sun Microsystems has held the number four position in servers for nearly a decade now, and came in there again with $1.16 billion in sales, a decline of 13.7 percent. Clearly, the Unix hit has hit Sun hard, and IBM was able to maintain because its System z10 mainframe upgrade cycle got underway despite the bad economy. The Fujitsu-Siemens partnership, soon to be only Fujitsu now that Siemens is selling out its stake in the joint venture, had a 7.3 percent decline in server sales in the quarter to $616.8 million according to Gartner. All other vendors combined, which includes legions of whitebox makers as well as boutique rack and blade makers such as Verari Systems or Rackable Systems, venerable server makers NEC, Hitachi, and Bull, and supercomputer makers such as Cray and Silicon Graphics, accounted for $1.79 billion in sales, off 4.7 percent across all vendors.

Gartner doesn’t provide a lot of detail publicly, but does offer some Unix and X64 numbers. RISC and Itanium boxes running Unix accounted for $3.36 billion, down 10.8 percent. IBM’s Unix business was off 6.9 percent to $1.2 billion, and the good news for Big Blue is that it fell less than the Unix space at large and has a solid lead over HP and Sun, its chief Unix rivals. Sun’s Unix biz fell by 16.9 percent, to $963.8 million, while HP’s Unix biz fell by 10.6 percent, to $923.9 million. Fujitsu-Siemens was slammed, with Unix sales down 35 percent to just under $146 million–this despite product upgrades. On the X64 server front, Gartner said that such iron (regardless of form factor and operating system) accounted for $7.15 billion in revenues, down 6.6 percent. HP had $2.56 billion in sales, down 2.5 percent, and Dell came in at $1.5 billion, down 5.2 percent (as I said above, since Dell only sells X64 iron). IBM was slammed with 18.4 percent declines in its X64 server biz, falling to $1.12 billion in sales. Fujitsu-Siemens fell by 1.7 percent to $285.5 million, and Sun had a relative bright spot in its quarter, with a 5.6 percent increase in X64 sales, to just under $192 million. Other X64 vendors accounted for just under $1.5 billion in sales, down 6.9 percent as a group.

Not only are you ugly, but you smell bad, too.

The story coming out of the box counters at IDC about the third quarter’s server biz was not much different. IDC believes that server makers sold some $12.6 billion in machines in Q3, down 5.2 percent, and said that shipments only grew by 2.8 percent. IDC did not give a total server shipment number, but did say that it believes X64 server shipments, which make up the vast majority of shipments in the world, rose by 4 percent to 1.97 million units. The company added that X64 server sales declined by 6.6 percent to $6.9 billion. IDC said further that X64 sales in the United States fell by 12.2 percent in Q3, the biggest decline since the dot-com bust in 2001. In fact, IDC says that every region saw server sales declines except Latin America, which miraculously grew by 12.8 percent for the 13-week period. (Pity this is a tiny slice of the server racket.)

“The server market experienced significant deceleration in the third quarter with particular weakness in September. The slow down impacted a wide range of traditional server technologies with improved demand for blades and IBM System z notable exceptions,” said Matt Eastwood, the group vice president of enterprise platforms at IDC who puts together the server stats. “Many OEMs experienced significant pricing challenges in the quarter and revenue declines were experienced in all regions except Latin America and the Middle East and Africa (MEA). Enterprise budgets continue to face increased scrutiny as IT organizations of all types look to run their hardware harder and defer acquisitions wherever possible.”

One difference that is immediately apparent, but probably only significant if raises and bonuses at IBM and HP are pegged to market share stats, is that IDC pegs HP as the leader in server revenues in Q3, with $3.86 billion in sales, down 2 percent, compared to IBM, with $3.8 billion in sales, down 3.1 percent.

IDC also provides some insight into server platform sales by operating system. The company reckons that new machines sold for running Microsoft‘s Windows accounted for $5.1 billion in sales, down 5.1 percent and more or less in synch with the market at large. Windows servers accounted for nearly 41 percent of global server revenues in the quarter. Unix boxes accounted for $3.7 billion, or just under 30 percent of the server pie, after declining by 8.4 percent compared to the third quarter of 2007. Every size Unix box had revenue declines, according to IDC. Linux-based iron had a more modest 2.5 percent revenue decline, to $1.8 billion, in Q3, and IBM’s System z machines accounted for just under $1.2 billion in sales, up 25 percent. IDC did not give any data on Power Systems i and System i sales.

The company did give some idea about what happened on boxes of various price bands, however. The so-called volume systems market, which is for boxes that cost under $25,000, had a 7.2 percent revenue decline in the quarter, thanks to price pressure and representing the first revenue decline for volume servers in 14 quarters. The midrange segment (which is for machines that cost between $25,000 and $500,000) and where the i platform gets a lot of its sales and profits, had a 9.5 percent revenue decline. Big iron boxes, despite the large numbers of companies that were deferring server acquisitions, had a 4 percent revenue increase in Q3, thanks in large part to the mainframe upgrade cycle.

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