The Server Market Sees Some Stability

December 14, 2009 Timothy Prickett Morgan

While the box counters at Gartner and IDC carve up the server racket slightly differently, they came to basically the same conclusion about sales and shipments in the third quarter: things are still bad, but the situation is stabilizing. This will bring good cheer to those who believe that server spending is a leading indicator for the IT economy.

The Four Hundred told you all about Gartner’s analysis of Q3 in last week’s issue, where I did the math and showed how average selling prices are on the rise in different sectors of the server market, thanks in large part to the downshifting of platforms as more and more cores are added to boxes and virtualization-driven server consolidation. Gartner said that it estimates that worldwide server sales fell by 15.5 percent to $10.7 billion as shipments fell by 17.1 percent to 1.92 million machines.

IDC tracks factory revenues at the vendor level, and said it believes revenues in Q3 across all vendors and geographies fell by 17.3 percent to $10.4 billion, and added that shipments were down 17.9 percent, but the company did not provide a shipment figure. The company did say that x64-based servers accounted for 1.6 million server units, down 17 percent, and x64 boxes are generally north of 95 percent of server shipments in a quarter these days.

“The worldwide server market exceeded expectations in the third quarter with improving x86 server demand leading the way, which was driven in part by the infrastructure refresh momentum that is building in many geographies,” said Matt Eastwood, the group vice president of enterprise platforms at IDC who put out the numbers. “In fact, x86 server revenues experienced their largest sequential quarterly revenue increase in nearly five years. IDC believes that platform migration is once again gaining steam in the market and the post-recession server deployment patterns will establish the technology agenda in the data center for the next business cycle. For server vendors, after five quarters of market contraction, the next few quarters will be critical to determining the technology platform winners and losers in the years ahead.”

When IDC talks publicly about the server biz, it talks in terms of price bands and operating systems that are configured onto the boxes. The volume server space (which includes different processor architectures such as Power, Sparc, Itanium, and x64 chips, but which is dominated by x64 boxes) had a 14.7 percent decline in revenues compared to the third quarter of 2008. In the IDC lingo, volume boxes cost less than $25,000, while enterprise servers cost more than $250,000 and midrange boxes are snuggled in the middle. The midrange took it on the chin in the quarter, falling 23.4 percent compared to this time last year, and enterprise servers had a 19.3 percent drop.

In terms of platforms, Windows boxes did better than the market at large, with revenues down only 12.8 percent to $4.5 billion and giving Windows 43 percent of overall server sales in the quarter. Linux sales were off 12.6 percent to $1.5 billion. As far as I can tell, Linux has reached its equilibrium in the market and is more or less keeping pace, up and down, with Windows.

A decade ago, Unix boxes accounted for nearly half of server sales and were stacking up against IBM‘s mainframes and AS/400s (which had bigger shares then, too). Unix boxes did pretty well when the economy went on the rocks last summer–comparatively well, anyway, thanks to the inertia of Unix upgrades, which like mainframes, take forever to get budgeted and are nearly impossible to stop once a deal is inked. But IDC says that in Q3, Unix sales were down much more steeply than the server market at large, falling nearly twice as fast as Windows sales, down 23.4 percent to $2.8 billion. IBM is, of course, ecstatic that it gained 5.1 points of Unix market share in the quarter, but with Sun Microsystems‘ server sales dropping like a rock, how hard is it to gain share? IBM had 39.5 percent of the Unix server sales in Q3, compared to Hewlett-Packard‘s 29.2 percent share and Sun’s 23.4 slice of Unix sales.

That leaves the often-overlooked Others category, which includes IBM mainframes and i/OS machines as well as a smattering of OpenVMS boxes from HP, some mainframes from Hitachi and Fujitsu, and other boxes. In the third quarter, if you do the math on IDC’s numbers, the aggregate Others market fell by around 22 percent, to about $1.6 billion in combined sales. My guess, as I explained last week, is that the Power Systems i platform probably accounted for around $170 million or so of that.

IDC says that the demand for X64 boxes is on the rise now that Intel and Advanced Micro Devices have their respective “Nehalem” Xeons and “Istanbul” Opterons out in the market. In the first part of the year, customers were not just hesitant to spend money on X64 servers in general, but were also waiting to see the new products so they could start spending on cutting-edge X64 machines rather than last year’s models. IBM bucked the trend in the X64 space, showing a 1.2 percent increase in revenues in Q3, gaining 2.5 points of X64 share, but you have to remember that IBM’s System x and BladeCenter businesses started dropping off ahead of the economic meltdown last summer and this is a pretty easy compare for Big Blue. HP had 37.7 percent of X64 server sales in the quarter, compared with Dell at 23.2 percent and IBM at 18.5 percent.

It is interesting to note that blade servers showed actual revenue growth in Q3, with shipments rising 14 percent and revenues rising by 1.2 percent, to $1.4 billion. Obviously there is finally some price competition here, which is helping to drive volumes, and the volumes are helping to stabilize revenues. HP had a stunning 50.7 percent of blade revenues (across all architectures) in Q3, while IBM, gaining 6 points of blade share, rose to 27.2 percent of the blade market. Dell came in third, with 8.9 percent of blade sales, and a handful of other vendors accounted for the rest.

When you add it all up, IDC ranked IBM the top revenue generator in the server market in the third quarter, with a decline of 12.9 percent (considerably better than the market at large) to $3.32 billion. HP was right on IBM’s heels, but falling faster, dropping by 16.8 percent to $3.22 billion. Dell ranked third, with its $1.41 billion in sales, all for X64 iron, and was notable in that the company only had a 6.8 percent decline. (Against a relatively easy compare, mind you.) Sun had a shameful 35 percent decline, to $778 million in sales, with about half the decline due to its ambiguous Sparc roadmap and the pending Oracle acquisition and the other half due to the general market conditions. If you take Sun out of the Q3 numbers, the market only fell by 15.4 percent; another way of looking at it is that Sun should have sold another $212 million of servers in Q3 to keep pace with the market. Fujitsu did better than the class average, with a decline of only 8.2 percent to $594 million. Other vendors, with only $1.1 billion in sales, took a shot to the sternum, with a 29.4 percent decline.

It’s tough out there in Server Land, and if you need to buy capacity on anything but a high-end X64, Unix, or proprietary box (which are going to all get refreshes early next year), there is probably not going to be a better time to negotiate a big discount than right now.

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