IDC Chops Server Forecasts Thanks to Virtualization, Multicore Chips

Published: March 27, 2007

by Timothy Prickett Morgan

The IT analysts are finally coming around to the idea that server virtualization and multicore processors are going to have a disruptive effect on the server market from this point forward. Only weeks after IDC announced its figures for server shipments and revenues in the fourth quarter of 2006, when virtualization and multicore chips started a small downdraft in the server space, the consultancy has revised its server market models through 2010 significantly downward.

Years ago--and I mean like three or four years ago--the growth projections for the server market from IDC and Gartner did not really take into account the effect of server virtualization, which enables physical machines to be carved up into many virtual or logical servers and which allows the aggregate bunch of virtual servers to run much more efficiently and--here's the rub--with a lot less computing power. Server virtualization causes a nice bump up in sales as companies move to machines with integrated hardware features to support hypervisors, but eventually, they unplug some footprints and do not need to add so many footprints going forward. Ditto for the effect of multicore processors on the market. Why buy a four-socket server, which costs a lot of money, when a two-socket server with quad-core chips can do the same work and costs a lot less?

To its credit, IDC is the first among the consultancies to publicly say the forecasts need to be changed. This assertion, which I made in a Breaking News piece last week when IDC made its announcement, was vehemently protested by Gartner, who says that its analysts have been "all over this." (I will be talking to Gartner this week to see how its server models have evolved since virtualization entered the server market.) In any event, IDC last week removed 4.5 million server shipments from its forecasts spanning 2006 through 2010, and the X64 server market is going to be hit hardest since it is the last platform to go virtual. Proprietary minicomputers, and Unix boxes have all been virtualized since the late 1990s, and mainframes did it in the late 1980s. And each was hit by revenue declines that were more times than not ascribed to a shift away from their platforms instead of more efficient, virtualized usage by customers. Now, the X64 segment will see shipment growth from 2006 to 2010 drop to 39 percent compounded annually; IDC was projecting only a few weeks ago that X64 servers would see 61 percent shipment growth through 2010.

Ouch. Intel and AMD, and all of the server makers who depend on shipment growth to sustain them, will be hurt to the tune of about $2.4 billion in lost revenues over the course of that five-year span.

This is a pretty dramatic change, given the fact that the IT industry has for years been operating under the assumption that no matter what, the server market would just keep chugging along so long as there was not a recession, because historically, no matter how much computing power IT vendors could ship, the market could absorb it. But that assumption was based on the continued inefficient use of computers. The real question is this: Are IDC's revised forecasts cutting out enough?

IDC believes that aggregate server revenue growth will be lower than it has been, but that the change will be a lot less than for server shipments because the use of virtualization and multicore processors tends to mean buying beefier servers. This remains to be seen, and it is quite possible that in a price war environment, server prices drop very fast indeed. This will be particularly true if server vendors, desperate for shipments to keep their volume pricing agreements and economies of scale, try to create a home server market. A home server could end up being very attractive, but families will not shell out $2,500 for a home server even as they demand IT-class features.

The use of multicore processors will not, according to IDC, cut back on the number of effective processors being shipped. If you count a core as a processor, then IDC is still projecting that the number of processors in the server space will grow by an average annual rate of 25 percent between 2006 and 2010. The company also expects that in 2010, 1.7 million physical servers will be deployed to run virtual servers, and these machines will account for some 7.9 million virtual servers. That's about as many physical servers as shipped in 2006, by the way. IDC says the number of virtual servers will grow at nearly 41 percent (compounded annually) in that five-year span. IDC is projecting that by 2010, 14.6 percent of physical servers sold will be virtualized, compared to 4.5 percent of servers sold in 2005.

It will be interesting to see if this IDC forecast needs to be revised yet again, if the effects of virtualization and multicore processors really kick in. And no one has said anything yet about the secondary effects on software licensing, server maintenance streams, and the reseller channel other parts of the server market that will be adversely affected by a reduction in server shipments. It would not be surprising at all if software makers, out of sheer necessity, all start to count cores as processors as far as software licensing is concerned, even as they have tried to be somewhat generous so far.

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