The Server Market Begins to Cool in Q4
Published: February 22, 2006
by Timothy Prickett Morgan
The latest server market statistics from IDC and Gartner came out today. IDC gave out stats for the fourth quarter of 2005 and all of last year, while Gartner just talked about 2005. The two companies more or less agree on the shape of the server market, but it was IDC that came out and declared that revenues had actually declined in the fourth quarter, and shipments had begun to slow. Gartner was mum on the subject of the fourth quarter.
IDC believes that the server market cooled in the fourth quarter of 2005, declining 0.2 percent to $14.5 billion--marking the first revenue decline in the server market since the first quarter of 2003. There were, of course, huge revenue declines from 2000 through 2003. IDC also believes that overall server shipment growth rates cooled to 10.6 percent, with overall shipments in the quarter of 1.97 million units in the fourth quarter, according to Matthew Eastwood, program vice president of IDC's worldwide server group.
For the full year, IDC reckons that 7 million servers shipped--a very large number of footprints, which Eastwood says are more richly configured than in years gone by because many companies are moving to 64-bit architectures and deploying virtualized server environments. Even with server prices plummeting, the hardware necessary to deploy virtualization is helping offset declines in individual prices for processors, disk drives, memory sticks, and other components. But, like many in the industry, Eastwood believes that in the long run, shipments will continue to slow as companies start increasingly virtualizing their server infrastructure. "We expect to see an overall slowing in shipments and then footprints," he explained. For all of 2005, IDC believes the server revenue tally came to $51.29 billion worldwide.
This matches my own gut feeling that shipments will slow once companies have deployed sufficient 64-bit, virtualization-capable platforms so they can unplug huge numbers of servers that do not have these features. Once that happens, down will go revenues and shipments. I am of the opinion that the installed base of 20 million to 25 million servers in the world could condense radically, perhaps to as low as 10 million to 15 million machines. That is like turning back the clock a decade in terms of installed server footprints, and it is from this base that customers will be doing their upgrades. This current upgrade cycle is being driven by a desire to move from expensive to cheaper platforms and from larger to smaller servers as well as consolidating distributed platforms onto bigger, virtualized boxes. This upgrade cycle will take years to run its course. So the downdraft will not be sudden, but rather gradual. But, I think it is inevitable--unless, of course, Linux 2.8 and Windows Vista Server turn out to be real resource hogs. I don't think the programmers working on the open source Linux platform or at Microsoft could program so badly as to propel the server business to new heights in the remaining part of this decade.
IDC says that sales of volume servers--by which it means X86 and X64 servers--grew by 7.3 percent in the fourth quarter of 2005, but that after four consecutive quarters of growth from Q3 2004 through Q3 2005, the midrange server market's momentum petered out and dropped by 11.5 percent. Aided by IBM's new System z9 product line, the high-end server market managed to decline by only 1.7 percent, however, marking the fifth straight quarter of declines for servers that cost more than $500,000.
"The volume server market continues to evolve as richer server configurations driven by both scale-out cluster implementations and scale-up server virtualization initiatives continue to drive increased customer spending," said Eastwood in a statement accompanying the IDC report. "However, even in the volume segment, the quarterly unit shipment growth of 11.5 percent was two-thirds the year-over-year unit growth rate observed in Q4 2004, illustrating a transition towards more richly configured systems in the market. This evolution is driven by IT managers increased desire to consolidate and virtualize their server infrastructures as they seek to maintain balanced and manageable IT growth in the future."
One important thing to note about the volume server space: In the fourth quarter, the Opteron processors from AMD accounted for over 14 percent of server sales worldwide and almost 25 percent in the United States, according to Eastwood. If the U.S. is a leading indicator for the world market, Intel has some serious challenges ahead. AMD has a goal of taking a third of the X64 server market by 2009, and it looks like it may be ahead of schedule--or low-balling what it tells Wall Street. IDC says that 79 percent of the X86/X64 server spend in Q4 2005 were 64-bit chips.
The X86/X64 server market had shipments of 1.8 million in the fourth quarter, up 13.7 percent, with revenues up 6.7 percent to $6.8 billion. Hewlett-Packard is the revenue and shipment leader in this space (with 33.4 percent of sales), Dell and IBM are in a statistical tie with 20 percent shares. In the U.S., Rackable Systems, which has a very innovative rack-server design, grew by 268 percent to take position four in the X86/X64 space.
On a platform basis, the Windows server platform continued its steamroller in Q4 2005, growing revenues by 4.7 percent to reach $4.86 billion in sales. While the collective Unix platforms (based on RISC and Itanium processors) were able to beat Windows by a nose in the fourth quarter of 2005, with $4.96 billion in sales (but declining by 5.9 percent), Eastwood said that Unix only accounted for $17.5 billion in sales for all of 2005 compared to $17.7 billion for Windows.
As for Unix, it will be interesting to see if Sun Microsystems will be able to start reversing declines in Solaris system sales in 2006 now that it is shipping very competitive Opteron and Sparc T1 systems. IBM is clearly on a roll with its AIX-based systems (although its growth is slowing), and Hewlett-Packard has stabilized its HP-UX business. Given the relative inefficient use of Wintel and Wamd platforms compared to Unix boxes, the footprint crunch--and therefore the revenue crunch--could affect Windows sales a lot more than Unix sales going forward. Unix has already lived through five years of increasingly sophisticated virtualization; Windows will really just be getting started when Intel gets VT features and AMD gets Pacifica virtualization features into their respective chips sometime around the middle of this year.
For the full year, IDC says that the Linux platform edged out IBM's zSeries mainframe platform in overall sales--the first time in a decade that the mainframe has moved down one notch in the platform rankings. (The last time was a decade ago, when Unix toppled the mainframe from the top spot.) In 2005, Linux platforms accounted for $5.7 billion in sales worldwide, while zSeries machines only accounted for $4.8 billion. IBM's iSeries platform had $1.9 billion in sales, according to IDC, essentially flat from 2004. In the fourth quarter, thanks to the System z9s, the mainframe edged out Linux boxes with $1.63 billion in sales (up 20.8 percent), compared to $1.58 billion for Linux machines (up 20.8 percent). The iSeries had about $600 million in sales during the quarter, down 18 percent by IDC's math.
Over at Gartner, the news was a little bit different, but not by all that much. The analysts there did their spreadsheet magic, and they reckon that worldwide server shipments were up 12.7 percent to 7.57 million units, and revenues across all vendors, architectures, and geographies climbed by 4.5 percent to $51.68 billion. Gartner also calculates that IBM has retained the top revenue spot, with $16.6 billion in sales for all of 2005 (up 3.6 percent), but that HP closed the gap between them by growing 8.8 percent and hitting $14.6 billion in sales. Dell increased its sales by 13.3 percent for the year to hit $5.4 billion, according to Gartner, with Sun declining by 5.5 percent to $4.95 billion. The Fujitsu-Siemens partnership ranked fifth in 2005, with $2.7 billion in sales, up 0.8 percent, and other vendors accounted for $7.4 billion, up 1.2 percent.
"The most dynamic market remains the X86 server segment," according to Jeffrey Hewitt, the research director at Gartner whose statement accompanied the tables put out by the company. "These servers continue to be the choice in increasing numbers to meet the needs of more Web users accessing more file types from more access points than ever."
Hewitt said that shipments of RISC-Itanium Unix servers fell by 5.3 percent in 2005 and revenues were relatively flat with a 0.5 percent increase in revenue. "The replacement at the low end of this market with Linux servers and declines at the high end of the market are the reasons for these results," Hewitt said. "Mainframes fell in revenue for 2005 (9.5 percent year over year), as all vendor revenue declined for the year including the mainframe leader, IBM, which declined 7.6 percent."
If you want to see the tables put out by IDC and Gartner, just click here. These tables will give you the blow-by-blow for server shipments and revenues by vendor.