The Four Hundred

Analysts at Gartner's Dataquest market research unit have released preliminary unit-shipment statistics for the server market for all of 2002, and the good news is that companies actually bought more servers--good news if you are an IT supplier, not necessarily if you are a system administrator. While improved shipments are a good sign, Dataquest says that pricing pressures remained intense as the year ended. This is good news for server shoppers, but not so good for IT vendors, which need to show revenue and profit growth.

For the full year, worldwide server shipments across all architectures and operating system platforms were 4.61 million units, up 4.2 percent from the 4.425 million units shipped in 2001. Beating 2001 was not such a hard game, to be sure, since that was a very tough year for selling any IT gadgetry, and servers in particular after the buying binge that was driven by the dot-com boom. Server shipments and sales were chugging along in 2000, growing by 25.6 percent and 14.4 percent from 1999's levels respectively, according to Shahin Naftchi, senior analyst covering servers for Dataquest's computing platform worldwide program, but in 2001, worldwide server shipments grew only by 2.25 percent and worldwide revenues dropped by a whopping 15.37 percent. Compared to 2001, 2002 will feel good to most server suppliers in the aggregate, mainly because the pain level didn't get much worse. But Dataquest and rival analysts at IDC are both seeing a pronounced shift toward Wintel and Lintel iron and away from proprietary and Unix equipment in roughly the same power class as everybody tried to do the same or more with less IT budget.

This trend will not stop in 2003, and revenues from this year will look a lot like those from 1996, by my reckoning, only it will take nearly twice as many servers to produce that revenue. Think about that for a few minutes. Now think about what might happen to shipments if grid and logical partitioning technologies just emerging in the Wintel and Lintel spaces and established in the proprietary and Unix server markets start being used by customers. Remember, most servers are only using 10 to 25 percent of their capacity most of the time. Now remember that that processor speed is doubling every 12 to 18 months, even though workload needs are probably only growing at 20 to 30 percent per year at most companies. This increased capacity stretches out upgrade cycles for all types of machines. If servers could, through virtualizing technologies, be utilized even at 50 percent capacity, shipments would drop because of the faster processors and the increased efficiencies. Let's say it dropped to 3 million units, which would put it at the run rate of early 1999. The average selling price of a server has dropped from over $19,000 to just over $10,000 from 1997 to 2001. If units get crunched by increasing processor speed and virtualization, and the average selling price of the servers keeps getting pushed down, how can aggregate server revenues not compress dramatically, unless there were an explosion in computing needs? How does the server market not drop to $25 billion to $35 billion and 2 million to 3 million units shipped over the next few years if these technologies take off? If you have an answer, I'd love to hear it.

Back to 2002. "The performance of the worldwide server market continues the growth pattern which began in the first quarter of 2002, suggesting that server shipments for the worldwide market may be stabilizing, but not showing signs of dramatic growth due to continued economic pressure in a number of regions," Naftchi said in a statement accompanying the Dataquest numbers. Dataquest will release revenue market share figures for the server market within a few weeks.

On a worldwide basis, Hewlett-Packard was the market share leader, with 1.385 million machines shipped in the year (30.1 percent of the total pie), thanks to the merger of HP and Compaq. But the merger did come with a cost, and the combined HP actually saw shipments decline by 4.6 percent for the full year. HP said in a statement that it regained the number-one position in the U.S. market, in terms of shipments, from rival Dell and that it was the fastest-growing server shipper in the U.S. market in the fourth quarter, which may be a signal that HP is getting back on track with the growth it was counting on from the merger. Peter Blackmore, executive vice president of HP's Enterprise Systems Group, says that HP was the only vendor to see double-digit shipment growth in the U.S. market. Whether HP can build that momentum in its other markets around the world remains to be seen, especially given the economic and political climate in many areas of the globe.

In terms of shipments worldwide, Dell was the number-two vendor, with 851,227 servers shipped in 2002 and 18.5 percent of the total server shipment market. That represented a growth of 19.3 percent over the 713,653 units it shipped worldwide last year. Dell said that it added 4,600 new PowerEdge server customers in the four quarters ending in October 2002, and said that it expected to be the number-one shipper of Intel-based machines worldwide in the fourth quarter (based on Dataquest numbers), as it had been in the prior three quarters of 2002.

"Most of HP's growth is fueled by IA servers, which accounts for about 95 percent of HP's overall shipments," said Jeffrey Hewitt, principal analyst for Dataquest's servers worldwide program in the same statement. "HP completed the customer transition from the NetServer to the ProLiant brand, and it appears that a percentage of the old NetServer customers have lost their inhibition to move to the ProLiant brand, which helped HP to retain that customer base. The majority of Dell's sales are occurring below the $25,000 segment. This market has seen an increase in shipments because of the poor economic situation." What Hewitt didn't say is that HP is as reliant with ProLiant on shipments down in this space as Dell, and that this is pretty much the only place where HP can get significant shipment growth. If HP is lucky, its channel and direct sales could take half of Dell's growth away, which would more or less allow these vendors to maintain their relative positions in the market.

Because HP sells a lot of big Unix and proprietary iron and is very strong in the midrange market, HP's share of worldwide server revenues is expected to be larger than Dell's. It may even rival sales at IBM, which has been the revenue market leader in the server market since there has been a server market. IBM got 14.3 percent of worldwide server shipments, pushing some 657,895 machines through direct and indirect partner channels. Unix and Linux server maker Sun Microsystems increased its unit shipments from 259,905 shipped in 2001 to 277,300 in 2002, a growth of 6.7 percent. However, Sun's market share was essentially flat at 6 percent because Dell, and to a certain extent white box server vendors, grew shipments faster. Japanese server maker NEC was ranked fifth worldwide in shipments, with 103,521 units shipped, but its shipments actually declined 2.5 percent from 2001.

The shipment story in the U.S. was a little brighter, with shipments across all vendors up 13.8 percent to 1.949 million units. HP held on to its number-one position in the server market in the U.S. with 506,589 machines sold, up 4.7 percent, but Dell grew shipments by 22.2 percent to give it 487,984 units shipped in the U.S. HP's market share slipped from 28.3 percent to 26 percent from 2001 to 2002, while Dell's grew from 23.3 percent to 25 percent. It's a neck-and-neck race at this point in the home market of these companies. IBM was the number-three vendor by shipments, with 225,315 machines shipped in the U.S., up 3.8 percent from 2001 and representing an 11.6 percent share of the market. Because IBM grew more slowly than the market at large, its share of the U.S. server pie actually dropped from 12.7 percent share. Sun increased its server shipments by 15.9 percent to 143,753, largely thanks to its pushing of Cobalt Linux-based entry and appliance servers and its V-series of value-class, low-priced Sun Fire UltraSparc-III servers, which offer much better bang for the buck than its regular midframe Sun Fire UltraSparc-III machines. Sun's share of the U.S. market was up two-tenths of a point to 7.4 percent in 2002.

The Dataquest analysts say that the U.S. market saw positive shipment growth in each quarter of 2002, but that the lack of revenue growth suggests that the market is still in stagnation and that customers are shifting to lower-cost machines or are getting big price breaks. Dataquest says that server shipments in Europe, the Middle East, and Africa picked up in the final few weeks of December, but that aggressive pricing and a model mix that is shifting toward smaller servers or away from RISC machines to Intel-based servers is driving revenues down across the region. The Asia Pacific region is also showing some signs of growth, say the analysts, but the economic and political turmoil is depressing business in the region, and that, in turn, is suppressing spending on servers. Latin America is similarly in political and economic turmoil, and its server market is also hurting.