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Volume 21, Number 9 -- March 5, 2012

Server Sales Slump A Little In Q4

Published: March 5, 2012

by Timothy Prickett Morgan

Conspiracy theorists think that PC and server makers are making a little too much about the impact of the flooding in Thailand, which led to disk shortages and therefore lower than expected shipments of both PCs and servers in the waning months of 2011. But according to the analysts at Gartner, a shortage of disk drives was one of the contributing factors in a fourth quarter that was a little bit weaker than it might otherwise have been.

Not that the situation was all that bad, particularly when measured up against the declines in server revenues and shipments during the Great Recession. But it is important to point out that while server shipments are now above where they were at the end of 2007, before the recession started, revenues have not recovered. In the fourth quarter of 2007, server revenues hit $15.4 billion and against shipments of 2.42 million units, and they sort-of held up until late 2008. In early 2009, server sales and shipments were back at levels set in 2005 and 2006, and even this year, revenues have not recovered despite a strong refresh cycle in late 2010 and throughout 2011 and the build-outs of hyperscale data centers for Web apps. Gartner reckons that companies purchased a little more than 2.5 million servers in Q4 2011, an increase of 4.5 percent compared to Q4 2010. But revenues actually slid backward by 5.4 percent to $13.9 billion.

You can thank the declining Unix server business, where IBM is eating market share like it is cotton candy as Hewlett-Packard, Oracle, and Fujitsu suffer declines from competitive pressures from each other and from Linux and Windows alternatives. You can also thank the revenue decline on slackening sales of IBM's System z mainframes, and on an estimated several hundred thousand X86 server shipments that Gartner analyst Jeffrey Hewitt tells me the industry might have shipped if there were no disk shortages. I would add, if Intel and Advanced Micro Devices had been able to ramp up their respective Xeon E5 and Opteron 4200/6200 processors by September, as many had expected.

The mainframe business shrank by $610 million, to $1.37 billion, and that is not a small decline even if it is absolutely expected given the fact that the flagship System zEnterprise 196 mainframes are in the second half of their sales cycle and will probably be replaced later this year with new mainframe iron. (IBM has been vague about this.) Sales of Unix machines based on RISC or Itanium processors dropped by $237.3 million in the fourth quarter as well, and if you assume somewhere around 200,000 X86 servers were not shipped that might have otherwise, at around $3,800 a pop (the average for X86 boxes in the quarter, not some made up number) you are talking about maybe another $765 million in sales. If those X86 boxes had made it out the door, overall server sales would have been flat in the quarter.

Of course, "if" don't mean squat in the server racket. And presumably this pent-up demand will be executed against Xeon E5 and Opteron 6200 gear in the next few quarters. And even when (and if) it is absorbed, I happen to think that the Moore's Law track of price/performance improvements, coupled with virtualization and cloud computing (which make servers more highly utilized) will make it very hard for server makers to ever hit $15 billion in sales in a quarter.

Back in 2007, server makers could get higher revenues precisely because many servers were under-utilized. This is one of the reasons why the platforms that had virtualization first--mainframes, then proprietary midrange gear, then Unix boxes--all took big revenue hits after they virtualized and they never recovered. The thing that saves the X86 racket is that supercomputer clusters and hyperscale Web clusters running cloudy apps don't virtualize. Yet.

For the full year, Gartner says that companies bought a whopping 9.52 million servers, up 7 percent from 2010's levels, and when you add up all the dough the servers generated, you get a pile that is $52.8 billion high. That's 7.9 percent revenue growth over 2010, and it is not too shabby, all things considered--the Thai flooding, server processor delays, a wobbly economy in certain parts of North America and Western Europe, and so on. In 2007, server revenues hit $55.4 billion against shipments of 8.84 million units. So the cloud is driving boxes, but the prices for RISC, Itanium, and mainframe machines are falling and so are the prices on cloudy boxes going into big data centers. So the average server price is also coming down for a lot of reasons even as companies are buying physically (meaning core count, memory and disk capacity) fatter machines.

IBM has not given us a sense of how the i5/OS-IBM i platform has done in years, and it is not possible to tease it out of Gartner's numbers, either. The best you can do is break RISC/Unix and X86 server sales out from IBM's overall sales and get a revenue figure for IBM Other, and if you have a sense of mainframe revenues, then you can pull that out of IBM Other and you are left with something that should be IBM i-based Power rack, tower, and blade servers. But it is hard to be sure, since plenty of big and a number of midrange shops mix AIX and IBM i on platforms. If you do that math this time around in Q4, you'll see that the non-mainframe IBM Other machines accounted for about $72 million in revenues, down from around $208 million in the year ago quarter.

Having done that math, I don't trust it and I don't trust that either Gartner or IDC are reckoning Power Systems-IBM i platform sales any better than you or I could do on the back of an envelope. I suspect the numbers are larger than many expect, but smaller than historical levels the platform delivered a decade ago. Again, Moore's Law and virtualization, as well as the fact that most IBM i platform sales go through the channel, diminish the IBM i hardware revenue stream as counted at the base server level. So has the fact that more than half the installed base has migrated off the platform in the past decade (if my estimates are correct). And the IBM mainframe, by the way, has experienced the same level of customer contraction, and last month, none other than IBM chief financial officer, Mark Loughridge, said that Power7-based systems were eating into mainframe sales.

As I have said many times, the important thing to remember is that supporting IBM i on Power Systems iron doesn't cost Big Blue very much at this point, so it will be supported for many years to come. IBM will cut Linux support on Power-based servers long before it cuts IBM i support.

In the quarter, IBM's server sales across all platforms were down as reckoned by Gartner, to $4.68 billion, and it had the top ranking despite a 10.2 percent revenue decline. HP came in second, with $3.74 billion in revenues, dropping 16 percent compared to Q4 2010. Dell was the only top-tier vendor to grow both revenues and shipments in the quarter, with sales up 7.3 percent to $2.06 billion and shipments rising 11.2 percent to 573,125 machines. (IBM, by contrast, shipped 329,232 boxes and HP pumped out 704,853 machines.)

Oracle ranked fourth, with $735.4 million in sales, down 8.7 percent despite very healthy 48.4 percent growth in its X86-based Exadata database and Exalogic Web application server appliances, which hit $249.6 million in sales in the quarter by my math against Gartner's numbers. This is consistent with claims by Oracle co-founder and CEO, Larry Ellison, who has said that the Exa line of machines would have a $1 billion run rate as Oracle ended its fiscal 2012 this coming June. The company expects to double that Exa hardware business to around $2 billion in fiscal 2013.

Fujitsu came in fifth, as it traditionally has for the past decade, with $496.1 million in sales, falling 11.5 percent. But perhaps it will not be long before networking giant and server upstart Cisco Systems will be right behind Fujitsu and maybe even jumping it. In the quarter, Cisco's Unified Computing System blade and rack servers (which sport integrated networking and therefore have higher average selling prices used to reckon revenues) brought in $321.3 million, rocketing up 123.4 percent.

Cisco only sells machines based on Intel's Xeon processors, and pumped out about 45,000 blades and boxes in Q4 2011. It bypassed Fujitsu in the X86 market, with the Japanese company generating $315.8 million from X86 boxes in the quarter and ranking fifth in the X86 server segment. X86 servers generated $9.38 billion in revenues in Q4, up 2.6 percent, drive by 2.45 million in shipments, up 5 percent.

RISC and Itanium machines running Unix, by contrast, only accounted for 49,905 shipments (down 10 percent) and only generated $2.73 billion (down 8 percent) according to Gartner's box counters.

Gartner is not tipping its hand too much on what it expects for 2012 in terms of server sales, but at least the news is not bad. "The outlook for 2012 suggests that growth will continue," Hewitt said in a statement that came out with the server numbers last week. "These increases continue to be buffered by the use of X86 server virtualization to consolidate physical machines as they are replaced, but the introduction of new processors from Intel and AMD is likely to help fuel and initiate a new round of server replacement cycles."

IBM will obviously be rolling out new X86 machinery in the first half sometime, and is expected to put other new iron in the field--very likely upgraded mainframes and Power7+ systems--in the second half of the year.


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