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OS/400 Edition
Volume 12, Number 36 -- September 8, 2003

Server Sales Rise Slightly in Second Quarter

by Timothy Prickett Morgan

Everybody is looking for a good sign these days that the economy is coming back and that IT spending is on the upswing. While the server market is still cut-throat, according to the latest information from IDC, server spending actually rose for the first time in nine quarters during the second quarter of 2003. Don't get out the champagne just yet, since sales rose only two-tenths of a percent. However, it beat the 1.7 percent decline that IDC was predicting.

A gain of two-tenths of a percent is also better than the 3.3 percent decline in factory revenues that IDC reported during the first quarter of 2003. IDC's factory revenues are the measure of wholesale and retail sales of server equipment worldwide by each of the major server vendors. The channel adds markup to these numbers, so the amount of money that companies spend on server equipment is actually a little higher than these number suggest.

During the second quarter, IDC said that factory revenues were $10.6 billion across the world. IBM had the number-one spot when ranked by revenues, with $3.23 billion in server sales worldwide, which is an increase of 10.1 percent over last year's second quarter, when Hewlett-Packard held the top position. This time around, IBM outgrew HP, which only increased sales by 0.36 percent in the second quarter 2003 to hit $2.95 billion in sales. That gives IBM a 30.4 percent share of the server market, compared to HP's 27.7 percent share. Both companies have been jockeying for the number-one position since HP bought Compaq, and there is no indication that their rivalry will abate any time soon or that any one vendor will put enough water between itself and the other to declare a permanent top position in server revenue rankings.

IBM is, as you might expect, very happy to have passed HP after losing the top spot for the first time in its history in the wake of the HP-Compaq merger. But this happiness is almost certainly fleeting. HP will get its act together in the Unix server market. It is still the dominant server supplier in the Intel space. And it will get traction with the Itanium-based Integrity line as time goes by, which will cause problems for Big Blue. IBM will get Power5 out the door, and it still has mainframe and OS/400 customers that it can wring profits from in a way that HP simply can't, because it doesn't have the same kind of lock-in with HP-UX servers that IBM does with its proprietary customers on zSeries and iSeries machines. I mean, get real: IBM is charging $35,000 to $40,000 a GB for main memory on mainframes. Mainframe processors cost hundreds of thousands of dollars each. It is no wonder HP is having trouble consistently holding IBM down in the number-two spot. It can't be done as long as customers love their mainframes and their iSeries boxes. They do love them, and will continue to do so for the foreseeable future. In many ways, it is good to be IBM.

Sun Microsystems brought down the class average among the top-five server vendors during the second quarter of 2003, posting sales of $1.43 billion. Sun is in the midst of a product shift from high-cost midrange Sparc machines to lower-cost and less-featured Sparc and X86 machines, and that is making it hard for Sun to maintain its server sales levels. Sun, like HP, can't count on proprietary machines to prop it up, and, in fact, it is moving toward more commodity products, chasing down-market after Dell, HP, and IBM. Sun's strategy is to make it up in volume, just as HP hopes to do. Sun's sales slipped 18.7 percent in the quarter, and lost three points of market share, dropping to 13.5 percent of the worldwide server pie.

People have been making a lot of noise about HP, Dell, and IBM taking share from Sun, but this is not what is happening, so much as Sun's own customers, who are tired of paying high prices for Sun Fire midframe gear, are defecting to less expensive V Series gear and in some cases, Sun Solaris and Linux X86 servers, which have prices that are competitive with Wintel iron from the usual suspects. Sun's customers are putting it on a diet, to put it bluntly, and one that could end up making Sun leaner and meaner. IBM and HP like to think the server market is a two-horse race. If Sun gets its act together, it can cause lots of grief for them.

Dell, the darling of the server market in many ways, posted only 9.9 percent growth, bringing in $980 million in sales in the quarter, raising its share of the market by eight-tenths of a point, to 9.2 percent. Fujitsu-Siemens' consolidated worldwide revenues placed it in the number-four position, with 10.6 percent growth and 2.7 percent of the market, with $286 million in sales. Dell will just keep plugging along, putting pricing pressure on all the other server makers as it pushes clusters against big SMP boxes for commercial and HPC data processing. The share of sales from other vendors slipped by 4.2 percent, to $1.74 billion, giving these other vendors 16.4 percent of the market.

Server unit shipments rose by 17.5 percent in the second quarter, which means that average selling prices for servers are still dropping dramatically. This also means that revenue gains are going to be hard to hold for all vendors as prices continue to decline. More than 1.2 million servers were shipped in the second quarter of 2003, says IDC.

"The fact that this nine-quarter decline in worldwide server revenues has finally come to a halt could signal that IT managers are once again investing in IT infrastructure build-out on a worldwide basis," said Jean Bozman, research vice president of global enterprise server solutions at IDC, in a statement accompanying the numbers. "Although it's too soon to declare a rebound in the server market, it looks like new IT buying patterns are overtaking old ones," she added.

This echoes what HP Chairman and CEO Carly Fiorina was talking about a few weeks ago, when HP missed its profit targets for its third fiscal quarter. The traditional midrange has always been the belly of the server market, and that belly is aching. Fiorina said two weeks ago that the market is polarizing and bifurcating, with some customers moving toward the new, powerful entry machines, which they cluster to do work, and still others are moving toward big iron boxes, onto which they consolidate workloads and lower administration costs.

The Windows server market accounted for $3.1 billion in sales in the second quarter, up 11.5 percent. Windows server shipments were up 21.7 percent. Linux server sales were up 39.5 percent, to $650m. HP is the dominant vendor of X86-based servers running Windows (33.6 percent of the pie) and Linux (28.9 percent of the pie), and it also has dominant position in blade servers (which, at about 41,000 blades and $119m in sales for the entire world market, is still miniscule).

Unix server sales accounted for over 40 percent of the total server pie in the second quarter, but sales were down 5.2 percent, to $4.33 billion. Sun regained the top spot in the Unix market with $1.43 billion in sales, edging out HP with $1.36 billion. Sun lost Unix market share, and IBM gained nearly the same share. That has more to do with the changing product mix at Sun and the increasing adoption of IBM's Power4-based pSeries iron in the corporate world. That change in market share is not exclusively (or even mostly) IBM replacing Sun iron. Let's get that straight, because IBM wants everyone to believe that. Very few customers at any given time put their server farms up for bid. We read about the ones who do, and that are indicators for what might be right or wrong with one server product line compared with others. But many IT shops don't open up the bidding, and, of those that do, most incumbent vendors hold their accounts.

If Unix server sales were down and Windows and Linux server sales were up, sales in the "other" category, which includes IBM's zSeries and iSeries machines as well as HP's NonStop machines, were down 9 percent in the quarter, slipping to about $2.5 billion. This part of the market could be in permanent decline, inching downward with each passing year, even though these platforms have very staunch supporters. These products are still profitable, so they are not going to be discontinued any time soon.

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Managing Editor
Shannon Pastore

Contributing Editors:
Dan Burger
Joe Hertvik
Kevin Vandever
Shannon O'Donnell
Victor Rozek
Hesh Wiener
Alex Woodie

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Jenny Thomas

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