Server Sales Skyrocket in Q3--But Can It Last?

by Timothy Prickett Morgan

There has been much joy in the server business in recent quarters, and the latest market statistics from IDC and Gartner for sales in the third quarter of 2005 are bound to cause even more exuberance among those who sell servers for a living. This is one of the best quarters the market has seen in a long, long time, and there are very good reasons for this. And, sorry to be a killjoy, but I think there are equally good reasons why this will not last for long.

But before I get into that bummer, let's talk about the healthy business that server makers did in the third quarter, starting with IDC's assessment of the market and followed by Gartner's reckoning of where the server makers stand and how various sub-markets are doing.

The analysts at IDC did their math and came to the conclusion that some $12.5 billion in servers were sold in the third quarter, an increase of 8.1 percent compared to sales this time last year and marking the tenth straight quarter of revenue growth for the server market. IDC was projecting server revenue growth of 6 percent, so the upside was a bit of a surprise. That 8.1 percent is a lot of server growth when you consider the extreme pricing pressure in all parts of the server space and the continuing downshifting of platforms as entry machines get powerful enough to run midrange workloads and midrange iron is now, in all honesty, equivalent to enterprise-class server equipment of years gone by. As I have said before, Moore's Law cuts both ways: Customers get more powerful machines in each class of server every year, but most customers' workloads do not grow anywhere near as fast as the pace of Moore's Law, so many customers downshift boxes (and price bands) even as they are adding computing power. Matt Eastwood, the IDC analyst in charge of server research, says server volumes (across all architectures) increased by 11.3 percent, and 1.74 million servers were shipped in the quarter. This is a stunning number of machines. But don't get too excited yet.

"Although there was continued IT investment across all three server classes, the volume and midrange enterprise server segments are showing the strongest growth, speaking to IT purchasers' continuing focus on cost containment, which is often achieved through strategic server consolidation and server virtualization initiatives," Eastwood said in the statement accompanying IDC's numbers. "Both scale-out and scale-up models for adding computer capacity are in place at most customer sites, giving IT managers flexibility in the way they install, deploy, and maintain server-hardware resources." Server virtualization and increasing performance are already having a big impact on the server market. Two years ago in the same quarter, companies were buying cheap servers in droves as the IT recession was still in full swing, and unit shipment growth was up 20.5 percent from the third quarter of 2002. A year ago, shipment growth had slowed to 17.5 percent, and this quarter, it has slowed further to 11.3 percent. If this trend persists--and there is no reason to believe it will not as companies start consolidating servers like crazy--it won't be long before server shipment growth halts, and it may even start heading into negative territory. In my opinion, there is very little that will keep it from going into negative territory, in fact, but we could see "Dot Com 2, Revenge of the Internet" or something. You can never be sure what will happen two years from now.

IDC said the volume server market (machines that cost less than $25,000) saw revenue growth of 14.8 percent in the quarter, while sales of midrange boxes (which cost between $25,000 and $499,999) grew a more modest 3.8 percent. High-end boxes that cost $500,000 or more saw a revenue decline of 1.2 percent from the third quarter of 2004, the fourth consecutive quarter of decline for big iron. By platform, IDC says that X86 and X64 servers together (which IDC designates as the X86 platform) had 16 percent revenue growth (which suggests that entry Unix and proprietary boxes actually declined in the volume space), reaching $6.3 billion in sales or a little more than half of the sales generated in the third quarter of 2005. The 32-bit X86-32 market utterly imploded, declining 60.7 percent, while the X86-64 market increased seven-fold, more than making up for the decline. Eastwood says that during the third quarter, servers based on X86-64 processors represented 69 percent of all X86 server spending--making it the largest segment of the server market. IDC believes dual-core processors now account for 25 percent of all server sales (across all architectures), and in the X86 market, blade servers using dual-core processors account for 10 percent of sales, the largest penetration in the X86 market. To sum it up, 64-bit is now normal, and it won't be long before dual-core processors are also normal. IDC is betting this transition takes four to five quarters to complete itself.

By the way, while the blade server market, which has been the darling of the server space for a few years, grew shipments by 72.1 percent in the quarter and revenue increased 96.8 percent, that revenue only racked up to $569 million and still only represents 4.6 percent of sales in the quarter. This is a business that generates a lot more noise than money still. IDC says IBM had 42 percent of the blade server sales in Q3, compared to 31.6 percent for Hewlett-Packard and 9 percent for Dell.

According to IDC, the Unix server market shrunk by 0.4 percent in the third quarter to $3.9 billion in sales, after posting a very decent growth rate in the second quarter, which is usually a strong quarter for midrange and high-end server sales because Sun Microsystems ends its fiscal year in that quarter and HP has the weeks of August fall in its final quarter of the fiscal year. IBM said in a statement that its Unix server sales were up 11 percent in the quarter, while Sun's and HP's declined by IDC's reckoning, but HP was quick to point out in its statement on the IDC numbers that it had nonetheless posted more Unix server sales than either IBM or Sun. HP also claimed the mantle to wear as the top Linux server seller, in terms of both revenues and shipments. IDC says the Linux server market grew for the thirteenth consecutive quarter, with revenue growth of 34.3 percent to $1.44 billion and shipments up 20.5 percent. The Linux market is beginning to cool, which is no surprise. The Windows market continues to grow as companies deploy Windows not only for infrastructure workloads but for core ERP applications. Sales of Windows servers grew by 17.7 percent to $4.6 billion, and shipments were up 15.3 percent, which drove up the Windows share of the server pie by 3 points. Linux is not blunting sales of Windows by all that much, clearly, and both Windows and Linux are taking it out of the Unix market's hide.

By vendor, IDC says IBM held on to the top spot according to a revenue ranking, with just over $4 billion in sales, followed by HP, which booked $3.47 billion in sales. HP actually had larger server revenue growth in the quarter than IBM or Dell, as the table below shows. Because Sun continues to decline (sales were down 7.6 percent to $1.09 billion) and Dell grew 11.8 percent to $1.31 billion, Dell has now become the solid and uncontested number three in the server space. The question now is whether Sun can rebound enough by peddling lots of Opteron servers and somehow bypass Dell again. Fujitsu-Siemens continued as the number five vendor, with $756 million in sales, but grew slower than the market at large and a lot slower than the top four vendors.

Over at Gartner, Joe Gonzales, the company's server analyst, put the finishing touches on his company's casing of the server market, and while Gartner dices and slices a bit differently, the same general trends prevail. Gartner's analysis reveals that the server market grew by 5.6 percent to $12.47 billion. Gartner hit the same ending number as IDC, but had higher numbers a year ago, so it feels growth rates are actually more muted. The company believes quite a bit more shipments went out the door, however, with 1.87 million units shipped in the third quarter of 2005, an increase of 13.2 percent.

Gonzales says HP remained the server shipment king, with 504,466 servers shipped, up 7.6 percent and giving it just under 27 percent of the market. Dell was close behind, with 416,148 servers shipped in Q3, an increase of nearly 20 percent over last year and giving it 22.3 percent of the shipment pie. IBM was number three in terms of shipments, with 308,898 units shipped (up 16.4 percent), and Sun was a distant third with 78,030 units shipped, but saw shipment growth of 2.3 percent--a move in the right direction for Sun. Gonzales says Hurricane Rita, which hit just east of Houston where HP has its X86 server and PC factory, might have hurt HP's sales in the calendar quarter, since the factory had to shut down for at least a few days. Because HP ends its fiscal quarter a month later, he believes the company could re-open the factory and get back on track and finish the fiscal quarter without a blip. But there might have been a blip in the calendar quarter. And Dell, which is located outside Austin, didn't get much bad weather from Rita, which might have helped its business relative to HP. Fujitsu-Siemens shipped 69,222 servers in the quarter, up 14.3 percent.

In terms of sales, Gartner has IBM as the top server seller, with $4.08 billion in sales, up 9 percent, followed by HP in the number two position, with $3.5 billion in sales, up 6.6 percent. Gartner has Dell at number three in the revenue ranking, with $1.27 billion in sales, up 8.9 percent, Sun number four with $1.05 billion, down 7.6 percent, and Fujitsu-Siemens number five with $690 million, up 5.7 percent. Server makers in the "Others" category continued to lose share, collectively accounting for $1.88 billion in sales, up only 3.1 percent.

By platform, Gartner believes the RISC/Itanium Unix market continues to be a heated one, with HP posting sales of $1.13 billion, down 5.1 percent but still ahead of IBM and Sun, which respectively had $1.09 billion and $963 million in Unix server sales on RISC or Itanium boxes in the quarter. Gartner believes IBM grew its Unix sales on these platforms by 12.6 percent, and Sun's sales declined by the same amount. Across all server platforms (including X86 and X64 platforms as well as RISC and Itanium platforms), Unix server sales amounted to $3.71 billion, down 1.4 percent. Windows server sales were $4.64 billion, according to Gartner, up 8.3 percent, and Linux sales were $1.77 billion, up a stunning 40.2 percent. Gartner thinks Linux is doing better than IDC does. And while Gartner thinks the Windows market grew more modestly than IDC in the quarter, they arrived at almost the same sales for the Microsoft platform--$4.64 billion by Gartner's estimates and $4.6 billion by IDC's reckoning. The "Others" category--which for now includes the Mac OS platform that is now based on Unix--saw sales drop by 5.8 percent to $2.4 billion.

Gonzales says the one part of the market that seems to be hot is Linux on Opteron servers. Gartner believes Opteron-based server sales were up 190.5 percent in the quarter to $688.5 million, with AMD now having 10 percent of X86 server shipments and 10.7 percent of X86 server sales. Linux captured 47.8 percent of Opteron-based servers sales. "Linux is really doing great on Opteron," says Gonzales, "which makes sense because Opteron is becoming the darling of the HPC community, just like Linux has already become." But don't count out Windows on Opteron yet, though. Windows accounted for 45.8 percent of Opteron server sales--right behind Linux. The issue now is which one will benefit from Opteron's own growth and which one will help push Opteron going forward. Stayed tuned.