Server Sales in Q2 Reach Heights Not Seen Since 2000

Published: August 28, 2007

by Timothy Prickett Morgan

The box counters at both IDC and Gartner have taken the pulse and blood pressure of the server market for the second quarter of 2007, and as far as they can tell, their patient hasn't been this healthy since the peak of the dot-com boom seven years ago. Server revenues are matching levels not seen since 2000, and shipments are continuing to grow, even if more slowly than in past quarters.

According to IDC's estimates, worldwide server sales rose by 6.3 percent to $13.1 billion in the second quarter of the year, marking the fifth consecutive quarter of quarter-to-quarter revenue growth. By IDC's reckoning, this is the highest server revenue in Q2 since the market peaked in 2000, just before the dot-com boom went bust and the 9/11 terrorist attacks did the final bit of destabilizing of the world's economy in 2001. IDC noted with a certain amount of satisfaction that after three years of shipment declines, server shipments rose in tandem with revenues in the quarter, increasing by 6.1 percent.

"The server market not only continues to experience solid growth, but revenue growth has accelerated over the past seven quarters," explained Matt Eastwood, group vice president of enterprise platforms at IDC, in a statement accompanying the server market stats. "Although X86-based systems are once again the primary driver for overall market growth, continued growth in other market segments demonstrates that a single standardized infrastructure is not capable of meeting the full range of needs in today's modern enterprise. Enterprise customers of all types continue to focus on driving business growth. This growth drives new computing demands, which increasingly require both scale-up consolidated systems and scale-out distributed configurations to meet very different workload needs in today's enterprise."

When IDC says volume servers, it means machines that cost under $25,000, which by and large means X64 machines but also low-end Unix boxes such as Sun Microsystems' Sparc T1-based "Niagara" line of rack servers. Volume server shipments rose by 11 percent in the quarter, while midrange boxes had a meager 0.2 percent revenue growth. Revenues in the high-end market, where machines cost more than $500,000 a pop, grew by 1.7 percent compared to last year's second quarter, according to IDC.

By platform, IDC reckons that Windows-based servers accounted for $5 billion in sales in the second quarter, up 18.7 percent and gaining four points of market share. (Who needs Windows Server 2008 anyway?) Windows-based servers, which means only machines that have X86, X64, or Itanium processors, accounted for 38.2 percent of all server revenue worldwide in the quarter. Unix, the formerly dominant operating system collective in the server space, has been in decline relative to other platforms and relative to past highs during the dot-com era for a long time, and in Q2 2007, Unix sales slipped again by 4 percent to $4.2 billion. A lot of sales that would have been for RISC/Unix systems in years gone by now end up on Linux platforms, particularly on X64 boxes, as well as on Windows machines. The growth in Linux-based server sales kept pace with Windows, up 19 percent to $1.8 billion. Linux-based machines accounted for 13.6 percent of server revenues in the quarter, thanks in no small measure to IBM's mainframes, which support Linux, and other high-end boxes that do as well, such as Hewlett-Packard's Integrity Itanium-based line and IBM's System p Power-based line. If you want to be generous and say Linux is a kind of Unix, then this Unix-Linux market would comprise $6 billion in sales for the quarter, but the aggregate growth rate of this Unix-Linux segment would be only 1.9 percent. Windows is still growing 10 times as fast. The other growing platform, in terms of revenues, is IBM's System z mainframes, which IDC said rose by 4 percent in the quarter to $1.2 billion.

In terms of architecture, X86 and X64 platforms accounted for $6.9 billion in sales, up 15.5 percent compared to the second quarter of 2006, and shipments for these type of servers rose by 7.8 percent to 1.8 million units. Sales of servers based on RISC, CISC, and Itanium processors fell by 2.3 percent to $6.3 billion. Everyone always wants to talk about blade form factors each quarter, and blade server sales across all process architectures rose 36.7 percent growth to $875 million, according to IDC. HP had 47.2 percent share this time around as its c-Class blades announced last summer are getting traction, while IBM's share slipped to 32.3 percent. Sun, Dell, and a few others make up the bulk of remaining blade server sales at this point.

Dicing and slicing the market by the brand on the box, IDC says that IBM has still retained the top position in the server space, but HP is closing the gap again after some faltering steps in 2005 and 2006. IBM's overall sales in Q2 came to $4.07 billion, up 6.4 percent, while HP's sales rose by 8 percent to $3.71 billion. HP is, of course, the shipment leader in the X64 space with its ProLiant machines. Sun came in third in the rankings, but did not outpace the market, with only 5.6 percent growth to $1.71 billion in Q2. Dell may be having lots of troubles with its accounting and with the PC space, but it has lit a fire under its server business again, and saw 20 percent growth in the quarter, hitting $1.53 billion in sales worldwide. The Fujitsu-Siemens partnership saw server sales fall in the quarter by 2.3 percent, to $542 million, and the remaining vendors in the space saw their share decline by 4.7 percent, to $1.58 billion.

Over at Gartner, the server story for the second quarter was much the same as at IDC, but there are always some differences in the figures.

"There were a number of dynamics that affected the market, but the X86 server area was the real growth contributor," said Jeffrey Hewitt, a research vice president at Gartner in a statement accompanying that company's market stats. "A strong underlying demand for increased capacity and new applications is driving volume growth despite potential inhibitors like virtualization and economic concerns."

Specifically, Gartner said that worldwide server sales grew by 5.1 percent to $13 billion, and that unit shipments rose by 2.7 percent to just over 2 million units in the quarter.

As you can see, IDC thinks that server sales and shipments more or less kept pace in the quarter, while Gartner says that shipment growth was not as high as revenue growth. These differences might have more to do with numbers from Q2 2006 than they do for numbers from Q2 2007--and we won't know for sure until a year from now, after these numbers have been either left alone or revised based on better data.

In terms of sales by vendor, Gartner has IBM and HP a bit closer together, with the former having $3.87 billion in sales in Q2 (up 6.5 percent) and the latter having $3.7 billion in sales (up 9.2 percent). Gartner thinks Sun pushed $1.75 billion in iron (up 7.9 percent), with Dell coming in at number four with $1.56 billion in sales (up 19.6 percent). Gartner pegs Fujitsu-Siemens at $490 million in sales, down by 4.9 percent, and other vendors getting $1.62 billion, down 14.7 percent.

Gartner also provided server shipment figures for Q2, which came to 2.06 million units, up 2.7 percent. HP grew by an astounding 17.1 percent, pushing 650,371 servers by Gartner's reckoning. Dell returned to shipment growth, thanks to a refurbished PowerEdge lineup that now includes Opteron-based machines as well as those using Xeons, with 7.3 percent growth to 464,650 units shipped. IBM was the number three shipper, with 295,088 servers going out the door in Q2, but declining by 6.5 percent from shipment levels that Big Blue set a year ago. Sun also saw shipment declines despite the uptake for its "Galaxy" X64 servers and "Niagara" Sparc T1 machines, with shipments down 11.4 percent to 95,000 units. While Fujitsu-Siemens had revenue decline in the quarter, it saw shipments rise by 14.4 percent to 59,142, showing that the company's Primergy X64 and PrimeQuest Itanium machines are gaining ground even if the sticker prices are lower than for RISC-based PrimePower boxes, and therefore causing it to have overall sales declines. The remaining vendors in the server space accounted for 500,158 unit shipments in Q2 according to Gartner, down 8.6 percent.

Revenues for other vendors selling servers in Q2 were falling faster than unit shipments were falling, which suggests not only that white box server vendors are cutting prices to try to compete, but that the strategy is not working so well. But, when you are a whitebox server vendor and you want to stay in business in a cut-throat market, what choice do you have?

There will be much rejoicing among some IT analysts and most server vendors that a virtualization and server consolidation footprint crunch has not put the kibosh on server revenues or shipments yet. Numbers are always subject to interpretation, however, and some trends take time to establish themselves.

The transition is just really beginning for 64-bit computing for X64 servers and that virtualization is still nascent; moreover, with maybe 30 million servers in production worldwide, it will take some time to churn through that base and virtualize and consolidate it. But inevitably, because X86 servers are the worst-utilized platforms in the data center, there will be an effect, and if virtualization tools can really drive up utilization and foster consolidation, this crunch is coming. It is just a matter of time because data centers in major metropolitan areas are running out of power. One need only look at the massive data center and server consolidation projects that IBM, Sun, and HP have announced to see how the footprints are disappearing. What these vendors are doing for themselves to save money their customers will want to do, to. How could it be otherwise?

Luckily for server makers, a lot of the servers that people buy sit in departments and remote offices and not data centers. The pressure to virtualize such machines will be small--at least for a while. Consider it breathing room.

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