Gartner Gives 2004 Server Report Cards

by Timothy Prickett Morgan

For all the talk about virtualization, partitioning, and other means of driving up server utilization and driving down box counts, the worldwide server market doesn't seem to be listening. This is a great thing if you happen to be selling servers for a living. According to Gartner, companies worldwide consumed and incredible 6.7 million servers in 2004, up 20.5 percent from the 5.6 million machines acquired during 2003. And even with average selling prices going down, server makers still raked in $49.5 billion in sales for 2004, an increase of 7.2 percent.

Gartner last week released its statistics for the server market for the fourth quarter of 2004. Even though the shipment growth rate has been accelerating through 2003 and 2004, the revenue growth rate has been declining since hitting a 12.3 percent growth rate in the fourth quarter of 2003. This is a bump in server revenues like we haven't seen since the dot-com boom, and topping it at all is something of an accomplishment considering the continued stinginess of companies when it comes to spending on IT these days. In the fourth quarter, worldwide server sales came to $14.2 billion, up 5.7 percent. In the first three quarters of 2004, sales ranged between $11.4 billion and $11.8 billion, with growth rates of 9.6 percent, 8 percent, and 6.1 percent in Q1, Q2, and Q3 of last year, according to Gartner. While the revenue growth rate is cooling in the fourth quarter of last year, absolute sales increased by a significant volume compared to the other quarters of 2004. This might mean sales are going to pick up decently in 2005, or that vendors pushed like crazy at the end of last year and the first couple of quarters in 2005 will be tough. We won't know what happened until a few quarters from now.

IBM, of course, maintained its position at the top of the server heap when ranked by sales, with $5.1 billion in server sales in the fourth quarter of last year, growing 5.8 percent and getting a 36.1 percent share of the market. Hewlett-Packard was the number two on the list, with just under $3.9 billion in sales, with 9 percent growth (outgrowing the broader market for the first time in a long time) and a 27.4 percent share of the server pie. Sun Microsystems just barely held onto its number three position, with $1.365 billion in sales after a 5.1 percent decline in revenue compared to the fourth quarter of 2003. Part of Sun's revenue decline is due to the shift toward X86 server, but most of it is due to Sparc customers buying less iron or paying a lot less for what they do buy. After beating out Sun in the third quarter of 2004, Dell slipped back behind Sun into the number four position in the fourth quarter, with $1.316 billion in sales even after growing revenues by 18.2 percent in the quarter. The Fujitsu-Siemens partnership ranked number five on the Gartner list, with $654.3 million in sales in Q4, down 3.1 percent, followed by NEC with $182.7 million (down 7.4 percent) and Unisys with $172 million (up 9.6 percent). NCR was notable in that it grew sales by 18.3 percent in the quarter to $117.8 million and so was Silicon Graphics in that it grew sales by 43.3 percent to $99.6 million. Itanium-Linux Altix supercomputer sales appear to be getting traction. Sales at Group Bull were up modestly in the quarter to $107.9 million, and sales of other vendors was essentially flat at $1.19 billion.

On the shipment front, HP was the top shipper in the fourth quarter, with 547,698 shipments, an increase of 18.2 percent. Rival Dell's growth was 19.5 percent in the quarter, but it only shipped 380,593 servers. Message: Dell is not invincible, and HP still knows how to make and sell servers. IBM grew shipments by 19.4 percent in the quarter as well, pushing 327,189 pieces of iron. Sun sold 93,553 machines, an increase in shipments of 13.1 percent. Most of that growth was driven by Sun's X86 server business. Message: Don't count Sun out yet, either. Sun's X86 server revenue grew by 360 percent, hitting $152.5 million for 2004. If Sun can maintain that growth rate, it will have a $700 million X86 server business in calendar 2005. If by some miracle Sun can do this, and its Unix sales continue to slide at about 5 percent, Sun will actually grow overall server sales by about 5 percent to about $5.4 billion or so in 2005 (about what Sun sold in 2003). That's a tall order, but clearly along the lines of what Sun has in mind as it ponders its future "Galaxy" Sun Fire Opteron lines.

The Unix server market continues to be problematic, and is now a dead heat among the three top players, IBM, HP, and Sun. For the first time in any quarter, IBM was ranked the number one Unix server seller, with $1.338 billion in sales in Q4, besting HP's $1.335 billion and Sun's $1.329 billion. A quarter does not a year make, however. Sun retained the top Unix sales position for all of 2004, with $5.14 billion in sales, compared to HP's $4.89 billion and IBM's $4.32 billion. If IBM's current 7 percent Unix growth rate for 2004 holds and HP's and Sun's Unix sales continue to shrink by their respective 7.8 percent and 5.3 percent, Sun will still be the number one Unix vendor in 2005, but HP will drop to number three behind IBM. This race is far from over, particularly considering how hard IBM and HP are pushing Linux. IBM would sell Linux on Power and abandon AIX long before it loses deals to Sun, and that could significantly affect its Unix sales this year. Fujitsu-Siemens is also getting traction in Unix, with $891 million in sales for 2004, up 8.8 percent, and so is NCR, with $457.6 million in sales and growth of 16.2 percent. Even Group Bull grew its Unix business as fast as IBM in 2004, with sales up 7 percent to $159.8 million. The overall Unix market amounted to $4.47 billion in the fourth quarter, down 1.3 percent, and $16.2 billion for all of 2004, down 2.8 percent.

In the broader X86 server market, sales came $6.55 billion in the fourth quarter of 2004, up 16.4 percent, and to $23.2 billion for the full year, up 16 percent. The twin engines of Windows and Linux are the main drivers of X86 platform sales at this point; Windows provides the base, and Linux provides the growth. HP has roughly a third of that market, according to Gartner's analysts, with Dell and IBM each getting about a fifth of the market each. At current growth rates, the X86 server business will account for more than half of all server sales in 2005. X86 servers already dominate shipments, accounting for 91 percent of shipments in 2004. Considering the amount of legacy applications out there running on Unix and proprietary iron, it is hard to imagine that percentage going up much higher. But it inches up a tiny bit every year.

Gartner did not provide statistics for the iSeries server market, but IBM said in its financial filings that iSeries sales were down 9 percent in the fourth quarter, a significant improvement over the double-digit declines the iSeries experienced throughout the rest of 2004. I reckon that the iSeries business declined by between 20 and 25 percent in 2004. Many of us are looking for 2005 to be a lot better.