Gartner Says Server Market Warmed Up Some More in Q2

by Timothy Prickett Morgan

The analysts at Gartner finished up their box and money counting for the server market last week, and did their traditional handing out of quarterly report cards for the world's major server makers. The market heated up a little bit in terms of annual growth from the prior year, which is an interesting development for a second quarter in any year. First and second calendar quarters are not usually easy ones for IT vendors.

Despite the advent of server virtualization and the desire to consolidate servers, operating systems, and applications on as few platforms as makes sense, the IT shops of the world are buying newer machines (often a requirement for virtualization on some platforms) at a rate that allows shipments to grow in the aggregate even if, in many data centers, box counts are going down. Despite all the talk about companies having long-since burned off their excess server capacity from the dot-com days, I think only now--four, five, and in some cases six years after companies shelled out a lot of cash to modernize their data centers for dot-com workloads and Y2K projects--have companies come to the conclusion that it is time to spend money on more modern machines. Issues of performance, heating, and cooling are playing a part in upgrade plans as well, since newer machines tend to run more efficiently.

With Gartner's quarterly server figures, we just see the aggregate shipments and revenues, not the drivers behind the numbers, of course. In the second quarter, some $12.15 billion in servers was sold, up 4.7 percent from the prior year's second quarter, when $11.6 billion in machines were sold. The revenue growth has slowed, of course, because two years ago sales were up 7.7 percent after being essentially flat in the second quarter of 2003 and down 12.8 percent in the second quarter of 2002. In 2004's second quarter, sales were about the same as in 2002, when the market was hitting bottom, at $11.6 billion in worldwide server sales across all architectures. So 2005's second quarter represents the first time the market has grown in a second quarter above the baseline set in 2002. To put this another way, 4.7 percent growth might not be as good as 7.7 percent growth a year ago on a quarter-to-quarter basis, but even this diminished growth represents an improvement over where we were at before the full effects of the bubble bursting, economic scandals, a worldwide recession, and terrorist attacks pretty much kicked the wind out of the IT market. This is real improvement, if you measure improvement by vendors getting more money, that is. In terms of shipments, server buyers consumed a staggering 1.781 million units in the second quarter, an increase of 10.3 percent on an annual basis, and somewhat surprisingly, an increase of 1.3 percent sequentially.

While shipments were up sequentially between the first quarter and the second quarter in 2005, revenues declined 1.6 percent, due in large part to IBM's slippage with mainframe sales as its customers awaited the new System z9 mainframes and a slight cooling in the X86 server market. Gartner reckons that sales of RISC-based servers were up 2.3 percent to $4.368 billion in the quarter (up 1.6 percent sequentially), and that sales of RISC/Itanium servers running Unix were up 6.3 percent to $3.978 billion (up 2.6 percent sequentially). Sales of X86-based servers came to $5.913 billion in the quarter, up a nice 10.6 percent, but down 1.5 percent sequentially.

In a development that was not exactly unexpected by some industry players, the Unix market continued to rebound. Gartner calculates that the worldwide Unix server sales came to $4.184 billion in the quarter, up 6.6 percent compared to the second quarter of last year and up 2.3 percent sequentially. While IBM wants to take all the credit for the growth in the Unix market of late and is certainly the main growth engine for Unix sales these days, the fact that Hewlett-Packard has seen some traction with its dual-core PA-8900 sales as well as improved migrations of HP-UX workloads to its Itanium servers has helped stabilize Unix. And while Sun Microsystems continues to see Unix server sales in the aggregate decline, the decline is slowing and there is a chance--I said chance--that in the next four quarters Sun could see some revenue growth as its vast customer base looks at upgrading their Unix gear. Sun closes its year out in the second calendar quarter, so it is not a surprise that it was able to boost Unix sales by 17.2 percent sequentially to $1.342 billion, giving it a 33.74 percent share of the RISC/Itanium Unix market; however, those sales were still 9.4 percent lower than this time last year, so go ahead and mail those "Get Well Soon" cards to Sun. HP increased its Unix server sales by 6.6 percent in the second quarter, with $1.2 billion in sales and a sequential increase of 4.5 percent. And while IBM posted sales of $1.157 billion in RISC/Itanium Unix gear (it does not actually sell Unix-Itanium gear, but that is the Gartner category), growing an astonishing 32.9 percent, sequentially sales were off 3.1 percent. If IBM can maintain its annual growth rates thanks to the Power5-based Squadron boxes, then it should easily become the dominant Unix vendor in the final two quarters of 2004. But if the sequential decline is a more accurate measure of what is going on, then we are back to the three-way knife fight in the Unix market between these three vendors, with the rest fighting for scraps in their home markets. Fujitsu-Siemens held steady in Unix sales in the quarter, up 2.7 percent at $167.7 million in sales, but Group Bull, thanks to its own pushing of the Power5 platforms in Europe (Bull is an IBM OEM), Bull posted sales of $60.85 million, up 39.3 percent, topping even IBM's growth.

The Windows platform had slightly better growth than Unix, and continued to be the dominant platform in the server racket--in terms of revenue, by a smidgen, and in terms of shipments, by a ridiculous margin. Gartner says that companies consumed $4.3 billion in Windows servers in the second quarter of 2005, driven by shipments of 1.19 million units. Windows servers comprised a 66.8 percent share of total shipments, a few points of share loss from this time last year, however. That's because of Linux, which is becoming a major factor for growth in the server market. Linux server shipments were up 40.6 percent in the quarter to just over 363,000 units, 2.6 times the number of Unix servers sold but under a third of the number of Windows machines sold. The aggregate revenue of Linux platforms sold during the quarter, including all kinds of Linux platforms (since Linux is supported on more machines than any other operating system in the history of computing), amounted to $1.518 billion, up 31.6 percent.

Here's the ironic bit: If you add Unix and Linux together, they have about the same share of shipments and revenues as Unix did by itself in the late 1990s. Linux has without question hurt Unix more than Windows, but has also curtailed Microsoft's ability to sell Windows to Unix shops, which fueled a lot of its own growth in the past decade. If Linux had not come along, all those servers and all of that growth would have moved onto Windows because of the compelling economics of X86 and now X64 iron compared to pseudo-proprietary RISC/Unix boxes.

Other platforms--proprietary minicomputers and mainframes--made up only 87,296 shipments in the quarter (down 23.3 percent), with revenues for these other platforms (not Windows, not Unix, not Linux) down 15.3 percent to $2.14 billion. In IBM's financial results for the second quarter, it said that mainframe sales were off 24 percent, but iSeries sales were up 10 percent. Gartner does not break out zSeries or iSeries sales in its reports.

Looking at total server sales by vendor, IBM maintained its lead over HP to have the top spot in sales, but declining mainframe sales allow HP to get within spitting distance of Big Blue--and HP will undoubtedly try to keep the heat on as IBM deals with a mainframe transition over the next six months and tries to take sales of Power5 machines up another notch. In the second quarter, IBM accounted for $3.698 billion in sales, getting 30.44 percent share of the server market; this represented a tiny faction of market share slippage because IBM grew server sales at 4.6 percent compared to the overall market's 4.7 percent growth. HP outpaced the market with 11.9 percent growth to hit $3.527 billion in sales, giving it 29.04 percent of the market. Sun's $1.451 billion in sales for the quarter gave it its more traditional third pole position in the server race and gave it a 11.94 percent share of the market, a drop of about a point of market share as it declined about as much as the server market in aggregate grew. Juggernaut wannabe Dell Inc grew sales by 18.5 percent, but that was not enough to overtake Sun, which posted $108.8 million in X64 server sales that kept Dell by beating it. Dell booked $1.343 billion in server sales in the quarter for an 11.06 percent share and nearly flat, like IBM, from the first quarter of 2005. Fujitsu-Siemens took up its traditional number five position, with $512.8 million in sales, down 3 percent and giving it a 4.22 percent share of revenue.

In terms of shipments, HP is still the king, thanks to the ProLiant server line, and HP has managed to keep ahead of a faster-growing Dell. HP shipped 493,910 boxes in the quarter (up 6.6 percent), giving it a 27.7 percent share of shipments, while Dell shipped 423,195 boxes (up 25.2 percent), giving it a 23.8 percent share. Dell will soon pass HP as the shipment champion unless something radical changes in the market. IBM pushed 277,232 boxes in the second quarter, up 16.1 percent, and is also making life tough for HP in the X86 and X64 markets that account for the bulk of HP's shipments. IBM garnered about a 15.6 percent share of server shipments in the quarter, gaining almost a point of market share from a year ago as HP lost a point of share. Dell has gained almost three points of market share compared to last year's second quarter. Interestingly, Sun boosted shipments by 3.9 percent to 94,728, giving it a 5.3 percent share of shipments. Were it not for the 20,297 X86/X64 servers Sun shipped in the quarter (nearly twice what it did in the same quarter last year), Sun would have lost yet more ground. At some point, Sun is counting on gaining some ground.