Worldwide Server Market Perked Up in Q1

Analysts for market researcher Gartner have just released their latest snapshot of the server market, and it looks like the downshifting from big, expensive SMP boxes to lower-cost commodity boxes is continuing apace. However, the rise of the entry server market (fueled, it seems, by small businesses buying their central machines, as well as larger enterprises moving to clusters) has counterbalanced the decline in high-end sales. Overall shipments are up like a rocket, and even revenues are up.

According to Michael McLaughlin, principal server analyst at Gartner, IBM has retained its lead as the number-one server vendor in the world based on revenues, and it even managed to grow sales by 16.7 percent in the first quarter of 2004, to $3.63 billion, giving it a 30.7 percent share of the total $11.8 billion market. IBM’s new archrival, Hewlett-Packard, grew server sales by 6.2 percent, by Gartner’s reckoning, pushing $3.07 billion in various kinds of boxes and giving it a solid number-two position worldwide.

In Europe, however, HP, which was only $4 million behind IBM in the first quarter of 2003, grew sales by 20.1 percent, to hit $1.2 billion, giving the company a 32.5 percent share of the European market. IBM came in second in Europe, with $1.12 billion in sales, up 12.2 percent in the quarter. HP and IBM control the lion’s share of the European server market, with each having roughly one third of the $3.7 billion in sales for the quarter. In terms of revenue, the European market was up 10.3 percent, thanks in large part to currency effects. The worldwide market was up 9.3 percent. Worldwide sales figures were pulled down by the figures from the United States, still the largest buyer of servers, with $4.47 billion in sales across all platforms, up 7 percent in the quarter.

The real story (and one that is playing into the strategies of some server and operating system makers at the expense of other IT providers or other divisions within the same companies) is that the entry server market, by which Gartner means machines costing less than $5,000, is booming. McLaughlin says that in the first quarter, these machines accounted for $3.52 billion in sales, up a staggering 34.4 percent and comprising 29.9 percent of the entire server market. Sales of big servers costing $100,000 or more were down 6.8 percent, to $2.05 billion, and machines costing between $25,000 and $100,000 accounted for $1.59 billion in sales, down 3.4 percent. And while the mainframe business was up very decently, at just under 15 percent in the quarter, to $1.76 billion, the fact remains that companies are shifting from proprietary and Unix systems to Windows and Linux systems where practical, and this usually means moving to less costly iron. This is what is propping up the server business right now.

While Gartner did not provide specific iSeries or other proprietary server sales for the first quarter, IBM has said that iSeries sales were down 7 percent. IBM has attributed that decline to the transition from the Power4 to the Power5 servers, as customers stopped buying in anticipation of new gear. But the fact remains that shipments of servers that run operating systems other than Unix, Windows, or Linux continue to decline. In the first quarter of 2004, such machines accounted for 114,228 shipments, down 6.4 percent year-to-year and down a whopping 17.1 percent from the fourth quarter. Whatever was affecting the IBM OS/400 server base is also affecting all other so-called “proprietary” machines. While the shipment numbers were down, the rise in the mainframe base helped push up aggregate sales of proprietary boxes by 1.8 percent, to $2.63 billion. Such machines accounted for only 7.2 percent of server shipments worldwide in the first quarter, but made up 22.2 percent of revenue, and I believe, the bulk of the profits in the server market. That is why machines like the iSeries persist, and by some measures (profit, mainly) can be said to be thriving.

While IBM and HP were the top two vendors, Sun has managed to just squeak ahead of Dell to retain the third spot in Gartner’s top ten server list. Sun’s sales in the first quarter were $1.22 billion, down 12.5 percent, while Dell came in at number four, with sales up 24.8 percent, to $1.17 billion. It seems inevitable that if current trends persist, Dell will become the number-three server maker by revenue share within a few quarters. However, Dell is going to have to more than triple its sales to reach the levels of IBM and HP. That seems unlikely for a few years, and maybe even for the foreseeable future. The Fujitsu-Siemens partnership came in fifth, with $842 million in sales, followed by NEC ($228 million), Unisys ($188 million), and Hitachi ($119 million). Unisys was noteworthy in that its sales declined by 21.2 percent. I am not sure what is going on here, but it could be pricing pressure from IBM’s Summit xSeries machines.

In the Unix server market, Sun retained its top ranking, with $1.21 billion in sales, 30.1 percent of that $4 billion sector, which declined by 2.3 percent across all Unix vendors, according to Gartner. In terms of shipments, the X86 server market is still the main driver. Of the 1.57 million servers shipped in the first quarter of 2004, 1.4 million had an X86 processor from Intel, Advanced Micro Devices, or another vendor inside. HP is the undisputed shipment champion in the X86 server market, with 412,343 units shipped, an increase of 21 percent, compared with last year’s first quarter. Dell grew X86 shipments (it’s only kind of shipments) by 38.3 percent to push 343,354 boxes. If Dell can keep growing at this rate, and HP cannot stop it, particularly in that entry server space, then this time next year Dell may be the volume shipper in the X86 space. HP’s revenue and shipment growth in the server market was below the average across all players. The heat is clearly on from HP’s top brass to change this. IBM shipped 193,842 X86 machines in the first quarter of 2004, followed by Fujitsu-Siemens with 53,937.

And for all the talk of Linux, only 230,074 machines, or about 14.7 percent of shipments, were servers running Linux. However, all of those Linux machines added up to a smidgen more than $1 billion in sales for the quarter, with IBM and HP getting a little under 30 percent each and Dell getting 18 percent. The Linux server space is white hot, though, with sales up 57.3 percent and shipments up 69.7 percent, according to Gartner. In terms of revenue, the Windows server market is much bigger, with $4.13 billion in aggregate sales, and with revenues up 19.5 percent, it is now the largest piece of the server market–a position that Unix servers held for a decade. Unix and Windows are neck and neck for the top spot, and the question now is, when Linux will start seriously eroding Windows and Unix sales to the point that these three platforms get something close to 25 to 30 percent of the market each.