Servers Sell Well in Q2, Say Gartner and IDC

It’s time again to look back and see how well or how poorly the server makers have done, according to the market share statistics gathered by the industry pillars of Gartner and IDC. Both companies say that server sales were up respectably in the second quarter of 2004, and Gartner says that shipments were up considerably.

While Gartner and IDC have different numbers for particular vendors, they agree about the shape of the worldwide server markets and which vendor has what share of the pie. They both also agree that the server market has moved from stabilizing itself, as it did in 2003, to actually seeing revenue and shipment growth, which it is doing in 2004. IDC tracks vendor factory revenue, meaning the value of the servers as they bring sales to the vendor of origin. What Gartner tracks is a bit unclear, but given that they are virtually the same numbers, it seems unlikely that Gartner is assessing the value of server sales at the retail level for machines directly by vendors and through the channel. This number should be anywhere from 20 to 30 percent larger. (I contacted Gartner to get an explanation but had not received a response by press time.)

Gartner released the most statistics about the server market, including both sales and shipments for the top five vendors and the market as a whole, so I will cover Gartner’s numbers first.

GARTNER’S NUMBERS

Gartner reckons that, in aggregate, companies sold $11.5 billion in servers in the second quarter of 2004, up 7.7 percent from the $10.72 billion they sold during the same quarter in 2003. In Gartner’s rankings, IBM is still the lead dog in the market, with $3.5 billion in sales, or a 30.7 percent share of total sales. IBM’s server sales were driven by a stunning increase in mainframe capacity purchases, which offset plummeting iSeries sales as customers awaited the new line of eServer i5 Power5-based machines. Because Gartner’s comparisons are based on calendar quarters, and not fiscal quarters, Hewlett-Packard‘s numbers were not as bad as you might expect, given its missed revenue and earnings targets in the second fiscal quarter, ending July 31. HP booked $3.15 billion in server sales, up 4.3 percent, and giving it 27.3 percent share. While IBM grew at about three points better than the market overall, HP did about three points worse, and consequently IBM gained a point of market share and HP lost a point. (See chart detailing Gartner and IDC numbers.

Sun Microsystems managed to hold onto third place in the server wars, with $1.5 billion in sales, an increase of 2.9 percent over the second quarter of 2003, giving Sun 13 percent of the market. Sun’s server shipments were up 38.4 percent in the quarter, to 90,487, giving it the best growth it has seen in years and allowing it to grow faster than the market overall.

Gartner reckons that more than 1.6 million servers were shipped in the second quarter, an increase of 24.5 percent. Sun needs to increase its unit volume dramatically if it hopes to catch up with IBM, which sold more than twice as many machines in the quarter. Dell sold nearly four times as many machines, and HP, more than five times.

The server racket is all about volume these days, and it is interesting that, although Dell, as usual, did well as it rode the wave of adoption for two- and four-way X86 servers as the main engines for commerce at all but the largest companies, shipment growth for the company was only 29.2 percent, barely outpacing the market overall (at least by Dell’s standards). HP shipped 463,489 machines, according to Gartner, up 22.7 percent, giving it a 28.9 percent share of server shipments worldwide. Dell’s revenues were up 20.1 percent.

HP also has benefited from the transition to X86 machines (which wouldn’t have happened if the company hadn’t bought Compaq), even though shipments of Unix and proprietary midrange machines have tapered off. (Maybe HP should have bought Dell? Then again, Dell had a market cap of about $65 billion in early 2002 and was out of reach for HP.) Fujitsu Siemens, with $518 million in sales (up 6.9 percent) and more than 47,000 units shipped (up 17.7 percent), was ranked as the fifth vendor by Gartner.

“Overall, each region showed positive year-over-year growth in terms of revenue,” said Mike McLaughlin, principal analyst for servers at Gartner, in a statement. “We also saw increased activity in the x86-64 market, as well as continued strong sales in the low-end server market.” Laughlin said that 32-bit X86 chips accounted for $5.1 billion in sales, or about half of the total revenue in the quarter; X86 machine have long since dominated shipments. He also said that the 64-bit X86 machines using new Xeon processors from Intel or Opteron processors from Advanced Micro Devices gained traction, with sales up 2,183 percent. The 32-bit X86 market saw sales grow at 10 percent, and Gartner even conceded that Itanium sales “grew at strong rates.”

For the operating systems tied to these servers, Gartner figures that, in the second quarter of 2004, the Windows platform accounted for 34.4 percent of operating system sales on these machines, while Linux servers (which are growing at 61.6 percent in terms of shipments and 54.6 percent in terms of revenues) accounted for a mere 9.5 percent of operating system revenue. Unix sales continued to decline, with aggregate revenue worldwide down 4.3 percent. What Gartner did not say in its statement was that the Unix and Windows markets are roughly the same in size, and that a move to push Solaris 10 on X86 iron, coupled with a rapid uptick in sales of 64-bit Xeon and Opteron iron, could almost single-handedly reverse this downward Unix trend. People don’t hate Unix; they hate high RISC/Unix prices.

IDC’S NUMBERS

IDC analysts had a similar view of the server world. “IT spending remained strong overall, with server consolidation activities continuing to drive demand for high-end systems,” said Matt Eastwood, program director of global enterprise server solutions at IDC, in a statement accompanying IDC’s release of revenue statistics for the second quarter of 2004. “The pattern in spending during the quarter demonstrates the bifurcation of the server marketplace, with growth at both the high and low ends of the computing spectrum.” This backs up what HP Chairman and CEO Carly Fiorina has been saying for several quarters.

What HP needs right now is a very large installed base of mainframe customers that have only one source for iron and software and are not being pushed to new platforms. Lucky for IBM, it has such a thing in the zSeries. If not, IBM would no doubt be singing the blues right now. IDC says that IBM’s zSeries mainframe sales were up 40.6 percent in the quarter, almost hitting $1.5 billion in sales. This is the best quarter that IBM has had for mainframes in a while. (Students of history will remember that IBM used to ship $13 billion a year in mainframes in the late 1980s and used to push $3.5 billion to $4.5 billion in big iron each quarter.) IDC attributes this bump in zSeries sales to price cuts and innovations, but with IBM being the only supplier of mainframes that runs its MVS-OS/390-z/OS software, it seems likely that the company has been able to hold MIPS prices higher than it might have been able to do if there were some competition. Linux on the mainframe, as well as other middleware (like WebSphere), is also helping to drive mainframe sales.

IDC reckons that Windows servers accounted for $3.6 billion, or 31 percent of the $11.5 billion pie in the second quarter of 2004. Sales of Windows servers grew by 13.2 percent, and unit shipments were up 25.3 percent. Unix server shipments, according to IDC, were up 20.2 percent, but aggregate Unix server sales slipped 3 percent, to $4.2 billion. (IDC still thinks that Unix server sales are outpacing Windows server sales, one point on which it does not agree with Gartner.) Sun regained the top Unix spot again, with $1.4 billion in Unix sales, or 33.6 percent of the market. However, HP and IBM were close behind, with 30.3 percent and 24.4 percent of Unix revenue share respectively. IDC said that Linux growth cooled a bit, with server shipments for that platform up 38.2 percent and sales up 48.9 percent, with $967 million in sales in the quarter, giving Linux an 8.4 percent share of the server revenue pie.

IDC says that server shipments across all types of operating system platforms were up 22.7 percent, with sales up 6.9 percent.

IDC likes to carve the server market up into bands, and says that the so-called volume server segment (which really means mostly X86 machines and some entry RISC machines that cost less than $25,000) had revenue growth of 21 percent in the second quarter of 2004. Sales of high-end machines (like big Unix boxes and zSeries mainframes that cost $500,000 or more) were up 6.1 percent. Given IBM’s stellar mainframe sales, this would imply that big Unix boxes in the same price class didn’t do so well. IDC said further that the midrange server market declined 11.7 percent. By “midrange,” IDC more or less means Unix or proprietary RISC servers, but says that they are for machines that cost between $25,000 and $499,999. This obviously includes big Wintel and Lintel iron.

On the X86 front, IDC says that X86 machines accounted for $5 billion in sales, almost exactly what Gartner said earlier in the week. This is the second quarter that X86 server sales edged out RISC-based server sales. X86 shipments were up 22.4 percent, accounting for more than 1.3 million units shipped. IDC said that Dell and HP had unit shipment growth rates that exceeded this, with 29.4 percent and 24.2 percent growth respectively. But it was the Opteron that exploded, with sales up 81.1 percent sequentially compared with the first quarter of 2004.