Server Sales Decline for the Second Straight Quarter
May 30, 2006 Timothy Prickett Morgan
In the server market, it is not called a semester but rather a quarter, and it isn’t a report card but rather a slice of the revenue and shipment pie. But, nonetheless, every quarter when the analysts at Gartner and IDC hand down their market share statistics for server sales, it feels a bit like report card day, complete with its joy and loathing. Last week was report card week for the first quarter of 2006, and the grades are mixed. Depending on who you ask, server sales are either flat or down.
The immediate effect of the statistics put out by IDC and Gartner is bragging rights, but it is important to note that careers in the IT industry (among server makers, operating system platform providers, and their reseller channel partners) are staked on market share gains and losses. Moreover, the health of overall server sales is something of a barometer for the IT economy as a whole, although people argue as to whether or not it is a leading or lagging economic indicator. I happen to think it is both: When the economy starts heading south, server sales almost immediately drop because people make do; and when the economy recovers, server sales tend to lag any recovery. Moreover, economic recessions tend to drive the adoption of new, less expensive server technologies faster than they might otherwise have taken off. Witness the minicomputer revolution of the late 1970s; the mainframe downsizing, Unix server ascendancy, and client/server revolutions of the late 1980s and early 1990s; and the triumph of X86 and X64 servers in the early 2000s. To be more precise, it is my hunch that average server sales prices are probably the indicator, and you have to adjust this for recession-driven architectural changes and the legacy lag effect, and someday, I will ask IDC and Gartner for the data to prove this thesis.
In any event, both Gartner and IDC race to get their market share numbers out each quarter, and they now tend to get them out on the same day in an effort to try to steal each other’s thunder.
According to Gartner’s analysis of the first quarter of 2006, worldwide server sales came to $12.35 billion, an increase of $4.5 million over the same quarter last year. (Gartner also revised its Q1 2005 number upward by about $10 million, which made the gap tighter between the quarters.) This represents a tiny fraction of a percent increase in sales, compared to 4.1 percent sales growth one year ago. Shipments are not the problem, however. Average selling prices are. Gartner said that all told, server makers peddled nearly 2 million server units in the first quarter of 2006, up 13.7 percent from Q1 2005. There are a couple of forces at work driving ASPs down. The general shift away from RISC processors to X64 chips is one. The shift to “smaller” (in terms of packaging and core count) RISC machines, which has as much oomph as “larger” ones from a few years ago is also impacting ASPs.
“The X86 server portion of the market continues to be the strongest segment,” explained Jeffrey Hewitt, research director at Gartner, in a statement accompanying the market statistics. “X86 servers remain as the leading server choice for meeting ongoing Web-related growth while other segments have started the year in a less-positive mode.” Hewitt added that RISC/Itanium Unix server shipments only declined by 0.9 percent, but revenues for this formerly dominant sector of the server economy fell by 5.1 percent. For once, Hewlett-Packard and Sun Microsystems were driving Unix revenue gains, but IBM, which has been the growth engine keeping Unix from plummeting for the past several years, saw revenue declines as it makes a bumpy transition from Power5 to Power5+ machines. Hewitt said that, in general, Linux on X64 servers at the low end and a decline on high-end Unix sales are putting the squeeze on the Unix market.
Significantly, though, because of its new “Galaxy” Opteron and UltraSparc-IV+ servers, Sun had a revenue increase for the first time in two years. And while HP’s ProLiant X64-based server line grew shipments by 8.3 percent, this was lower than the 13.7 percent shipment increase for the server market overall; significantly, HP’s Itanium-based Integrity server line saw shipments increase by 29.9 percent. Dell, which has been hurt by its support of only Celeron, Pentium, and Xeon processors in its PowerEdge line, saw sales decline by 2 percent even as shipments increase by 7.1 percent. There’s a reason why Dell is going to put Opteron processors from AMD in its PowerEdge machines by the end of the year. It wants to sell more four-socket servers, which carry higher ASPs and higher margins.
In terms of aggregate revenues for the first quarter, Gartner said that IBM saw its server sales drop by 3.7 percent to $3.53 billion, with shipments of 298,526, up 19.3 percent. IBM’s System x X64-based server sales were up 11 percent, and drove its shipment gains, while sales of System z mainframe and System i and p midrange gear dropped. HP’s overall sales were up 0.3 percent to $3.46 billion, with shipments up 8 percent to 538,201, according to Gartner. Dell came in as the number three vendor in the Gartner rankings, with $1.31 billion in sales (down 2 percent) and shipments of 431,445 units (up 7.1 percent). Sun grew its server shipments by 8.1 percent to 87,953 unit, driving sales of just under $1.3 billion, up 7.6 percent. The Fujitsu-Siemens partnership came in at number five in the Gartner rankings, with $765.4 million in sales against 75,777 server units shipped in the quarter. Other vendors accounted for nearly 555,000 shipments, up a stunning 25.3 percent, with sales close to $2 billion.
If you don’t think the Opteron processor is having an impact, just ask the some tier two and white box server makers. Significantly, Gartner says that AMD had a 15.3 percent share of the worldwide X86/X64 server market in the first quarter, and 25.7 percent of the market in the United States. And, big surprise, AMD has 36 percent of the market for four-socket servers worldwide and 48.1 percent of the market for these machines in the U.S. And while Intel is making lots of noise about “Woodcrest,” its dual-core Xeon Core chip for two-socket servers due in about a month, the future “Tulsa” Xeon MP chip is not going to be as compelling. Hence, Dell’s addition of Opteron to the mix for four-socket servers.
IDC’s assessment of the server market was a bit less optimistic than Gartner’s, and it showed slightly different figures as well. According to its models of the market, IDC says that server revenues (measured at the factory level, which means it does not include channel markup) actually declined by 1.9 percent to $11.85 billion. IDC believes that HP’s sales shrank by 0.3 percent to $3.34 billion, but because IBM’s revenue shrank by 3.6 percent in the quarter to $3.3 billion, HP just narrowly beat out IBM as the top revenue producer in the server market during the quarter. (This is, boys and girls, why HP bought Compaq.) IDC reckons that Dell increase sales by 3.6 percent to $1.32 billion, giving it the number three position in the market. According to IDC, Sun had $1.27 billion in sales, up 5.8 percent, while the Fujitsu-Siemens saw sales decline by 16.8 percent to $823 million. IDC also believes that all other vendors together saw sales drop by 2.4 percent to just under $1.8 billion.
“After three years of consistent growth, the server market began to show signs of deceleration in the first quarter,” said Matt Eastwood, program vice president of worldwide server research at IDC, in a statement accompanying its dicing and slicing of the server market. “Although customers continued to invest in new infrastructure in the quarter, IT spending patterns are evolving and these shifts are clearly having an impact on the server market. IDC continues to see IT managers in the data center working to strategically align the IT organization with the business. Meanwhile, IT executives are focusing on condensing their IT infrastructure so they can deliver new IT services and enhance existing service levels while holding the line with respect to both IT budgets and staffing levels.”
IDC said that the Windows server market grew by 5.9 percent to $4.4 billion, with X86 and X64 server shipments relating to Windows up by 12.9. The Windows platform gained 2.7 points of share over other platforms and Windows garnered 37.1 percent of all server revenue in the first quarter. Unix server shipments declined by 8.7 percent according to IDC, and Unix server sales fell by 7.1 percent to just over $3.9 billion. Linux server shipments grew by 14.4 percent and sales grew by 17 percent, to $1.45 billion. Itanium-based servers generated $640 million in sales, up 41.8 percent.
The X86 and X64 portions of the server market drove $6.1 billion in sales, comprising 51 percent of all server sales, an increase of 6.3 percent over Q1 2005. But, significantly, the growth rate for X86/X64 servers is less than half of what IDC calculated a year ago. Shipments of these X86 and X64 servers increased by 12.1 percent to 1.7 million units. All of the top five server vendors grew their X86/X64 server shipments, but only Sun and IBM outgrew the overall X86/X64 market in the first quarter of 2006. Significantly, IDC says that AMD Opteron machines (with a smattering of Athlons, presumably) accounted for over $1 billion in sales for the first time. Echoing Gartner, IDC said that four-socket servers seem to be a hot item, driven by consolidation efforts, and sales of these machines increased 20 percent in the first quarter.
Blades are still hot, too, and IDC says that blade server sales across all architecture types and operating systems increased by 43.4 percent to $591 million. Blade server shipments were up 29.5 percent in the first quarter, but it is helpful to remember that blades only account for about 5 percent of all server sales. IBM had a 40.1 percent share of the blade market, with HP getting a 35.6 percent slice of the pie, followed by Dell with its 11.1 percent. Dell’s revenue growth for blades is twice that of the overall blade server revenue growth in the quarter.
IDC gave a reckoning of server sales by type, too. The so-called volume server segment, by which IDC means machines that cost less than $25,000, had sales growth in Q1 2006 of 6.3 percent, which is good. But this was the slowest growth in the volume segment in the past three years–basically, since we came out of the post dot-com bust and 9/11 slumps that knocked the wind out of the IT economy in 2002 and 2003. Sales of midrange machines, which cost between $25,000 and $500,000, fell by 16.2 percent, the second consecutive quarter of decline, while sales of high-end machines that cost more than $500,000 declined by 3.2 percent. This is the sixth quarter of decline for big server sales.