Server Makers Stomach the Worst Quarter in History

September 14, 2009 Timothy Prickett Morgan

Servers have been the backbone of the business of supplying corporate-scale data processing since mainframes were invented more than 40 years ago. Over the years, as Moore’s Law has provided faster, more capacious, and cheaper systems every year like clockwork and competitors bucked against each other for business, server makers have had to get their profits from other areas. If sales levels in the second quarter are any indication of the new normal level for the server biz, then there are some dramatic changes coming our way.

The second quarter was, to put it bluntly, not just awful, but in fact the most severe year-on-year decline that the server business has ever stomached. Worse than the dot-com bust mixed with 9/11 mixed with the Y2K and ERP droughts, all of which hit in 2001 and accelerated through 2002 and 2003. The box counters at IDC and Gartner have put together their estimates of how the business did in Q2, and as usual, they give away slightly different bits of their datasets for public consumption and when you combine them, you get something akin to a binocular view of the server racket (even if it is blurred somewhat by slightly different ways of counting revenues and shipments).

Over at Gartner, the analysts reckon that worldwide server sales declined by 29.4 percent to $9.7 billion in the second quarter, a little bit worse than they had been expecting. Unit shipments fell by 28 percent to 1.68 million units. Gartner doesn’t talk publicly about Windows versus Linux versus Unix versus i/OS versus mainframes, but you can infer some things from the data it does give away. Gartner said that RISC-Itanium server shipments fell by 40.6 percent in the quarter, to a mere 57,789 servers, with revenues down 31.4 percent to $2.75 billion. X64 servers accounted for the bulk of shipments, at 1.62 million boxes, down 27.4 percent, and accounted for $5.39 billion in sales, down 25.7 percent.

If you do the math, that leaves only 6,180 servers that were not RISC-Itanium boxes running Unix or X64 boxes not running anything–the “Others” category where IBM proprietary mainframe and midrange gear as well as a smattering of other proprietary gear is added up. The Others server category saw a 39.2 percent shipment decline, and revenues fell a similar 37.2 percent, to $1.55 billion. While the numbers are small in the Others arena, you just gotta love the average selling price of $310,859 that IBM was able to garner. However, IBM’s ASPs for proprietary gear were down 5.7 percent compared to a year ago, while ASPs for its RISC-Unix boxes were on the rise by 4.6 percent, to $64,662, and for its X64 boxes were up 7.1 percent, to 4,351.

The box counts are down, thanks to virtualization and the poor economy, but the ASPs are up because virtualization takes beefier boxes to run properly. Other server makers are seeing the same trends in terms of ASPs, at least as indicated by the averages using Gartner’s quarterly stats. In fact, ASPs for all Unix players rose by 15.6 percent in the quarter, and considering this dominant market share, that means despite all of their woes, Hewlett-Packard and Sun Microsystems are doing a good job selling beefier boxes.

What I find alarming is that IBM’s Others shipments fell by 32.6 percent to a tiny 3,776 boxes in the second quarter. Now, either Gartner is counting i/OS boxes as Unix machines (which is a no-no, making IBM look like it is selling more Unix gear than it really is) or IBM is really selling a tiny number of mainframes and i/OS boxes each quarter. Granted, at over $310,000 a pop on average, this is still a good number. But I have a bad feeling that most of the i/OS-related sales are for relatively big machines these days. I can remember when IBM sold 18,000 AS/400s each quarter. If these numbers are right, then now we are talking about maybe 3,500 i/OS boxes in Q2. This would imply that the Power 520 business has all but dried up.

By vendor, IBM was still ranked top dog in the server racket in the second quarter by Gartner, with $3.15 billion in sales, a decline of 27.1 percent and slightly better than the class average. HP did a smidgen worse than the average, with a drop of 30.1 percent in revenues, to $2.8 billion. (HP is the shipment leader, with 522,477 boxes shipped in Q2, giving it 31 percent share and with shipment declines that were slightly less steep than most of the other players.) Dell came in third in the Gartner rankings, with $1.29 billion in sales, down 20.3 percent (a good number by comparison), and Sun posted just over $1 billion in server sales, taking a 36.2 percent shot to the solar plexus that was absolutely predictable given the chilling effect that Oracle’s pending $7.4 billion acquisition has had on the company. Fujitsu did equally badly, with a 34.7 percent decline to $321.7 million in sales, and other vendors accounted for a little under $1.1 billion in sales, down 34.3 percent.

The Numbers by the Platform

Over at IDC, which counts factory revenue, not end user sales, the box counters believe that in the second quarter sales fell worldwide by 30.1 percent to $9.81 billion. IDC also placed IBM at the top of the list, with $3.38 billion in sales (down 26.3 percent), followed by HP with $2.8 billion (down 30.4 percent), Dell at $1.22 billion (down 26.8 percent), Sun at $981 million (down 37.2 percent), Fujitsu at $345 million (down 35 percent), and Others at $1.08 billion (down 35 percent).

The interesting bits of the IDC data are the platform numbers. All sizes and prices of systems were hit in the second quarter. IDC says that revenues for volume servers (those that cost under $25,000) declined by 30 percent in the quarter, while midrange boxes (which cost between $25,000 and $500,000) fell by 28.1 percent in the quarter. The high-end, where machines cost in excess of $500,000, was hit slightly harder, with a 32 percent decline compared to Q2 2008. (IDC did not give out sales figures for these three categories.) The company did say that sales of all types of servers that did not employ an X64 processor (or earlier 32-bit X86 chips) fell by 32.2 percent in the quarter, to $4.7 billion. Now, IBM had a 53.3 percent share of this racket, or $2.5 billion in sales; IDC also said that IBM had $1.28 billion in Unix server sales. That leaves $1.22 billion in proprietary server sales (including machines running Linux)–as much as Dell made. So this is why IBM stays in the mainframe and AS/400 racket, friends.

Blade server sales are the one relative bright spot in a pretty dim market in Q2, with sales across all blade processor types down only 12.1 percent to $1.2 billion; blade server shipments declined by a higher 19.8 percent, which suggests that some companies are doing the smart thing and combining blade architectures with virtual servers to get the most server compression for the buck. IBM gains 3.8 points of market share in blades in Q2, giving it a 27.2 percent share of the blade space with its $326 million in sales. But HP still blows IBM out of the water, with 52.9 percent of blade sales in the quarter with its $635 million. Dell got a 9.1 percent slice, with $109 million in blade sales.

Broken down by operating systems running on the servers, Windows was the revenue leader as it has been for years–so long as you don’t count Linux as an inexpensive form of Unix, that is. Windows servers accounted for $3.7 billion in sales in Q2 according to IDC, falling 27.7 percent from the year-ago quarter. Global sales of Unix gear accounted for $3.1 billion in sales, down 30.9 percent year-on-year, while Linux server revenues dropped 28.9 percent to $1.3 billion. If you add Linux and Unix together–a market I like to call Unilinux–then this space accounted for $4.4 billion in sales, down 30.3 percent in the quarter. (Linux grew at the expense of expensive and usually low-end Unix systems is the lesson here.) Servers running other operating systems, including those on proprietary mainframe and midrange boxes, accounted for $1.7 billion in sales, down 34.3 percent.

No part of the market, no operating system, no geography, and no vendor was spared from the declines. Period. And the competition is going to keep being tough, which is great news for buyers–if they happen to have budgets to upgrade their iron.

It is hard to imagine that the third quarter will be any better, but the compares will be a little easier. And the compares will be a lot easier in the fourth quarter and throughout 2010 as well. So the numbers will not seem so drastically changed. But this contraction in server sales will have repercussions in the business, particularly if Cisco Systems can get traction with its converged server and storage networks and its “California” Unified Computing System. If, as I expect, the server market stays essentially flat in 2010 (maybe with a few percent of growth), the possible $500 million that Cisco is going to make peddling 100,000 blade servers is going to come out of many different hides.

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