Cheap Servers Sell Like Hotcakes, Big Systems Not So Much

March 10, 2014 Timothy Prickett Morgan

The box counters at Gartner gave their assessment of the state of the systems business in last week’s issue of The Four Hundred, and this week we turn to the market data from IDC to get a slightly different view of the same system landscape.

The most jarring thing about the modern systems market–and something that is making it difficult for all server makers to meet their price points and profit margins–is how sales of rack and modular machines to hyperscale datacenters continues to ramp on public clouds and public Internet application providers such as Google, Facebook, Yahoo, and others. In private enterprises, the use of converged systems continues to grow at a rapid clip, driven by the adoption of private clouds for test and development, virtual desktop infrastructure, and production databases and applications.

IDC thinks of these as platforms, with first platforms being the kind of back-end systems that made the AS/400 a hit decades ago and second platforms being the Webby applications that often sit in front of or work in conjunction with modern IBM i systems. The third platforms are modern, scalable, data-driven (some would say obsessed) applications that are akin to the things that the Googles and Yahoos and Facebooks of the world cook up.

“While a record number of servers shipped in 4Q13, the market was constrained by weak demand for midrange and high-end systems,” explains Matt Eastwood, general manager of enterprise platforms at IDC. “The market continues to be impacted by enterprise focus on 2nd platform workload consolidation, which at this point in time is only partially offset by 3rd Platform hyperscale server deployments around the globe. 2nd Platform workloads continue to represent a healthy profit pool for server vendors targeting consolidation opportunities across the market. However, new profit pools in the 3rd Platform are emerging that create new market opportunities for OEMs and ODMs. IDC believes this market transformation requires increased focus from vendors in order to best capitalize on these diverging market trends.”

Dell and Hewlett-Packard do a fair amount of business with these hyperscale data centers, but IBM and Cisco Systems do not. They are more focused on private clouds with their respective PureSystems and Unified Computing System converged platforms. IBM still makes plenty of money from its System z and Power Systems businesses, but the mainframe is in the middle of its product cycle, where shipments slow down, and Power Systems are getting ready to be updated, perhaps in April or May, with the new Power8 processors, as we report elsewhere in this issue.

Consequently, IBM’s revenues took a dive in the fourth quarter, according to IDC, falling 36.8 percent to $1.1 billion for machines running the z/OS operating system. (Linux-based mainframe capacity is booked in the Linux systems category, as is sales of Linux-based Power Systems machines.) IBM might be the dominant Unix system vendor at this point, by a long shot compared to HP and Oracle, but the Unix market declined by 20.2 percent in the fourth quarter and IBM fell with it. Add it all up with System x sales and Power Systems-IBM i revenues, and IDC reckons that Big Blue’s server revenues worldwide fell by 28.5 percent to $3.82 billion. If IBM had shipped the Power8 chip at the end of 2013, the Power Systems line might have filled in the big gap from falling System z sales, but that did not happen.

HP and IBM were in a statistical tie, but IDC reckons HP had $2 million more in sales and therefore took the top spot among server makers in the fourth quarter. Importantly, HP was able to grow its revenues by 5.7 percent in the quarter, according to IDC. It is important to realize that this is factory revenues, not end user revenues, and that IDC includes base operating systems in the revenue figures for all systems. Dell came in third in the world, with $2.06 billion in sales and falling 2.4 percent. Cisco continued to grow in the quarter, with $646 million in sales (up 34.5 percent) followed by Oracle with $589 million in revenues (down 2.2 percent). Here’s where it gets interesting. The original design manufacturers, or ODMs, who help design and build systems for hyperscale customers and cut out the tier ones, accounted for $907 million in revenues in Q4, up 47.3 percent. These include Quanta Computer, WiWynn, and a bunch of smaller players. Other server makers–including a lot of aggressive manufacturers in China and Taiwan who are on the rise such as Lenovo, Inspur, and Sugon–accounted for $2.39 billion in sales, up 12.9 percent.

Linux-based servers drove $4.1 billion in sales in the fourth quarter, rising by 14.4 percent over last year’s levels and driven by the steady growth of Linux in the datacenter and the fact that all of the hyperscale operators with the exception of Microsoft with its Windows Azure cloud install Linux (and usually a homegrown version, not a commercial one that costs them money) on their hyperscale boxes. Windows platforms, helped a bit by Microsoft’s own massive cloud build out, nonetheless only rose by one-tenth of a point to $6.5 billion in revenues.

That leaves Others, meaning so-called proprietary machines including IBM i boxes and other midrange and mainframe gear. Here’s the funny bit. Sales of these proprietary machines only dropped by 7.5 percent in the fourth quarter to $624 million. Those figures do not include the System z mainframes running z/OS mentioned above.

Add it all up and the world consumed some 2.5 million servers, an increase of 8.2 percent, but revenues were only $14.24 billion, falling 4.4 percent in the fourth quarter. For the full year, IDC reckons that worldwide server sales fell by the same 4.4 percent to $49.72 billion against 9 million units shipped.