Enterprises Spend On Systems, Hyperscalers Tap The Brakes

March 11, 2019 Timothy Prickett Morgan

For many enterprises, the current generations of processors that come from IBM, Intel, AMD, and the Arm collective are plenty good enough – and available at reasonable price/performance relative to each other and to their predecessors – that the end of 2018 was a perfectly reasonable time to buy what is on the truck. But hyperscalers and public cloud builders, who live and die by the total cost of ownership of their systems as gauged by raw compute power, space required, and power consumed, have to take a longer view. So with new processors coming from Intel and AMD on the horizon and enterprises having to burn their budgets before year end, it is not surprise to us that many of the hyperscalers and cloud builders took a pause in the final quarter of 2018 on their spending growth for servers and enterprises did not.

In Q4 2018, according to the box counters at IDC, sales of servers rose by 12.6 percent to $23.62 billion, which is an astounding amount of money when you consider that when the AS/400 minicomputer was launched a little more than three decades ago, that would have been on the same scale as the aggregate revenues of the entire global systems market. I cannot find server data for way back in 1989, which was the first full year of server sales for the AS/400 line, which was launched in June 1988, but I could find data for 1995, which was when the AS/400 line was making the transition from proprietary CISC processors to the PowerPC AS chips that were a derivative of the Power chips developed by the consortium of IBM, Motorola, and Apple. It is fun to take a look at this data from back then as we consider the systems market here in 2019, which come from the OECD’s Information Technology Outlook for 1997:

I remember these days clearly, just as the Internet boom was getting ready to explode and there were dozens of different servers and even more operating system platforms to run upon them available in the market. (IBM all by itself had three major mainframe platforms – MVS, VSE, and VM – as well as OS/400 and AIX on Power iron and various operating systems such as Novell, DOS and Windows NT, SCO Unix on X86 iron, with Linux coming shortly. That’s nine different platforms, with a tenth on the horizon.)

The rise of the commercial Internet and the adoption of its technologies greatly homogenized great swaths of the datacenter, but many platforms – including the successors of the AS/400 – survived by adopting these technologies without throwing the hardware baby out with the software bathwater. IBM, as you can see from the table above, had dominant revenue share in systems, with close to one-fifth of the revenues. RISC/Unix systems, which were created for high performance computing (engineering workstations and this new thing called parallel supercomputing to run simulations and models), had entered the market by storm just after the AS/400 was launched and were growing fast, and these systems, particularly those by Sun Microsystems, were the main platforms of the dot-com boom. How the server market has changed since even those days, but the funny bit is that among transaction processing systems, the proprietary and legacy systems like IBM mainframes as well as all of this RISC iron still has a pretty respectable presence in the datacenter. There are plenty of infrastructure and analytics workloads that run systems of engagement, but these vintage machines are still hanging in there as systems of record, to use IBM’s lingo.

Flash forward to 2018, and the world consumed $88.33 billion worth of servers for the full year, a 31.4 percent increase over sales in 2017, driven by shipments of 11.8 million units, up 15.8 percent over the twelve months. Frankly, I had been thinking sales would have been a little bit higher, but the original design manufacturers, or ODMs, that make servers directly for the hyperscalers and major public cloud operators took a hit, and so did the portions of the original equipment manufacturers, or OEMs, that are the traditional routes to market for most customers and how also sometimes supply machinery to the hyperscalers and cloud builders.

The hit came in the fourth quarter, when shipments rose by 5 percent to 2.99 million machines and revenues rose by a faster 12.6 percent rate as average selling prices continued to climb and hit $23.62 billion. IBM’s overall server sales in Q4 2018 came to $1.95 billion, according to IDC, falling 27.6 percent against a very tough compared with System z sales falling dramatically after five quarters of sales and despite the ramping of the Power9 line as 2018 came to a close. Still, with that much revenue, IBM ranked number three in the market, with 8.3 percent revenue share, but a pretty distant second to Dell and Hewlett Packard Enterprise, which command the kind of revenue share each that IBM used to have at the top of the market back in 1995. In the quarter, Dell had dominant revenue share, with $4.43 billion in sales (up 20.4 percent), followed by HPE with $4.2 billion in sales (up 10.5 percent). Inspur, in part thanks to its Power server partnership with Big Blue but also due to its sales at major cloud builders, hyperscalers, and service providers in China, rocketed up to the number four position with 1.55 billion in sales (up 70.7 percent year on year). It probably won’t be long before Inspur and IBM will be vying for the number three slot in the worldwide server rankings. Lenovo ranked a little bit lower, with $1.46 billion in revenues in Q4 2018 (up 33.8 percent), and the ODMs as a group had $4.74 billion in sales, up 11.6 percent but a growth rate that was lower than the market at large and that was about a third of the growth the ODMs had been sustaining in the prior three quarters of 2018. (The ODMs are a proxy for spending among the Super 8 cloud builders and hyperscalers, but it is not a perfect 1:1 relationship, since many of these companies also buy from the custom server divisions of big OEMs, with Dell, Lenovo, and Inspur being the biggies here.)

In the final quarter of 2018, volume servers – machines that cost under $25,000 – accounted for $19 billion in sales, up 17.8 percent and obviously representing the biggest part of the systems market. Midrange machines, which cost between $25,000 and $250,000 and which are where most of the sales of IBM i platforms fall in IDC’s dicing and slicing of the server market by segment, had a 30 percent revenue boost in Q4, to $2.5 billion. The Power Systems line is a big part of this story, and IBM i is a third of the chapters along with AIX and Linux. High end machines, like big RISC/Unix iron and IBM System z mainframes, posted $2.1 billion in sales, off 28.3 percent.

If you carve the world up into three parts – X86 servers, non-X86 servers, and IBM servers – this is what revenues have looked like since the Great Recession, one of the big turning points in the systems business:

X86 servers, based mostly on the Intel Xeon processor but also with a smattering of AMD Epyc processors these days, accounted for $21.1 billion in sales, up 18.7 percent and driving the vast majority of the server shipments in the last quarter of the year; non-X86 iron server sales came to $2.51 billion, off 21.6 percent, and IBM accounted for 77.9 percent of that non-X86 market with its System z and Power Systems lines. A year ago, as the System z14 machines were selling like hotcakes, IBM’s share of this segment was 83 percent. Incidentally, for the full year, non-X86 iron saw a 3 percent bump up to $7.64 billion in sales, which is pretty good. But X86 iron across all vendors and segments and server form factors rose by 35.2 percent to $80.69 billion.

It will be interesting to see how 2019 shapes up, with those “Cascade Lake” Xeons coming from Intel shortly and the “Rome” Epycs coming from AMD around the middle of the year to take on Power9 and the few Arm processors in the field. IBM is expected to get a Power9 update into the field for Linux machines this year, too, but don’t expect much action for the IBM i and AIX machines in the Power Systems lineup until the Power10 chips come out in 2021. That seems like a long time to wait and ride it out, but the Power9 has some legs yet. And enterprises buy these machines, and they appear to be in a mood to upgrade old systems while the spending environment is good.

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