The Midrange Gets Pinched A Little More
March 16, 2020 Timothy Prickett Morgan
The X86 server market turned in its best quarter ever in the final three months of 2019, will more machinery going out the door and more money coming in than has ever happened in the history of the systems market. Even if you adjusted sales in past quarters for inflation, it is still true. It was kind of crazy, even with some soft sales among OEM suppliers, the combination of ODM sales to hyperscalers and cloud builders. X86 server shipments rose by 12.9 percent to 3.35 million machines and revenues rose by 6.3 percent to $22.44 billion, according to the latest statistics compiled by IDC.
If you add in non-X86 servers, total server revenues across all architectures were up 7.5 percent to $25.35 billion, while shipments were up by 14 percent to 3.4 million units. Rebounding System z mainframe sales at IBM helped push server revenues worldwide. Non-X86 servers accounted for $2.91 billion in sales, rising 17.8 percent, and IBM’s portion of the sales accounted for 78.8 percent of the non-X86 shebang. Big Blue had a very good quarter, with sales of just a tad under $2.3 billion, rising 17.6 percent year-on-year and giving IBM the third place ranking behind Hewlett Packard Enterprise and Dell.
Back in the day, the vast majority of revenues generated by AS/400, iSeries, and System i systems were in the core midrange, where machines cost between $25,000 and $250,000, and there may be a lot of IBM i sales in that price range, the bulk of the server market has moved down to machines that cost way less than $25,000. The average server price is, in fact, somewhere around $7,400. Shipments of more expensive machines are so relatively thin in terms of the number that the class average does not get pulled up all that much even by sales of machines, based on Power architecture or System z or others, that cost a lot of dough. High-end systems that cost more than $250,000 accounted for $2.4 billion in Q4 2019, up by 8.9 percent, and volume servers, which cost under $25,000, drove $19.7 billion in sales, up 2.1 percent. But those midrange machines fell by 14.1 percent in the quarter to $3.3 billion.
In general, sales of non-X86 servers have more or less stabilized, and obviously X86 server sales have gone through the roof thanks in large part to the hyperscalers and big public clouds. In the quarter, the ODMs who sell machinery mostly to these customers accounted for a little less than a third of the shipments, and accounted for $6.47 billion in sales, up a stunning 37.9 percent. If you take out the ODM sales and IBM’s System z sales, the market is, in fact, dead flat, and you can see how that worked out by looking at the sales by vendor for the quarter. The table below, in fact, shows sales over the past two years by vendor.
In the table above, those numbers shown in red and bold font are estimates because the IDC data did not disclose them. IBM has not been in the top three for a year, so it is good to see Big Blue back again, but it probably will not last unless Power Systems sales pick up in the coming quarter. And that seems unlikely given that we are entering the last year of Power9 system sales, which tend to slow down across that three to four year upgrade cycle, and given that thanks to the coronavirus outbreak the world is probably going into a recession, even if temporarily for a few quarters.
That’s the real question on everyone’s minds at this point. And frankly, no one can even begin to formulate an answer because we are only now starting to get our heads wrapped around the economic impact of the outbreak. The good news as far as IBM i customers are concerned is that the patterns of upgrades for core, mission critical systems like the Power Systems platforms are not immediately impacted by such downdrafts. Some companies will defer, of course, but generally, when an organization is going through the process of installing a Power Systems machine, they are not going to back out unless something truly awful happens.
Power Systems and mainframe sales, for instance, held up far better at the beginning of the Great Recession a dozen years ago than did X86 systems. Sales of the non-X86 systems also took a little bit longer to come back, and in some ways, the recession caused a decline in sales of all RISC systems because companies decided in many cases to go with Linux or Windows Server systems.
Once again, the good news here is that Linux is ascending and Windows Server is on the decline this time around, and the Linux boat should help Power Systems rise at the other end of a sales decline, should it happen. IBM i will continue on its modest growth curve if and when the economy recovers after what will almost certainly be a COVID-19 driven recession.
That’s the theory, at least. We shall see what happens.