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  • The Ups And Downs Of The Server Cycle

    June 22, 2020 Timothy Prickett Morgan

    If you took a pause for your server upgrade plans in the first quarter as the coronavirus pandemic was starting to take root, you were not alone. But all things considered, the period ended in March was not as bad for server spending as you might have guessed, and we think that the second, third, and fourth quarters are the real test. The first quarter was just the warmup.

    Business has been pretty brisk for those who sell server components, and the ODMs and OEMs have been pretty busy, wrestling with their supply chains and trying to meet customer demand that no longer has the normal historical trends on which to plan. According to the box counters at IDC, server shipments were down a mere two-tenths of a percent to 2.58 million units, and revenues slipped by 6 percent to $18.61 billion. That’s not all that bad, but China didn’t really start getting hit hard with COVID-19 until February, Europe starting in late February and March, and North America and the rest of the world in mid-March. Demand for compute among the hyperscalers and cloud builders rose as people started working from home and using various SaaS services, and competition between Intel and AMD has made a lot more server oomph available for the buck. Now was a good time to buy, even though both Intel and AMD, not to mention a bunch of Arm server chip makers, have announcements on the horizon. Inasmuch as the majority of IBM i shops also have Windows Server or Linux platforms, these X86 trends also affect them.

    We have no sense from IDC about how the IBM i platform, or the broader Power Systems platform, did in the quarter, but what we can tell you is that IDC reckons that IBM’s sales in the quarter rose by 16.3 percent to $884.2 million, the first time in a long time that Big Blue made it into the top five. And as we have pointed out before, Chinese server maker Inspur has a rapidly growing Power-based server business in Asia, and this is one of the reasons why Inspur grew revenues by 8.6 percent to $1.32 billion. Dell, the world’s largest server maker by sales and by shipments, took a 13 percent fall to $3.47 billion, while Hewlett Packard Enterprise fell by 18.7 percent to $2.89 billion. Here’s a table showing the top vendors over the past nine quarters:

    As you well know, IDC breaks server sales down by the class of the machines as well as by vendor revenues and shipments. Volume server revenues – which means machines that cost under $25,000 – was down 2.1 percent to $15.1 billion, and midrange server sales – which means machines that cost more than $25,000 but less than $250,000 – fell by declined 23 percent to just under $2.6 billion. The big iron costing more than $250,000 had an aggregate of just under $1 billion in sales, off by 9.1 percent year-on-year.

    Here’s the breakdown of X86 versus non-X86 iron, and it looks like the alligator has an extra tooth forming:

    To our eye, it looks like non-X86 iron has find a kind of equilibrium at the moment. Some of that is being helped by the addition of Arm servers to the mix, but not by much at this point in the history of the glass house. Between its System z and Power Systems iron, IBM has the lion’s share of this non-X86 revenue, and over the long haul, this hardware business is profitable and drives a much larger stream of very profitable software and moderately profitable services. So we think IBM is still interested in being International Business Machines for the immediate future. After Power10 and z15, it is always a gamble and a guess. But thus far, IBM has stayed in the game every time we thought it might not, so there is that.

    In any event, sales of X86 iron fell by 9.1 percent to $16.8 billion, and sales of non-X86 iron, due mostly to IBM System z mainframe sales, rose by 38.2 percent against a frightfully easy compare in Q1 2019 to a tad under $1.8 billion.

    Now, we shall see how the rest of 2020 turns out. At this point, it is anybody’s guess what enterprises will do. But we know the hyperscalers and cloud builders that drive about a third of the market these days will buy when they have to and do so in volume and then take a breather until they need to binge again on compute. The magnitude of the ups and downs reminds us of the mainframe and Power Systems cycles in years gone by, and the pattern is settling in to boom sales for two quarters than a cooling for three quarters. It is not on a calendar cycle, and Intel and AMD product launches are being timed to ride this cycle, which causes higher peaks and lower valleys because the hyperscalers and cloud builders are first in line with any new technology. Again, like it was at the height the of IBM mainframe and midrange in the 1980s and 1990s.

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    Tags: Tags: IBM i, IDC, Linux, Power Systems, Power10, SaaS, System z, Windows Server, X86, z15

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  • The Ups And Downs Of The Server Cycle

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