The Server Racket Holds Its Own In The Fourth Quarter

March 4, 2013 Timothy Prickett Morgan

The server business is sputtering a bit with the economic uncertainty out there, but it has, at least according to the numbers coming out of Gartner last week, put the Great Recession a few miles back in the rear view mirror and is holding its own despite all of the wrenching changes going on in the data center these days. We may be witnessing another big wave of a virtualization of another kind, where new applications don’t end up in our own data centers, but in someone else’s, and therefore some of the server sales shift from your data center to a hyperscale cloud operator.

In the fourth quarter of 2012, Gartner estimates that server shipments fell by two-tenths of a point to 2.5 million machines (essentially flat) in a market where the fourth quarter usually sees a bit of a bump upwards, if you use the data from before and after the Great Recession as a guide. Thanks to a big bump in IBM‘s mainframe sales in the fourth quarter after last summer’s launch of the System zEnterprise EC12 mainframes, and to sales of fatter X86 machines aimed at virtualization workloads, worldwide server revenues nonetheless rose by 5.1 percent to $14.62 billion.

When I look at the pattern of server shipments for the past couple of years, it looks to my eye that around 150,000 servers that should have shipped this quarter, and represented something around $1 billion in incremental sales, didn’t happen. Look at the historical quarterly Gartner revenue and shipment data yourself:

Revenues and shipments should beaten the recent peak set in Q4 2007, by my eye, and while shipments were up a smidgen over that period six years ago as the Great Recession was getting going, revenues still have not hit the old levels. And given the vast increases in price/performance in servers even over those six years, it is no wonder. Even taking into account the immense appetite for machines that hyperscale cloud operators have for either their own or someone else’s cloudy apps, sharing servers and applications on a cloud means that customers are not only more efficiently using machines, but the aggregate user base utilizes less computing capacity then it might otherwise have acquired when it was just buying (and inevitably overprovisioning) for itself.

Virtualization makes us more efficient with server workloads within our data centers, but cloud makes us more efficient with servers across companies. Even if the machine is not virtualized, it is shared across time zones and multiple tenants.

This is one of the reasons–but by no means the only one–that the average selling price of a server continues to drop. The home-crafted minimalist boxes used by the largest cloud providers are really barebones, having not one element that is unused by a particular application. These customers buy in lots of 1,000 to 10,000 and they don’t pay a lot of extras.

In the quarter, Gartner reckons that IBM pushed just under $5.1 billion in tin and iron, an increase of 8.9 percent over the year-ago period. IBM’s Power Systems machines running AIX accounted for $1.27 billion of that, but fell by 19.2 percent year-on-year. IBM’s System x and BladeCenter business related to X86 engines brought in $1.62 billion, falling 2.4 percent and making IBM the only one of the top five vendors to see its revenues decline in the X86 racket in the fourth quarter. The Others part of IBM’s business, which includes mainframes and Power Systems running IBM i, rose by 52.6 percent to $2.2 billion in the fourth quarter. We have no idea how the IBM i-related business did, and I honestly don’t believe Gartner does either.

Hewlett-Packard continued to have issues with its Integrity and Superdome 2 line of Itanium-based machines, and those running its HP-UX operating system took a 39.1 percent dive to $341.8 million. HP’s X86-based ProLiant business did well by comparison, rising 4 points to $3.16 billion and giving HP a little less than a third of the $10 billion X86 server business.

Rival Dell, which is trying to take itself private at the moment and giving customers something to think about that might affect server sales this year, had 1.2 percent growth in the quarter to $2.06 billion. Server upstart Cisco Systems, also only an X86 iron peddler, pushed $480.2 million in machinery in the quarter, with a 49.5 percent jump year-on-year. Cisco is taking it out of everyone’s hide.

Oracle sells X86 and Sparc iron, of course, and pushed $341.4 million in Solaris systems running atop one or another Sparc implementation. That was 29.7 percent lower Sparc/Solaris sales than Oracle had a year ago. The company’s X86 server business, mostly inside of Exdata, Exalogic, and Exalytics appliances, had $261.7 million in sales, up 4.8 percent according to Gartner and not enough to make up for the gap in falling Sparc/Solaris sales. And thus, Oracle’s overall server biz was down 18 percent to $603 million.

The year 2012 was a mixed one for servers, with shipments up 1.5 percent to 9.67 million machines, which drove $52.5 billion in revenues, down six-tenths of a point from 2011. “2012 was a year that definitely saw budgetary constraint which resulted in delays in x86-based server replacements in enterprise and mid-sized data centers,” said Jeffrey Hewitt, server research vice president at Gartner, in a statement accompanying the numbers. “Application-as-a-business data centers such as Baidu, Facebook and Google were the real drivers of significant volume growth for the year. Relatively weak mainframe and RISC/Itanium Unix platform market performance kept overall revenue growth in check.”

Gartner is forecasting modest growth for servers in 2013, with aging “enterprise servers” needing to be replaced, pushing up revenues, with virtualization and cloud buffering the growth of X86 server shipments and revenues.