Quarterly Server Sales Drop Nearly 4 Percent, IDC Says

December 16, 2013 Alex Woodie

Continued soft demand for servers around the world resulted in a 3.7 percent decline in sales during the third quarter, according to IDC. A poor showing by IBM, which suffered a 19.4 percent decline in factory revenues during the quarter, enabled Hewlett-Packard to regain the title as the world’s top server maker.

This year has been tough on server makers, as they struggle to maintain revenues in an extremely competitive market for the commodity X86 servers that dominate the server landscape. Strong demand for low-end X86 servers actually increased year-over-year sales of these types of systems by 3.5 percent, but it wasn’t enough to offset low demand for midrange and high-end systems, which experienced year-over-year revenue declines of 17.8 percent and 22.5 percent, respectively. Total global sales revenue amounted to $12.1 billion, as the number of units shipped ticked down a hair, from 2.27 million to 2.26 million, according to IDC. These numbers closely track what Gartner saw during the quarter, which we covered last week.

The server maker most impacted by this shift in demand is IBM, which just had a disappointing third quarter. Sales of IBM mainframes were actually up, as they have been for four consecutive quarters now, and sales of low-end System x servers tracked the overall market. But it was not enough to counter soft global demand for Unix systems, which translated into a challenging quarter for Power Systems sales and IBM losing the overall top spot for the first time in a while.

The benefactor of IBM’s weakness and the overall shift in demand to low-end commodity boxes during the quarter was HP, which grew its year-over-year quarterly revenues slightly, from $3.34 billion to $3.39 billion. Maintaining its revenue at that level was enough for HP to increase total market share by 1.5 points, from 26.6 percent to 28.1 percent, while IBM’s share of the global server racket dropped from 27.9 percent to 23.4 percent.

Meanwhile, Dell saw a 6 percent drop in its global server revenue, to $1.96 billion, which translated into a decrease in global server market share from 16.6 percent to 16.2 percent. That was enough to keep it in third place. Cisco Systems grew its server revenues grew by nearly 43 percent, to $599 million, which gave it a full 5 percent of the global server business, while Oracle saw its server revenues decrease by 16 percent to $494 million, which gave it a 4.1 percent market share. Despite the clear differences in numbers, IDC says Cisco and Oracle “ended the quarter in a statistical tie.”

Third quarter server sales figures, according to IDC.

In terms of OS, sales of Unix servers declined by 31.3 percent during the quarter (compared to 3Q12) to $1.3 billion, which was the lowest quarterly Unix server revenue reported by IDC. Ever. Unix servers accounted for just 11.1 percent of quarterly server sales, which we’re also guessing is a low point in the Unix world. (Well, at least since IDC started tracking server revenues on a quarterly basis.)

Sales of Linux servers surged 5.6 percent to $3.4 billion, giving Linux servers 28 percent share of the global market. Sales of servers that run Microsoft Windows operating system declined by 1.3 percent during the quarter to $6.1 billion. However, because Windows server sales did less poorly than Unix, it was enough for Windows servers’ share of the market to tick up 1.2 percent to take a 50.3 percent share of the market. System z mainframe sales accounted for $827 million, giving it 6.8 percent share of the market. IDC doesn’t break out IBM i server OS figures, but you might surmise that they closely track IBM’s Unix server sales, which were double-digit in the red. Then again, with the new software updates, anything is possible. The IBM i business was actually growing in the first half of this year when Unix was falling. So this is equally likely, particularly with i5/OS V5R4 coming off normal maintenance. (You can still get extended maintenance, but it is pricey.)

IDC expected server demand to pick up in the beginning of 2014 as a server refresh cycle begins anew. According to Matt Eastwood, IDC’s group vice president and general manager of enterprise platforms, the market in the third quarter was impacted by “a steady transition from 2nd Platform to 3rd Platform workload demand.”

“2nd Platform workloads continue to represent a healthy consolidation opportunity across the market, driving solid demand for integrated systems,” Eastwood says. “At the same time, 3rd Platform applications are shifting more and more server demand into cloud service provider datacenters, which is opening up new market opportunity for both ODMs and Chinese OEMs.”

The rise of the Original Design Manufacturers (ODMs)–which sell complete systems and partial sub systems where final assembly is completed in the channel by integrators–is another interesting bit to come out of IDC’s quarter sales figures. IDC previously counted server sales of ODMs such as Quanta Computer, Wistron Group/Wiwynn, Inventec Corporation, and Compal Electronics in the “other” category. But a 45.2 percent increase in revenue during the third quarter to $783 million convinced IDC to give the ODM Direct its own place on the server chart.

The rise of the ODMs is being driven by the shift to hyperscale, Web 2.0, and cloud hosting environments, IDC says. Nearly 80 percent all ODM Direct server revenue was generated in the U.S. in the quarter primarily through sales to Google, Amazon, Facebook, and Rackspace. ODM Direct servers now represent 6.5 percent of all server revenue and 14.4 percent of all server shipments. This is a trend that is definitely worth keeping an eye on.

“Each year, ODM Direct growth is accelerating as large, established hyperscale customers begin new expansion phases of their infrastructure footprints, and as the customer base for ODMs continues to broaden,” said IDC research manager for enterprise servers Kuba Stolarski. “Capturing a majority of hyperscale demand for homogeneous environments, ODMs are well positioned for continued 3rd Platform infrastructure growth.”