IDC: Slow Sales For Servers

Worldwide server sales experienced a minor decline in the rate of unit growth, as well as tepid dollar growth in the third quarter of 2007. The numbers reflect a trend of fewer, but more expensive units being sold.

For the third quarter of 2007, IDC reported factory revenue in the worldwide server market grew 0.5 percent year over year to $13.1 billion, the slowest rate of growth since the first quarter of 2006. Server unit shipments grew 6.3 percent over the third quarter of 2007, down from the 7.8 percent growth in 2006.

Part of the reason is that virtualization is starting to take effect. After months of vendors telling customers that they can do the work of 10 servers with one, people started buying one server instead of 10. “We see it with Dell and IBM,” Jed Scaramella, research analyst in IDC’s Enterprise Computing group, told “They are shipping fewer units but more richly configured.”

Contrast IDC’s findings with those of Gartner, whose third quarter server sales numbers downplayed the impact of virtualization. In the end, Scaramella believes it will slow down the number of physical servers people need to deploy, but there will still be growth.

“The amount of servers in the world is going to continue to increase. Our installed base forecasts we’re still showing an increase. The rate at which they grow is tempering, and we’re seeing that,” he said.

Another reason for the slow sales is that there was considerable demand for dual-core processors from Intel and AMD in 2006. Scaramella isn’t seeing as much demand for the new quad-core processors that have shipped in recent months.

“The ramp from dual core to quad core won’t be as fast as it was from single to dual core,” he said. “There was such a pent up demand for dual that it took off. Quad core will steadily increase in adoption but won’t increase as fast because there wasn’t the pent up demand and there’s a lot of software issues because a lot of apps weren’t written for multi-core.”

Revenue growth for volume systems, those systems available for less than $25,000, grew 8.1 percent year over year, while mid-range systems ($25,000 to $499,000) dipped 2.2 percent and high-end servers, from $500,000 and up, fell 14.5 percent over the same quarter last year, the largest year over year decline in more than five years.

Scaramella said that the dip in mainframe sales is due to buyers holding off because of an expected upgrade in IBM’s System z mainframes.

“With those mainframes, there’s a lot of residual value with them. Once you buy a mainframe and a new version comes out, the residual value just drops. You can’t just resell them like an x86 server. So the people who need to buy a mainframe will, and those who can put it off will,” he said.

This led to an 8.5 percent dip in IBM revenues due to weakness in System z and System i, its mid-range systems. Gartner found almost the exact same results in its quarterly report this week.

IDC and Gartner were also in agreement that HP is rapidly closing the dollar gap. IBM still leads, with $3.93 billion for the quarter, but HP is hot on its tail with $3.75 billion. Scaramella said HP is gaining market share by cost cutting.

“HP has rolled back the average selling prices [ASPs] for the last few quarters, whereas Dell and IBM have increased their ASPs,” he said. “At the same time, HP has shown monster unit growth rate. That leaves me to believe they are buying footprints.” He points out that Dell’s revenue grew by 13.5 percent while HP’s grew by 10.3 percent, even though HP shipped more units.

Dell was in a strong third place position and Scaramella is the latest analyst to say that Michael Dell is turning his namesake company around after resuming control earlier this year. “A lot of people thought they were dead and buried, but they have been growing over the last couple of quarters. They have implemented a new strategy about simplifying IT, which is easy to understand and will resonate over the next year.”

Sun’s fourth-place finish, with a 0.9 percent growth over last year and 10.2 percent of the market, it’s a familiar story. “We still see Sun operating within their installed base. The story on Sun shows they are focused on profitable growth. To show higher growth rate they will have to step out of their customer base and get new customers,” said Scaramella.

Microsoft Windows server revenue was $5.3 billion in Q3 for 40.4 percent of the overall market, a 9.7 percent year-over-year growth in revenue and 4.8 percentage point gain. Linux servers grew by 10.7 percent to $1.8 billion in the quarter, accounting for 13.4 percent of all server revenue.

Unix servers also did well, growing 4.1 percent to $4.1 billion and representing 31.1 percent of quarterly server spending. This growth came at the expense of mainframes, with IBM’s System z mainframes experiencing a 31.9 decline in revenue.

The server blade market continued its rapid growth for the fourth consecutive quarter, with factory revenue growing 41.4 percent year over year. Overall, blade servers of all processor types surpassed $1 billion for the first time in a single quarter and represented 7.9 percent of the overall server market revenue in the quarter. HP led the way with 42.1 percent of the market, and IBM was second with 32.9 percent.

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