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Server sales continue decline – time to bargain hard with your supplier

Blame weak economies, CPU transitions, virtualization, and the dog who ate your nodes

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These are not easy days to be a server maker – and it very likely it'll never be easy again, so we had better get used to it. In the short run, there has probably not been a better time to wrestle with your server vendors on price since the dot-com bust.

That said, the confluence of many factors is putting tremendous pressure on both the revenues and profits for those who weld together boxes to run the world's applications and databases. In the long run, the results of those forces may not be all that good for customers.

In the second quarter of this year, the box counters at IDC reckon that server unit shipments were down 1.2 per cent compared to the year-ago period to 2 million units, and this is the third quarter in a row that server volumes coming out of vendor factories have declined.

This is not a huge decline, particularly with Intel getting ready to revamp its Xeon E5 chips for two-socket servers in the third quarter, most likely during its Intel Developer Forum two weeks from now. If Intel didn't so utterly dominate the market in terms of the number of machines shipped based on its processors, its product cycles might not cause such ups and downs.

The real shocker – and perhaps the one that matters most – is the revenue drop in the quarter. IDC reckons that worldwide revenues across all server makers for the quarter ended in June dropped by a full 6.2 per cent to $11.86bn.

The question now is whether that $784m that was sucked out of the market will ever come back in a future quarter, and the probable answer is "No, it won't."

The combination of virtualization and server consolidation, the continual shift from large expensive systems to clusters of cheaper ones as applications are rewritten to work on clusters instead of shared memory machines, the intense competition among tier one server makers and with the upstart whitebox and vanity-free server assemblers, and the dicey economies in several parts of the world are all combining to drag down server revenues.

And we presume, profits.

"Mainstream SMB and enterprise server customers around the world continue to focus on consolidation, virtualization, and migration initiatives aimed at increasing efficiency and lowering datacenter infrastructure costs," said Matt Eastwood, general manager of enterprise platforms at IDC in a statement accompanying the statistics.

"At the same time," he continued, "challenging economic conditions are dampening demand for new IT projects necessary to grow the server market globally. It is clear that the competitive dynamics in the server market remain fierce as the leading server vendors work to offset weak demand for generally higher margin Unix and blade servers with lower margin rack and density-optimized servers."

You can't blame the ups and downs of the IBM System z mainframe for the decline this time around – IDC thinks that IBM's sales of mainframes actually rose in the quarter by 9.8 per cent to $1.2bn. Of course, that was against a very easy compare with the second quarter of 2012, when System z shops knew Big Blue was working on a new line of machines, which were announced in the third quarter and started shipping in the fall.

You can, however, blame x86 servers in general, which accounted for 1.9 million of the units sold during the second quarter, and you can also blame blade servers and tower servers as well, if you want to think in terms of form factors.

As far as IDC can tell, x86-based machines drove $8.7bn in sales in the second quarter, down 1.3 per cent. That is a quarter of the decline of the market at large, so that is a victory of sorts. But shipments were essentially flat (down one-tenth of a point), and that means average selling prices are dropping.

Converged/integrated systems showed growth and density-optimized machines also grew – IDC thinks these machines had 26.6 per cent revenue growth to $735m in the quarter against just under 200,000 unit shipments – but blade servers shrank in concert with the overall market, with sales down by 6.2 per cent to $2bn. Dell is the market share leader in the density-optimized portion of the market, with 60.5 per cent revenue share in Q2 2013, while HP has dominant share in blades with 44.8 per cent share. HP's blade server biz is still roughly twice as large as Dell's bespoke server biz, but not for long, if these rates of growth and decline continue. (Dell also sells blades, and HP does density stuff, too, obviously.)

The most telling stat in the numbers put out by IDC is this: HP lost 5 points of market share in the x86 market in the quarter, with sales falling by 14.8 per cent to $2.72bn. Dell grew is x86 server revenues by 10.3 per cent to $2.24bn. Whatever else Dell might be doing wrong, competing against HP in the x86 server market is not one of its problems – that is, if all you care about is revenue and not lots of profits. IBM's x86 server business, by the way, fell by 10.8 per cent to $1.1bn.

IDC tries to figure out what the final, dominant operating system will be on the servers as they come out of the factory and are sold either directly to customers or pushed into the channel. And as always, El Reg is well aware of the witchcraft used in such estimates and is also well aware that many machines ship without an operating system or have the one on the box nuked.

With all of those caveats, IDC believes that Linux-based servers accounted for $2.8bn of revenues in the second quarter of the year, an increase of 1.5 per cent compared to the year-ago quarter and representing 23.2 per cent of the worldwide server revenue pie.

Unix-based machines have been declining heavily and steadily since the Great Recession started at the end of 2007, but the rate of decline is starting to slow. Sales of Unix machines were off 21 per cent in Q2 2013 to $1.8bn. This is the lowest revenue figure for Unix machines ever reported by IDC, which started its server tracker in the mid-1990s after Unix had become established.

Windows-based servers, which at this point can only be based on x86 processors, fell by 5.1 per cent to $5.8bn. Windows fell more slowly than the market at large, and therefore gained a half point of revenue market share, up to 49.3 per cent of the pie. This is about the same revenue share that Unix systems had during the peak of the dot-com boom in the late 1990s.

If you look at Q2 server revenues by vendor, IBM was still on top with $3.31bn in sales despite a 10 per cent decline. HP was further behind than usual with a 17.5 per cent decline to $3.07bn, and Dell came in third with $2.23bn in sales and a 10.3 per cent jump. (Dell doesn't have a RISC/Unix server business. Can you tell?)

Oracle, which sells raw x86 and Sparc/Solaris boxes as well as "engineered systems" that marry servers, storage, networking, and systems software together, had a 5.7 per cent revenue decline, not nearly as bad as during the past three years. Oracle may be close to hitting bottom, as CEO and co-founder Larry Ellison has been saying would happen.

Server upstart Cisco Systems has now driven Fujitsu out of the top five, and raked in $537m in server sales (all x86 and all modular/blade form factor) after a very nice 42.6 per cent increase. Other server makers added up accounted for $2bn in sales, down 4.2 per cent from the year ago period.

Just think of how much fun this is going to be when ARM server chips start ramping in volume. ®

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