Analysis Server spending was solid in the second quarter, according the box counters at IDC and Gartner, with both shipments and revenues growing in the wake of the Great Recession. But don't jump to the wrong conclusion. While server shipments are up where they belong, revenues have yet to recover to their pre-recession levels.
Recessions have a nasty habit of not only crushing spending on systems (remember those, back in the 1970s, 1980s and early 1990s?) and servers (that's what we call them now), but also on accelerating architectural transitions that are generally driven by the desire to reduce costs and improve performance. The Great Recession has coincided with the rise of virtualization on x64 platforms and is arguably holding down revenues for these machines even as shipments recover.
There was considerably less spending in the second quarter of this year compared to three years ago, with an exceptional peak in mainframe spending in recent quarters as IBM has started shipping its latest System z behemoths.
Both the IDC numbers, which track server factory revenues at the vendor level (including sales into the channel), and Gartner numbers, which track server revenues at the end user level (including sales out of the channel), illustrate the effect of virtualization and conservative spending in the wake of the recession. The second quarter of 2008 was, according to IDC, the peak of worldwide spending for a second quarter since the dot-com bust in 2000.
This sets the high water mark for a second quarter with $13.9bn in revenues generated worldwide. IBM was at the beginning of a mainframe refresh cycle, much as it is now, and sold $1.6bn in machines in the quarter; this time around, in Q2 2011, generated only $1.2bn against total sales of $13.2bn across all server architectures.
That doesn't seem like much of a drop, does it? Especially when you consider that three years ago at the most recent peak, server makers pumped out 2.11 million units and in the recently completed quarter of Q2 2011, we were back up to 2.08 million units.
Happy days are here again, right?
Not so fast. You have to drill down into the numbers a bit by geography. Three years ago, The US accounted for $5.19bn in server revenues and 776,000 shipments, Jed Scaramella, research manager for enterprise servers at IDC, tells El Reg, and the server racket there has not yet recovered, with 722,000 machines generating $4.86bn in the second quarter of 2011 on the other side of the Great Recession. EMEA has even further to go. It has $4.11bn in revenues and 696,000 in shipments three years ago, but hit only $3.49bn in sales and 544,000 units in the most recent second quarter.
So what is pulling up worldwide sales if the US and EMEA are struggling to get back to their pre-recession levels? Asia. Scaramella says that three years ago, Asia (not including the stagnant Japan) shipped 390,000 units in Q2 2008 and generated $2.07bn in sales. But three years later, Asia consumed 506,000 machines and accounted for $2.3bn in revenues.
"Europe has not come back in terms of revenue or units," says Scaramella. "I think that what is not happening there is cloud. When I hear about cloud buildouts, they are in the United States, China, and various emerging markets."
Because of the economic uncertainty in the US and Europe, Scaramella says that IDC expects a "soft landing" in the second half, but not the kind of collapse we saw during the Great Recession. "People seem gun shy about making decisions, but the market is not dying."
Asia chases Europe
Gartner's server models are generally in synch with those from IDC, although they do diverge from time to time because of different assumptions and due to the different points in the supply chain where they are measuring the flow of boxes and money.
In the second quarter of this year, Gartner says that worldwide server revenues were up 19.5 per cent, to $13.2bn, with shipments up 8 per cent, to 2.33 million units. Again, that is almost back to "normal" in terms of sales and shipments, with the second quarter of 2008 accounting for $13.8bn in sales and 2.34 million units shipped.
But look at where the growth is and where it isn't. The Asia/Pacific region is growing like gangbusters in the current second quarter, with shipments up 25.6 per cent year-on-year, to 522,616 machines, and revenues up 26.1 per cent, to $2.48bn by Gartner's math.
The analysts said that server spending in China was driven in part by service providers building out their clouds, and said that server virtualization was on the increase, too, inside Chinese government and corporate data centers. X64-based machines accounted for 65 per cent of total server revenues and 98 per cent of shipments across the Asia/Pacific region.
Gartner said that shipments in EMEA, by contrast, were up only 5 per cent, to 611,828 machines, driving revenues up by 15.2 per cent, to $3,68bn. The mainframe bounce in Western Europe helped drive a lot of that revenue growth.
"As we have cautioned before, current growth rates may look positive but in absolute terms the market remains quite some way below the levels that we saw prior to the downturn," explained Adrian O'Connell, research director at Gartner, in a statement accompanying Gartner's figures. "Total server revenue across EMEA is only just over three quarters of the level that it was in the second quarter of 2008.
The RISC/Itanium Unix and Other CPU systems are even worse – both around 50 per cent of those pre-downturn levels. With that in mind, and the ongoing economic concerns, there is a real need for vendors to focus on driving competitive wins to maximize the available market opportunity, particularly in these non-x86 segments."
As a thought experiment, at current growth rates, it will take until 2015 or so for the Asia/Pacific region to meet European server sales, but by this time next year, Asia/Pacific will match Europe in the number of server shipments and by 2015, Asia/Pacific will account for nearly twice as many physical machines. Of course, current trends cannot persist.
Europe is in the midst of a mainframe refresh, and while Japan likes mainframes and big Unix iron and so do companies in Singapore and China to a certain extent, modern applications are generally coded on x64 machines at this point and any greenfield installation will use these platforms and either Windows or Linux as its operating system. All of this means that the Asia/Pacific region should catch up to Europe more quickly, once the mainframe and Unix system upgrade cycle slows, at it most certainly will.
The cloud question
IDC's public information about server shipments and revenues has shown different price bands – volume, midrange, and enterprise – as well as by primary operating system – Unix, Windows, Linux, mainframe, and other. Gartner's public data breaks the server market by processor – x64, RISC/Itanium running Unix, mainframe, and other.
While these are all good at providing some insight, to get a real sense of what is going on in the server landscape, someone needs to start tracking the service provider and hyperscale cloud builders and their consumption separately from SMBs and larger enterprises. This way, you might be able to reckon where companies and consumers put their workloads, which is what really matters for the long-term growth and profitability of the server racket.
The big question is whether virtual desktop infrastructure and the proliferation of consumer and business apps running on clouds will the drive server spending above and beyond the current growth rates, which are driven by virtualization and a recovery in the wake of a recession, when server spending was halted at many companies. The server makers and their parts suppliers – particularly chip makers Intel and Advanced Micro Devices and disk makers Hitachi and Seagate – are certainly hoping that the server market will grow even as it gets cloudy.
Prognostication is a tough business because you can't always predict the effects on technology and competition or where the economic cycle is going to be. For instance, as the dot-com boom was echoing in our ears back in the summer of 1999, IDC released a forecast that showed the server market would grow from $65bn in 1998 to $489bn in 2003. This projection was based on current trends persisting, but they surely didn't.
A recession hit and Unix took it on the chin from both Windows on one side and Linux on the other. The whole server market collapsed down into the $45bn range, and it took until 2008 to climb back to $57bn. And of course, we had another recession that hammered global server sales down to under $45bn in 2009 – pushing the market all the way back to 2001 levels.
It seems unlikely that server spending will hit $65bn again unless something radical happens, like several hundred million corporate PC images being put on server-based VDI and a big chunk of applications shifting to the cloud. Both of these, or one, can happen. And they just might over the long haul as a new generation of users doesn't think of owning a computer but rather using an application. ®