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ODMs and DIYs chomp x86 server racket

Shipments and revenues take a dive in Q1 – thanks a lot, EMEA

If the server market is an indicator of the health – or lack thereof – of the global economy, then we're not quite out of the woods of the Great Recession, despite the exuberance on the global stock markets.

According to the box counters at Gartner, server revenue worldwide were down 5 points to $11.83bn in the first quarter ended in March. And shipments, which had been managing to grow even as revenues had been declining in recent quarters, also stubbed their toes and fell seven-tenths of a point to 2.33 million units.

"The first quarter of 2013 was certainly not a strong period for the server market on a global level," said Jeffrey Hewitt, research vice president at Gartner, in a statement accompanying the figures.

"The only regions to post increases were Asia/Pacific and the United States," he said, "with Asia/Pacific showing the strongest growth with shipment and revenue increases of 7 percent and 1.7 percent, respectively. While these two regions grew in both shipments and revenue, it was not enough to offset the declines of the other geographies – all of which declined in server shipments and revenue for the quarter."

Don't get the wrong idea. That is still a lot of iron and tin to be pushing, and if this rate holds for the entire year, that is roughly the same number of boxes that vendors were pushing back in 2007 ahead of the Great Recession.

But revenues are not holding up, and that probably means that margins are not, either, as the most recent spate of financial results from IBM and HP show. Dell has managed to increase its operating profits in its Enterprise Group, but we do not know specific profits for its PowerEdge and bespoke server lines – and for all we know, the company is buying market share in servers as it is doing in PCs. Probably not at the same level as in PCs, is the guess of the El Reg systems desk, but certainly enough to give HP and IBM some headaches in systems and to keep upstarts Cisco Systems and the various original design manufacturers (ODMs) and do-it-yourselves (DIYs) at bay.

Server revenues had a hiccup worldwide in the first quarter

Server revenues had a hiccup worldwide in the first quarter

IBM has once again barely squeaked by HP to retain the server-revenue crown, with $3.02bn in sales compared to HP's $2.96bn. But both companies saw a revenue decline that was nearly three times as large as the market overall, and in particular because IBM's big mainframe and Power systems, and HP's midrange and high-end Itanium machines, did not perform well.

Dell grew its revenues by the same amount that HP declined (in percentage terms, not actual sales). Fujitsu and Oracle continued their declines, with Oracle actually falling 27.2 per cent to $538.5m in the quarter and dropping underneath Fujitsu for the first time this reporter can ever remember (including Sun Microsystems historical data).

To be fair, IBM, Oracle, and Fujitsu are all in the middle of major product transitions in their RISC/Unix system lineups, which has stunned Unix sales in Q1, but this market continues to lose air at a shocking pace – and has for years.

Well, shocking if you are trying to sell Unix systems. Not so shocking if you see how people are building modern applications.

Gartner estimates that Unix server shipments were down 38.8 per cent to 27,973, and for those of us who watched the Unix Wars in the 1990s, that is just a really small number of machines. They did, however, generate $1.42bn in revenues globally, but unfortunately sales were off 35.8 per cent. Average selling prices for Unix machines were up a smidgen and broke through to $50,700, which by the way is nearly thirteen times as expensive as an x86-based server.

Everybody who is still left in the Unix market took a beating. IBM pulled in $841.2m (down 32.3 per cent), Oracle did $280.1m (off 38.3 per cent), HP raked in $230.8m (down 39.6 per cent), and Fujitsu had $44.3m (down 24 per cent).

The x86 portion of the server market accounted for 98.7 per cent of all shipments, and Intel supplied most of those chips – and by any sane definition has a monopoly on server CPU. (Well, for now at least. We shall see if the ARM collective can take the place of Advanced Micro Devices to provide some competitive pressure and whittle down Intel's share.)

All told, x86-based systems brought in $9.12bn in revenues, up 1.8 per cent from the year-ago period. HP shipped the most x86 iron, at 576,835 machines and generating $2.65bn. But HP stomached a 10.9 per cent revenue drop while Dell grew 14.4 per cent to $2.12bn by pushing 516,355 machines. IBM shrank by 9.1 per cent to $1.21bn, and its shipments diminished by 13.6 per cent to 212,516 boxes.

No wonder Lenovo thinks IBM is overcharging for the System x business it is rumored to want to be selling to its Chinese server partner and the company that took the PC business off its hands eight years ago.

Here is the interesting bit of data that Gartner divulged with this pass of its server report card: in the x86 segment, Gartner carved out self-made servers and those made by ODMs, and lumped them together as if they were a single vendor. If you look at it like that, then SB/ODM had a 34.7 per cent increase in shipments year-on-year to 167,200 boxes, and that generated servers with a combined value of $434.1m.

If you do the math on that, the average selling price for one of these machines was flat at around $2,600 compared to an ASP of $4,073 for x86 boxes made by tier one and two vendors.

You can see now why Google, Amazon, and Facebook like vanity free serving.

Cisco continues to grow in the x86 racket, and had a 34.3 percent revenue bump to $450.1m in the quarter. Cisco shipped 53,873 machines, an increase of 33 per cent. Fujitsu shipped a total of 73,375 machines in the quarter, and 72,589 of them had Xeon motors, not Sparc64 or Sparc T engines.

If you extract out all of the other machines – those not using x86 engines and those not running Unix on either a RISC or Itanium engine – then a grand total of 2,131 machines shipped in Q1, generating $1.29bn. This is mostly IBM mainframes, with a smattering of other mainframes from Unisys, Bull, and Fujitsu as well as proprietary operating systems. The average selling price for these machines was a whopping $606,116, which tells you why these basically hand-made systems are still being manufactured.

Europe is a downer

The market for servers in Europe and the attached regions of the Middle East and Africa continued to be a drag on worldwide server sales as it has been for many quarters. Gartner reckons that EMEA shops consumed 583,443 servers in the first quarter, down 6.8 per cent from a year ago, and revenues fell at an even faster 9.6 per cent rate to $2.96bn. It looks like 2013 is getting off to the same challenging start that 2012 did, and no one – not the system makers, not the distribution channel, not the customers – are happy about that.

"The reality for server vendors is that spending levels are very low and there is severe weakness in the high-end segment," explained Adrian O'Connell, the research director at Gartner who tracks the EMEA market. "There are still areas of opportunity, but vendors need to be agile and focused on addressing them. The outlook for 2013 remains challenging."

Server shipments and revenues both took a sharp downturn in EMEA

Server shipments and revenues both took a sharp downturn in EMEA

While x86 server revenues grew at the same 1.8 per cent rate in EMEA as they did in the worldwide market, Unix systems sales fell by a staggering 54.8 per cent. Europe embraced Unix enthusiastically before other regions, and it looks like it is leaving Unix quicker, too.

Other systems, again dominated by IBM mainframes, fell faster in EMEA than the global rate, dropping 9.9 per cent in the first quarter. Fujitsu and Dell were the only server makers in the top five to show growth in EMEA.

If there is one place that is worse than EMEA to sell servers, it is Japan, which had a 19 per cent drop in Q1. ®

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