Server sales dropping faster than in dot-com crash

Gartner research reveals similar result to IDC data

Intel and AMD are spicing up the server market with ever-faster processors, but server vendors have suffered the largest revenue decline seen this decade, research firm Gartner has found.

Worldwide, server revenue declined 24% in the first quarter of 2009 compared with the previous year's first quarter, and server shipments dropped an almost identical 24.2%, according to Gartner. These were the largest year-over-year declines the server industry has experienced in recent memory, Gartner says.

"It was the biggest drop [we've seen]," Gartner analyst Martin Reynolds says. "The astonishing thing is it's a bigger drop than we saw after the dot-com crash".

Fellow analyst firm IDC came to a similar conclusion last week when it said worldwide quarterly server revenue dropped 24.5% year-over-year to US$9.9 billion (NZ$15.6 billion) — the lowest revenue total seen since IDC began tracking the quarterly server market 12 years ago.

Like IDC, Gartner says that virtualisation technologies, which let servers run multiple applications at once, have lessened the need to purchase new machines. But economic turmoil is clearly the biggest factor in customers delaying or cancelling server purchases, Gartner says.

"If your business isn't growing, you don't need to buy any new servers at all," Reynolds says.

According to Gartner's numbers, first quarter revenue was US$10.2 billion, down from US$13.4 billion in the first quarter of 2008. Total shipments dropped from 2.3 million to 1.7 million. Gartner analyst Jeffrey Hewitt says the global server market is unlikely to see growth until 2010.

In the United States, shipments dropped about 27% in the first quarter, while revenue declined 21.2%. The biggest declines geographically occurred in Eastern Europe, where shipments fell 41.3% and revenue fell 47.7%.

Even as the server market goes south, many new machines are hitting the market to incorporate upgraded processor designs from Intel and AMD. Intel got the ball rolling in March by releasing the Nehalem processors, and AMD followed up this week by announcing six-core Opteron chips code-named Istanbul.

AMD boasted of enhanced virtualisation and power management capabilities, and promised performance-per-watt improvements of up to 34% compared with previous AMD processors.

Even after this upgrade, AMD processors are only about two-thirds as fast as Intel's, according to Reynolds. But the speed improvements were badly needed to maintain AMD's competitive position.

"It puts [AMD] in a better position," Reynolds says. "The gap between Intel and AMD performance had been big enough that you virtually couldn't give the processors away", he says.

HP recently announced seven new ProLiant servers build on the six-core AMD chips, promising that energy bills can be cut in half by replacing servers purchased prior to 2006 with the new models. More new servers from vendors who offer AMD-based systems are likely in the works.

Despite losing 20% of its revenue, IBM grabbed the most revenue in the first quarter of 2009 with US$3.1 billion, or 30.7% of the market, according to Gartner. HP came in second place with US$2.9 billion, while Dell earned US$1.2 billion.

IBM owes most of its success to mainframe and Unix systems, while HP maintained a big lead in the x86 market with US$1.9 billion in revenue. Dell followed with US$1.2 billion and IBM came in third with US$856 million. IDC's research shows similar results. Server shipments and revenue fell as customers tightened IT budgets and held back on refreshing server hardware, IDC says. Shipments of x86 servers were around 1.42 million, while shipments of other types of servers — including those with processors from the IBM Power and Sun Sparc families — were around 64,450.

One reason for the drop in server revenue was virtualisation, says Daniel Harrington, a research analyst with IDC. As an alternative to buying new servers, larger enterprises are turning to virtualisation, consolidating more workloads per physical server. Most server purchases in the first quarter were made out of necessity, especially by small and medium-sized businesses that needed more server capacity, Harrington says.

The revenue decline has trickled into the second quarter of this year as well, he says. The recession has created an uncertain environment that makes it hard to predict a turnaround in server revenue, he says. However, revenue could grow slightly year-over-year during the fourth quarter of 2009, driven partly by IT budgets opening up, according to Harrington.

Revenue fell more steeply for x86 servers than for Unix servers, IDC says. Systems with Unix OSes typically run mission-critical workloads, which makes it hard to reduce spending, Harrington says. Unix-based servers typically require very high levels of availability and are used by financial institutions such as stock markets and banks.

On the other hand, x86 servers typically run applications that are not as critical — such as email and print servers — and are also easier to spread across virtual machines.

"It's easier to freeze purchases on x86 [servers], which are a commodity at this point," Harrington says.

Revenue for x86 servers declined by 28.8% in the first quarter to reach US$5.1 billion. Revenue for non-x86 servers — including Unix systems — fell by 19.4% to reach US$4.8 billion.

IDC also saw a drop in blade system revenue, with towers gaining a larger share of the revenue mix. Blades can be expensive to set up, as they require a chassis as well as individual servers, Harrington says. Companies are not putting up the capital to buy blade systems, instead opting for the cheaper tower servers, Harrington says.

According to IDC's numbers, all major server vendors recorded revenue declines during the first quarter. Hewlett-Packard, the top vendor, recorded a 26.2% revenue drop to reach US$2.91 billion, a 29.3% market share. IBM came in a close second, with revenue at US$2.9 billion, a decline of 19.9%. It also had 29.3% of the market.

Dell and Sun were in a statistical tie for third place, according to IDC, with Dell at 11% and Sun at 10.3% of the market. Dell recorded the largest revenue decline of any major vendor, 31.2%, to reach US$1.09 billion. Sun, which was recently acquired by Oracle, had revenue of US$1.02 billion, a decline of 25.5%. Fujitsu was in fifth place.

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