Server Sales Immune to Economic Sluggishness

Sales of its System z mainframes helped propel IBM to the top of the server market. Unix server sales were also up.

In spite of a worsening world economy, server sales are doing just fine. What's more, global sales of System z mainframe led the charge, helping catapult IBM Corp. to the top of the server market.

According to the latest data from market watcher IDC, far from slowing or even remaining flat, server sales are actually accelerating.

IBM Corp. led the market, generating fully one-third of all server sales. Big Blue has an ace up its sleeve when it comes to server market revenue, however: its System z mainframes, which -- compared to the low-price, low-margin x86 servers that are the bedrock of the volume segment (and which enable IBM competitor Hewlett-Packard Co. to habitually claim unit shipment bragging rights) -- are a high-price, high-margin business.

Big Blue's System z helped bring home the bacon in Q2, says IDC. Thanks to robust sales of its System z and System p (IBM's RISC-Unix/Linux platform) servers, Big Blue grew its revenue by almost 14 percent in the last year.

HP was number two, generating 22 percent of all server sales, but posting only 3.1 percent growth. HP's growth is due to strong sales of its Integrity (Itanium) and BladeSystem products. Dell Computer Corp. leapfrogged Sun Microsystems Inc. to come in third (grabbing a nearly one-seventh share of server market revenues), while Sun slouched to a fourth place finish, notching a 7.2 percent decline in year-over-year sales.

It was an extremely encouraging quarter from a System z perspective: IBM's mainframe platform posted 31.7 percent year-over-year growth in Q2, showing $1.6 billion in sales. The upshot, IDC says, is that Big Iron systems running z/OS comprised almost 12 percent of all servers sold in the second quarter of 2008.

There are a few thought-provoking caveats to IDC's otherwise robust growth forecast. While the global server market grew by 6.4 percent in Q2 (reaching almost $14 billion), volume system sales actually underperformed the market for the first time since Q4 of 2006. (Volume systems are those that cost less than $25,000 U.S.) IDC attributes this to "strong pricing pressure" among server OEMs.

Conversely, high-end sales (e.g., IBM System z mainframes, or high-end IBM System p and HP Integrity servers) outperformed both the volume and midrange segments, growing by 22.1 percent year over year. That marks the second consecutive quarter in which high-end sales have outstripped both groups. It's a key reason why IBM -- a prominent champion of high-margin mainframe systems -- grew its revenues at such a heady rate.

High-end revenues were not the only strong growth area. Mid-range server and blade system shipments also grew by leaps and bounds.

"Customers around the globe continue to deploy a wide range of technologies to meet their computing needs and as a result IDC saw strong growth in blades, Unix systems, and IBM System z demand across the marketplace. Diversity in market demand demonstrates customers do not believe a single standardized infrastructure is capable of meeting all their computing needs," said IDC vice-president Matt Eastwood.

Eastwood and IDC are troubled by a slowdown in the volume segment, however: "[T]he pricing challenges many OEMs experienced, particularly in the x86 server market, is a concern as it may foreshadow a slowdown in market demand as enterprise budgets face further scrutiny in the second half of 2008."

One reason for this, IDC notes, is that the recent spike in midrange and high-end server revenues is anomalous. "The refresh cycle we're currently seeing in the midrange and high-end segments is part of the IT transformation cycle that is continuing as older, scalable systems [for example, systems with 4 or 8 sockets] are being replaced, either by new scale-up servers or by groups of scale-out servers," said IDC's Jean Bozman, in a statement.

"The growth in midrange and high-end servers this quarter shows that customers still see value in leveraging these scalable servers, with built-in high availability and RAS features, for some of their most mission-critical workloads and for workload consolidation."

A case in point is the Unix server segment. Prior to Q2 of 2008, Unix server sales seemed to be trending downward:2006's tally was off by 1.6 percent from that of 2005; 2007's tally was off by 4 percent from that of 2006.

As if in defiance of an all-but-codified downward trend, however, Unix server sales actually surged in Q2 of 2008 -- growing at nearly 8 percent to surpass $4.6 billion. Just last year, the Unix server segment coughed and wheezed its way to a $4.2 billion finish. This time around, Unix server sales spiked; Big Blue was the biggest beneficiary.

"IBM regained the top spot in Unix market share on the strength of its Power-based System p and merged Power Systems families, growing revenue nearly 25.7 percent in the quarter and gaining 5.1 percentage points in year-over-year comparisons," said IDC's Steve Josselyn, in a prepared release. Here, too, Sun was particularly hard hit, according to Josselyn. "Sun took second position with 31.1 percent share, posting a drop of 5.6 percentage points from a year ago, and HP rounds out the top three with 25.8 percent share and a gain of 1 percentage point," he said.

The upshot, Josselyn concludes, is that reports of the Unix server segment's death have been greatly exaggerated: "Overall, the Unix market remains a significant source of revenue and competition among the top three suppliers."Linux Growth

Elsewhere, the Linux server segment notched strong growth, too. Linux revenues grew by 10 percent over the last 12 months, while Linux itself now accounts for 13.4 percent of all server market revenues. That's a 44 percent increase over last year. Surprisingly, sales of Microsoft-based servers were essentially flat, posting just 1.7 percent year-over-year growth. Windows itself still accounts for the biggest overall segment of IT spending, generating 36.5 percent of all server revenues in Q2.

For the quarter, x86 servers -- which traditionally put the volume in "volume server segment" -- notched their slowest growth rate in almost six years, 3.0 percent year-over-year to reach $7.0 billion.

"Low-end volume servers, such as 1- and 2-socket systems, are somewhat viewed as commodities and experienced the most pricing pressure. Additionally, the quarter was made noteworthy by the fact that several of the tier-one vendors began shipping their new systems targeting large-scale datacenters," said IDC's Jed Scaramella, in a statement. "Typically, these are stripped-down servers that are designed to operate at maximum power efficiency. All components and features that are not essential, including server redundancy, are eliminated to reduce the capital expenditure of these datacenter customers."

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