Server Sales Slip in Q2, Follow PC Decline

Server sales are decliningIf declining PC sales have you down, it’s best you don’t look at the server sales numbers.

According to analyst firm IDC, worldwide server sales declined 6.1 percent in the second quarter, marking the second consecutive quarter of falling sales as businesses constrain their IT spending and work to maximize their existing infrastructure assets.

Worse news for server vendors and resellers: Shipment numbers fell 1.2 percent — the third consecutive negative period. The sharper revenue decline with the modest shipment decline means prices are under pressure and vendors are willing to make deals to move units.

“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,” said Matt Eastwood, group vice president and general manager of Enterprise Platforms at IDC.

Server declines are nothing like those of conventional desktop and notebook PCs, which have suffered five consecutive quarters of decline and are expected to fall as much as 11 percent this year. In the PC market, the declines are mostly due to end users keeping existing machines in service longer as they adopt mobile devices such as tablets and smartphones. Server declines, though, are more about the businesses from SMB to enterprise virtualizing existing infrastructure, curtailing data center spending and migrating more workloads to cloud computing services.

The number are telling for the major server vendors, which nearly all saw declines in the sale and marketability of their midrange and high-end servers.

Hewlett-Packard Co., the world’s second largest server vendor, saw its market share slip from 29.5 percent to 25.9 percent, as sales of its ProLiant and Integrity servers slipped. Revenues fell a whopping 17.5 percent, from $3.7 billion in the second quarter of 2012 to $3.1 billion in 2013.

The news at IBM Corp. isn’t much better, where declines in System X and Power System server sales brought down Big Blue’s revenue numbers by 10 percent. The good news for IBM is now the top server vendor, with a market share of 27.9 percent, which is just 1.2 percent off the share for the same period last year.

The two bright spots in the server report are Dell Inc. and Cisco Systems Inc., which each posted strong numbers.

Dell improved its server market share to 18.8 percent, up nearly 3 percent over the previous year, and increased revenue more than 10 percent.

Cisco improved market share by 1.5 percent to 4.5 percent overall, and revenues increased a staggering 42.6 percent. Cisco continues to press its virtualized servers as a complement to its networking infrastructure products. While the increase is impressive, the law of small numbers applies; it’s much easier to grow small numbers faster.

Where HP, IBM and Cisco are doing well is in blade and high density servers, which are in much stronger demand than conventional x86 and Unix rack-mount servers. IDC says businesses don’t just want performance, but also decreased data center footprints to maximize real estate utilization and decrease power and cooling costs.

Demand for mainframe systems, such as IBM’s System Z, increased as sales improved by nearly 10 percent. Demand for Linux servers increased 1.5 percent as more service providers adopt the platform to support their cloud products. And while demand for Microsoft Server products fell 5 percent, revenues remain steady, showing that Microsoft is maintaining price integrity.

The most worrisome aspect of IDC’s report isn’t the general decline in server demand, shipments and sales, but the reasons behind those declines. Businesses simply aren’t racing to upgrade or replace existing infrastructure. When replacements or expansions are happening, they’re more often going to cloud providers over conventional hardware. While this is good news for the cloud market, it’s not necessarily good news for the overall IT market and channel.

Servers are a $40-plus billion marketplace. While cloud computing is fast approaching $200 billion, that number is inclusive of all things in the cloud – including consumer services, applications, virtualization software, and more. The revenue shift isn’t one-to-one, meaning the shift will cause market contractions.

The vendor to watch is Lenovo, which is steadily increasing server sales and expanding products through partnerships with EMC. Speculation is Lenovo will by IBM’s System x unit, catapulting it into the top ranks of server vendors. Lenovo could prove increasingly problematic to HP and Dell, which are looking to servers as a driver of their respective recoveries.