Server shipments up, revenues down in 2013

server sales are up, but revenues are not followingThe server numbers are not good. According to analyst firm Gartner, 2013 worldwide server shipments — orders placed and delivered — increased a scant 2.1 percent. Unfortunately, server revenues declined 4.5 percent reflecting the commoditization of the basic building blocks of data centers.

Server sales had been trending down most of 2013, with initial estimates placing the decline around 6 percent for the year. The year may have been saved for server vendors and resellers in the fourth quarter, when shipments increased a healthy 3.2 percent. But the fourth quarter was a bloodbath in terms of revenue. Overall, server revenues declined 6.6 percent the last three months of the year. IBM Corp. took the biggest hit, with server revenues declining 28.9 percent, and basically dragged down the entire segment.

Dell Inc. saw server revenue decline 0.5 percent and Oracle Corp. posted at 4.7 percent decline. However, Hewlett-Packard Co. reported a 6 percent increase in server revenue and Cisco Systems Inc. registered a whopping 34.5 percent uptick.

IBM also led the server vendors in shipment declines. Big Blue reported 20.6 decline in server shipments, where Dell posted a 5.4 percent slide. All the other major vendors posted single digit increases ranging from 3.5 percent for Fujitsu to 8.7 percent for HP.

The standout vendor is Huawei Technologies Co. Although the China-based vendor isn’t generating enough revenue to standout in the top 5 server vendors, it posted 188 percent increase in shipments.

Gartner says enterprise server budgets remain constrained, particularly in the RISC and mainframe segments. Demand for x86 servers and blade servers remains strong, as they are the mainstay of the data centers and cloud infrastructure.

But what’s causing prices to fall? Increased competition, perhaps. Lenovo, Huawei and others are pushing more product into the market at aggressive price points. But the bigger culprit may be demand-side economics. Basic laws of supply and demand dictate that when demand is high and supply is low, prices are high. When demand and supply are both high, prices moderate. But when demand is high among fewer consumers who buy in bulk, the price advantage goes to the customer.

Cloud service providers are consolidating the demand side of the market. They are building massive data centers and infrastructure to meet the growing appetite for cloud services. Because they are buying in bulk, they are putting pressure on vendors and resellers to make price concessions and grant discounts.

This is likely having a compounding effect on the commoditization of servers. In the late 1990s and early 2000s, server vendors believed high-end servers such as Sun Microsystem’s SPARC-based platform and Hewlett-Packard’s Integrity servers would be the backbone of Web-based services, as they delivered performance and reliability.

The cloud, however, is built on low-end, low-cost x86 servers. Service providers are able to string enough of these devices together to get the performance and reliability they need at a lower cost. Moreover, virtualization has extended the utility and performance of low-end servers.

If these two trends are valid, 2014 could see server shipments increase while revenues continue to slide. For solution providers, this will mean increased pressure of server margins, as well as a need for adding more value to server-based deals to offset revenue losses.

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