Advanced Computing in the Age of AI | Tuesday, May 17, 2022

Server Sales Pinched in Q3 by Hyperscale Datacenters 

It is not an easy time to be one of the big incumbents in the server market these days.

There is competition on new fronts and an expectation from customers to give a lot more bang for fewer bucks. Legacy Unix platforms continue to see plummeting sales, wiping out what used to be large profit pools, making it even harder for the top-tier server makers to compete against upstart manufacturers who are used to living on lower profit margins. Add in those companies who make their own boxes to save money and there is tremendous pressure on both revenues and profits.

All of this pushing and pulling is somewhat masked by the aggregate numbers put together by Gartner for the third quarter, except for those who remember when server shipments and revenues were both growing at a faster clip several years ago as we came out of the Great Recession.

In the third quarter, server unit shipments rose by 1.9 percent across all vendors, including those who build their own, to just a little over 2.5 million units. But because minimalist machines coming from original design manufacturers (ODMs) as well as those built by Google, Facebook, Baidu, and others for their own use are less expensive than the typical enterprise box, average selling prices are down. This is remarkable given that companies are buying heftier X86 servers to support their virtualization and private cloud efforts and, according to Intel, even hyperscale datacenter operators are buying more expensive processors for their machines. Add it all up, worldwide server revenues fell by 2.1 percent to $12.34 billion.

The X86 server market was the main driver of shipments and a large part of sales in the third quarter, as has been the case for the past several years. X86 server shipments were up 2.1 percent to 2.48 million machines, and revenues rose 4.4 percent to $9.78 billion.

The interesting part of the X86 market was not the incumbents – Hewlett-Packard, Dell, IBM, Fujitsu, and Oracle – but the Others category. First, Chinese server maker Huawei Technologies more than tripled its shipments in the quarter, which knocked Cisco Systems out of the top five rankings by shipments. (Just barely, mind you. Cisco shipped 66,524 machines using X86 processors in the third quarter compared to 69,573 for Huawei and 67,322 for Fujitsu.)

The Others category, which includes homemade machines from Google, Baidu, Facebook, and others as well as machines made by fast-growing Chinese vendors such as Inspur and Sugon, accounted for just over 1 million machines in the third quarter, up 15.6 percent year-on-year, and revenues grew by 15.4 percent to $2.57 billion for these Others. Inspur and Sugon, which are benefitting from a growing trend among Chinese companies to buy machines from indigenous vendors, had 64 percent and 61 percent shipment growth, respectively, in the quarter, Jeffrey Hewitt, research vice president at Gartner, tells EnterpriseTech. Lenovo, which doesn't sell many machines to hyperscale datacenters but rather mostly to enterprises, had only a 1 percent shipment bump. But if you add these four vendors together, they pushed a total of 204,000 machines in the Asia/Pacific region in the quarter, up 61 percent compared to a year ago.

Many of those machines might have been sold by IBM, HP, or Dell in years gone by.

As it has been for the past 70 quarters in a row (at least by Gartner's rankings), HP was the top server shipper, with 669,103 machines going out the door in the third quarter, up 5.4 percent. Most of these machines were based on X86 processors, but there are still some Itanium boxes in the mix running HP-UX, OpenVMS, and NonStop. HP accounted for $3.4 billion in server sales, up 2.2 percent.

Dell had an uncharacteristic slide in terms of both revenues and shipments, and Hewitt speculates that a couple of things might have hurt Dell. First was the effort to go private, which Dell completed in early November and which could have caused customers to pause until this was accomplished. Hewitt also says that it is possible that Microsoft, which relies on Dell for the servers behind its Windows Azure cloud and other services such as Office365 and Bing, might have pushed out some spending. He cautions that these are just guesses.

Dell had been growing both shipments and revenues for many quarters in a row, so seeing it drop shipments by 14.1 percent to 484,607 machines and revenues by 3.5 percent to $2.03 billion is a bit of a shock.

IBM also had a tough quarter, thanks in part to ongoing declines in the Unix market and difficulties in the X86 arena.

IBM's Unix server shipments were up 19 percent to 14,611 machines, but revenues were off 29.8 percent to $726.1 million. That revenue drop was basically in synch with the overall Unix server market, which fell by 31 percent to $1.29 billion. Those extra IBM shipments didn't lead to more money, which has to be frustrating for Big Blue. But IBM was also talking in late August about its forthcoming Power8 chip, due in the middle of next year, and with on the order of 2.5 times the performance of the current Power7+ chips, socket for socket, you can't blame AIX shops for waiting for Power8 if they can.

But Unix has bigger problems than a Power8 wait state. Unix system sales have been dropping like a stone for many years, even as companies put out successive generations of sophisticated and vertically scaling NUMA machinery. The reason is simple. Many of the workloads that drove the Unix business in the 1990s – workstations, electronic design automation, and high performance computing – have long since shifted to X86 platforms, usually running Linux. Basically, Unix systems are relegated to running large relational databases. This is an important and viable business for the server makers, but it is questionable that this part of the market can support four different processor architectures with X86 machines getting larger and larger core and memory footprints. Particularly when only 27,649 Unix machines shipped in Q3, a 4.5 percent decline from a year ago. That is about a quarter of the Unix server volumes during the dot-com boom.

"Everybody has these projects to move to Linux," says Hewitt. "We have been talking for some time about a tipping point in Unix, and I think that we are past that point. It will have to level off, but it won't be like mainframes. Moving from the mainframe is just too painful, while Linux is very much like Unix and it is easier to move."

IBM is fighting back, of course, with Power-based systems that are priced to compete head-to-head with X86 iron running Windows workloads, but this is still not a significant portion of the company's Power Systems sales.

On the X86 front, rumors about IBM selling off all or part of its System x and BladeCenter X86 server businesses probably did not help during the third quarter, Hewitt conjectures. IBM had a 29.8 percent shipment decline, to 185,634 X86-based machines, and its revenues from these servers fell by 17.6 percent to $1.17 billion. In the United States, IBM's X86 server shipments contracted by 39 percent by Gartner's reckoning. That is the kind of pause the Great Recession caused, just to give you a scale.

Cisco is no longer an upstart, but a player in the enterprise. The company grew shipments by 18.9 percent worldwide to 66,524 boxes and they drove up revenues by 42.7 percent to $599.3 million. It will be a long time before Cisco can topple IBM as the number three server maker, even if current trends persist. The odds of this happening are slim, unless IBM does indeed sell off its X86 server business to Lenovo as rumored.

IBM's venerable System z mainframe business was a bright spot for its third quarter, and this product line accounted for most of the sales of iron that is not based on X86, RISC, or Itanium chips. Collectively, this group of proprietary iron had a 7.8 percent revenue jump in the third quarter.

Looking ahead, Hewitt offered EnterpriseTech a sneak peek into its 2014 forecast. At the moment, the crystal ball on Hewitt's desk (really a multidimensional spreadsheet) is calling for worldwide server shipments to be up 3 percent next year. With average selling prices up a bit, this will drive a 4 percent revenue increase.

Hewitt admits that the interplay between enterprise server spending and hyperscale datacenter server spending is a big question, because in many cases it is a situation of "borrowing from Peter to pay Paul," as he put it. As companies move some workloads to the cloud, and still other companies never buy their own servers in the first place, there is a shift between the two types of machines and the consequent average selling price of a box. The more who shift to the cloud, the lower the ASP and therefore the lower overall revenues in the server market at large.

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