Has the Worldwide Server Market Rebounded?

In August of 2013, the worldwide server market revenue was down 6.2% from the previous year to $11.9 billion. In many geographic regions, the demand continued to soften. According to International Data Corporation (IDC), a decline of 2.4 % in volume systems combined with a reduction in midrange and high-end systems of 22.3% and 9.5% respectively. At that time, the leading server vendors began to implement strategies to offset this weak demand through bold competitive positioning. Unfortunately, they did not realize and gains for several quarters.

 Third Quarter Decline Continues

Despite the efforts of industry leaders, the factory revenue of the server market decreased 3.7% from the previous year to USD $12.1 billion. Part of the decline was attributed to the normal server demand cycle. These Q4 figures represented a look-forward to the refresh cycle expected in early 2014.
During this time, despite the overall trend, volume systems enjoyed an improvement over the previous year’s revenue of 3.5%. This was attributed to the solid x86 server demand. In contrast, midrange and high-end system demand fell 17.8% and 22.5% respectively. The continued weakness in Unix server installations was another major contributor to this decline.
First Quarter Expectations Dampened
The first quarter refresh cycle did not meet expectations for revenue growth recovery. The Worldwide Quarterly Server Tracker, a metrics tool created by the IDC, reported a 2.2% revenue decrease over the previous year. The total revenues totaled $10.0 billion, which represented the fifth straight quarter of declines in a row. The good news was that the volume server demand continued to grow. Deliveries reached 2.1 million units to show a 2.1% year over year improvement. Unfortunately, investments in hyperscale datacenter technology were effectively offset by consolidation. Experts expected this trend to continue as both small and large customers chose consolidation as a strategic focus.

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During this quarter, revenue for volume systems grew 3.9%, representing the fourth quarter in a row of sustained revenue gains. Meanwhile, demand for midrange and high-end system continued to fall from previous years, coming in at 4.8% and 25.6% decreases respectively.
The largest contributor for these values appeared to be the emergence of the 3rd Platform.  The increased use of big data, social enablement, and mobile systems drove the deployment of hyperscale servers globally. Simultaneously, traditional client-server systems continued to drive private cloud installations. Overall, the server environment concentrated computing power into fewer, larger enterprise providers around the world.
Worldwide Server Market Rebounds in Q2 2014
As the market refresh cycle continued from the first quarter, IDC reported an overall rise in revenues of 2.5% to 12.6%. Server unit shipments rose to 2.2 million units representing a 1.2 % year over year increase. This was bolstered by the continued move toward consolidation by the industry.
During this time, revenue for volume systems continued a five-month growth pattern to yield 4.9%. For the first time in several cycles, midrange systems also enjoyed a growth, coming in at a 11.6% increase. High-end systems were not able to follow the same positive trend. Annual comparisons in the segment drove revenue numbers to a decline of 9.8%.
Gains Credited to the Strengthening Refresh Cycle
Experts attributed strength in the critical refresh cycle to the turnaround of the worldwide server market. This refresh cycle occurred when the systems that were deployed immediately after the financial crisis were retired and replaced. IDC expected this refresh cycle to continue well into 2015. As hardware was refreshed, software was upgraded. In addition, that cycle was bolstered by the Microsoft announcement that Windows Server 2003 would be removed from marketing and no longer supported. This announcement was coupled with the news of Intel’s forthcoming release of the Grantley Xeon EP, as well a number of related server platform releases.

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In this same cycle, IDC saw increased enterprise investment in 3rd Platform workloads. These were expected to take advantage of the Webscale architectures normally seen in a hyperscale environment. These workloads are expected to drive the increased need for serves in the next generation datacenter infrastructures.
Second Quarter Breakdown by Servers
Following are the most recent market findings for the top servers:

• x86 servers – continued to perform strongly in the market, with revenues increasing 7.8% from the previous year totaling $9.8 billion worldwide. This represents a unit increase of 1.5% to 2.2 million x86 servers.
• Non-x86 servers – suffered a 12.8% revenue decline year over year for a total of $2.7 billion. This decline has been part of a trend lasting 12 consecutive quarters.
• Blade servers – increased 7.0% to $2.1 billion. This was attributed to their fundamental use as part of virtualized and converged environments. Blade servers have come to account for 17.0% of total server revenue.
• Density optimized servers – forming the backbone of large homogeneous datacenters, did not fare as well. These experienced a poor year over year comparison due to large deployments in Q2 2013. Revenue declined 7.6% to $768 million while server shipments decreased 16.1% to 216,314 units.

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Will Positive Trends Continue Through 2015?
From the time the downward trend began in Q2 2013, the market anticipated a turn-around. This did not occur until a year later. Even then, the gains were comparatively modest, and did not recover to the levels present before the previous four-quarter decline. Analysts have yet to see whether the positive direction will continue, or whether the market simply paused on the way to further decline. The main consideration points are:

• What number of server systems is currently being retired per year and are the right server products available to replace those servers currently in service?
• What is the next generation chip architecture? Will this architecture be accepted in the market, and in what quantities?
• What platforms are declining in the installed base?

Although the overall server installed base is growing, most of the growth is driven by the volume server space. Meanwhile, analysts must examine the metrics in a different way as the current installed server landscape is transforming. This change is occurring as proprietary CISC systems are speedily being retired and server consolidation gains momentum as the use of multicore processors and virtualization increases. Another factor is a shift in datacenter environmental controls as users seek to support aging equipment through more sophisticated power and cooling techniques.

Summary

These factors support IDC’s contention that the refresh cycle will continue strongly into 2015, and that the worldwide server market will continue to see increases overall.
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