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Good News and Bad News for Server Makers

June 2, 2016, 12:56 PM UTC
Servers in the data center
Photograph by Getty Images

The number of servers sold worldwide grew just a scooch in the first quarter, while total server revenue dipped, according to new numbers from market research firm Gartner.

For the first quarter of 2016, Gartner (IT) said revenue from server sales fell 2.3% to $13 billion from almost $13.4 billion for the comparable period last year. But the number of total boxes shipped rose 1.7% to just over 2.7 million from 2.66 million.

(For comparison purposes, Gartner’s fourth quarter numbers showed that worldwide server revenue grew 8.2% while unit shipments rose 9.2%)

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The latest figures are another indication of a key trend in modern IT, and one that’s got traditional server makers—the Dells, the Lenovos (LNVGY), the HPEs (HPE) of the world—on the defense: More big web-scale companies are designing their own servers and having them made by contract manufacturers instead of buying name-brand servers.

Massive cloud providers also known as “web scale” or “hyperscale” companies include Amazon (AMZN) Web Services, Microsoft (MSFT), Google (GOOG), and Facebook (FB). These companies deploy thousands upon thousands of servers in their data centers, divvying the work among them. When one fails, the applications are designed to reconfigure around the bad box, which gets swapped out.

This is what is called “scale-out” computing as opposed to the “scale-up” model exemplified by Oracle (ORCL) Exadata servers or mainframes where a single, albeit very powerful computer takes on big workloads. While those big boxes suit some enterprise situations, it’s clear that more companies are offloading at least part of their work to cloud providers, which means they buy fewer servers less often than they had in the past. That’s the pinch the branded server manufacturers have found themselves in.

Bye-Bye HP. It’s the End of an Era

The big growth server vendors per this report are Huawei and Inspur, which showed 24% and 19% unit growth respectively year over year, albeit that growth came off a much smaller base compared with the other server companies. Neither of those companies cracked the top 5 list in terms of revenue. Or, as Gartner analyst Jeffrey Hewitt put it in a statement:

The real driver of global growth continues to be the hyperscale data center segment. The enterprise and small or midsize business (SMB) segments remain relatively flat as end users in these segments accommodated their increased application requirements through virtualization and considered cloud alternatives.

In terms of revenue, HPE held onto the top slot with 25.2% market share and server revenue of nearly $3.3 billion, up 3.3% from a year ago. But it shipped slightly fewer servers year over year. Dell remained No. 2 with 17.3% share, but revenue dipped 1.4% to $2.26 billion from $2.29 billion a year ago. IBM was third at 9.7% market share but saw its revenue decline a whopping 32.7% year over year to $1.27 billion from $1.89 billion a year ago.

gartner server numbers

Gartner’s findings diverged slightly from figures from rival research firm IDC, which found that both server revenue and unit numbers slipped in the first quarter. According to IDC, server revenue fell 3.6% year over year to $12.4 billion total and server shipments were off 3% to 2.2 million.

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In a statement, IDC attributed the declines to both an end to an enterprise server refresh cycle and to a “pause in hyperscale cloud expansion.”