In the world of corporate IT, a postrecessionary rising tide doesn't always lift all boats. Tech companies with the right products will end up growing a lot faster than Wall Street expects, as businesses redo their IT budgets to focus on new priorities. And the ones that aren't well-positioned will be left wondering why the good times still haven't returned. The latest server market-share data from Gartner and IDC drive this point home -- and it's nothing for Sun Microsystems (Nasdaq: JAVA ) and Oracle (Nasdaq: ORCL ) investors to take lightly.
Sun's server business was already in dire straits going into the third quarter. In the second quarter, IDC estimated that Sun's server revenue declined by about 37% annually. Archrivals IBM (NYSE: IBM ) and Hewlett-Packard were bent on taking advantage of the uncertainty surrounding the Sun-Oracle merger to steal market share from Sun, and they had some success doing it. But at least the company's competitors weren't faring much better, with total industry revenues down by 30%.
Well, the Q3 numbers are now out, and they present a much different picture. The broader server market is showing signs of a rebound. Thanks to double-digit sequential growth, Gartner and IDC both estimated that the market declined by only 17% annually. But they estimated that Sun's revenues fell by 32%-35%. Any way you cut it, that's a sizable market-share decline.
Sun's loss is Dell's gain
Why isn't Sun bouncing back the way its competitors are? Continued pressure from IBM and HP is definitely one factor: During its Q3 conference call, IBM reported that its System p line, which competes head-on with Sun in the UNIX server space, took another five points of market share. But another factor is the recovery being seen in the x86 server market.
These servers, which run on Intel (Nasdaq: INTC ) and AMD (NYSE: AMD ) microprocessors and tend to be cheaper than Sun's flagship gear, have been gaining share for a number of years. During the recession, this trend reversed itself for a little while. However, with Intel's and AMD's next-generation Nehalem and Barcelona chips now out, and businesses loosening their purse strings a bit, x86 servers are gaining share once again.
IDC saw only a 12% annual decline for x86 hardware in Q3. That's good news for Dell (Nasdaq: DELL ) , which focuses on x86 servers, and whose annual revenue decline was estimated by IDC at only 6.8%. But it's also making a bad competitive situation worse for Sun, for which x86 hardware accounted for only 19% of server billings in the last quarter.
It's an open secret that Oracle is primarily interested in Sun for its software assets. But in light of the free-fall in the latter company's server business, it's worth asking whether those assets are worth the risks that Oracle will be assuming. Especially if the European Union forces Oracle to make concessions regarding Sun's MySQL database business, an asset that Oracle particularly covets.
On the flip side, the x86 server recovery has to be welcome news for Dell investors. With Dell succeeding in becoming more of a soup-to-nuts IT solutions company, rather than a mere hardware vendor, the server business could buffer the company a little from the struggles of its PC business. And it's also good news for VMware (NYSE: VMW ) , whose virtualization software is targeted at x86 systems.
As always, an IT spending rebound is producing leaders and laggards. Oracle is about to assume control of one of the laggards -- and if past acquisitions of such companies are any guide, the company's headaches are just beginning.