In the world of computer hardware, servers are sexy. They're more profitable than desktop and notebook PCs. They're more complicated, too. And they drive sales of high-margin add-ons such as storage systems, software, and services.
Servers are a high-stakes game, and things are getting tougher for the weaklings. The Big Three server vendors -- IBM (NYSE: IBM), Hewlett-Packard (NYSE: HP), and Dell (Nasdaq: DELL) -- raked in more than 78% of worldwide server revenue of $48 billion in 2010, compared with less than 75% in 2009. Worldwide revenue grew by more than 11% in 2010, helped by pent-up demand created during the recession.
Location, location, location
Industry-standard, or x86, servers saw revenue growth of 29% in 2010 and 21% in the fourth quarter. These servers use "standard" microprocessors from Intel (Nasdaq: INTC) or Advanced Micro Devices (NYSE: AMD) and accounted for 60% of server revenue for the quarter. The clear leader is this segment is HP, with a 39% share of revenue. Dell is a distant second, with a 21% share. IBM isn't far behind, in third place with 19%. Fourth- and fifth-place honors go to Fujitsu and Oracle (Nasdaq: ORCL), with 4% and 3%, respectively.
The biggest loser
At the other end of the spectrum is Oracle. After spending more than $7 billion to acquire server vendor Sun Microsystems in January 2010, Oracle saw its server revenue decline by 14.0% in 2010, as overall market revenue grew by 11.4%. The situation worsened in the fourth quarter, when Oracle's server revenue fell by 14.4% as overall market revenue grew by 15.3%. To be fair, though, Sun is predominantly a supplier of Unix servers, a segment that accounts for about one-fourth of worldwide server factory revenue and that experienced a 0.4% revenue decline year-over-year in the last quarter.
Following is the full market-share breakdown for the fourth quarter and all of 2010, as compiled by researcher IDC.
Fourth-Quarter 2010 Worldwide Server Systems Factory Revenue
|
Vendor |
Q4 2010 Revenue |
Market Share |
Q4 2009 Revenue |
Market Share | Q4 10/Q4 09 Revenue Growth |
|---|---|---|---|---|---|
| 1. IBM |
$5,592 |
37.4% |
$4,587 |
35.4% |
21.9% |
| 2. HP |
$4,470 |
29.9% |
$3,950 |
30.4% |
13.2% |
| 3. Dell |
$1,887 |
12.6% |
$1,489 |
11.5% |
26.8% |
| 4. Oracle |
$883 |
5.9% |
$1,032 |
8.0% |
(14.4%) |
| 5. Fujitsu |
$541 |
3.6% |
$597 |
4.6% |
(9.4%) |
| Others |
$1,586 |
10.6% |
$1,321 |
10.2% |
20.1% |
| All Vendors |
$14,960 |
100% |
$12,975 |
100% |
15.3% |
Source: IDC. Revenues in millions.
2010 Worldwide Server Systems Factory Revenue
|
Vendor |
2010 Revenue |
Market Share |
2009 Revenue |
Market Share | 2010/2009 Revenue Growth |
|---|---|---|---|---|---|
| 1. IBM |
$15,356 |
31.9% |
$14,153 |
32.7% |
8.5% |
| 1. HP |
$15,324 |
31.8% |
$12,888 |
29.8% |
18.9% |
| 3. Dell |
$7,014 |
14.6% |
$5,227 |
12.1% |
34.2% |
| 4. Oracle |
$3,279 |
6.8% |
$3,812 |
8.8% |
(14.0%) |
| 5. Fujitsu |
$2,194 |
4.6% |
$2,194 |
5.1% |
0.0% |
| Others |
$4,970 |
10.3% |
$4,944 |
11.4% |
0.5% |
| All Vendors |
$48,137 |
100% |
$43,218 |
100% |
11.4% |
Source: IDC. Revenues in millions.
Winner's circle
The biggest winner in terms of revenue was Dell, which grew server revenue by 34% in 2010 and 27% in the fourth quarter. Those figures compare favorably with the market for the industry-standard servers that Dell makes, which had revenue growth of 29% for 2010 and 21% in the fourth quarter. Dell's share gains were, however, slowing late in the year.
IBM was another big winner in terms of revenue -- and likely the winner in terms of profit. Big Blue reported its fastest quarterly growth ever for high-margin mainframes. The company doesn't disclose margins for its various hardware platforms, but mainframes are widely believed to drive far greater profits for IBM than lower-end servers do. Revenue from IBM's System z mainframes increased by a whopping 69% form the year-ago quarter on the heels of a product-line enhancement.
Still No. 2?
Hewlett-Packard grew its server revenue by 19% for the year. That jump resulted in a market-share gain that left it nipping at IBM's heels. But in the fourth quarter, revenue growth of only 13% widened the gap behind No. 1 IBM, while No. 3 Dell closed in.
In industry-standard servers, HP's revenue grew by 32% in the 12 months ended in January -- a nice showing compared with Dell's 26% growth over essentially the same time frame, especially since Dell’s growth includes the addition of an unspecified amount of networking equipment. Though HP benefited from strength in its industry-standard server line, flat market demand for Unix and midrange offerings was a drag on the company's overall server growth. This part of HP’s business is likely to bog things down, as the industry continues moving away from proprietary Unix offerings.
Foolish takeaway
The Big Three server vendors gained market share and raked in almost 80% of revenue last year. A rebound in spending as the economy recovered, coupled with product updates, contributed to strong growth at both the low and high ends of the market. It was a year that proved the strong get stronger and the weak get weaker.
Servers and the add-on sales they pull through carry high margins, so they're important profit drivers for each of the Big Three vendors. In the first half of 2011, IBM is likely to expand its lead over Dell and HP, with IBM benefitting from easy comparables early on. Dell and HP are likely to continue gaining overall market share from weaker players, but they face tougher comparables in the first half. With their growth slowing at the end 2010 as IBM’s growth was accelerating, IBM appears to be the best positioned of the Big Three for the next few quarters.
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