Shifting Sands: How The Server Hosting Market Is Changing

TO MOST people, a computer is a device with a screen and a keyboard, sitting on their desk or on their lap. More and more of them have tablets and they may recognise their mobile phones as powerful computers too—for that is what they have become. But a lot of the world’s computing power is hidden, in servers that communicate with all those personal devices, power the information-technology departments of companies, governments and research institutions, and sit blinking in rack upon rack in the vast data centres of Amazon, Facebook, Google and the rest of the growing cloud.
That the market for personal computers is in upheaval is well known. Sales of desktop and laptop PCs have been declining at a double-digit annual rate. IDC, a research firm, said this week that it expected more tablets than portable PCs to be shipped this year. Companies that thrived on the PC, such as Hewlett-Packard (HP) and Dell, have struggled in a more mobile world. Less visibly, the market for servers—worth more than $50 billion last year, estimate both IDC and Gartner, another research firm—is shifting too. One leading supplier, IBM, has been negotiating to sell part of its business. Two others, HP and Dell, have been sniping at each other. And these days some of the biggest customers are designing and building their own machines.
On May 28th Gartner published its quarterly survey of the server market. The squeeze on corporate budgets means that sellers must fight over a shrinking pie. Although sales in America and the Asia-Pacific region rose, global revenues were 5% lower in the first quarter of 2013 than they had been a year before. The number of units shipped fell by 0.7%. IDC’s figures, released a day later, showed steeper declines. Both suggest that four of the top five vendors by revenue (IBM, HP, Fujitsu and Oracle) had falling sales (see chart).
By revenue IBM, whose servers are aimed at the higher end, is ranked first by Gartner and second by IDC. It has been feeling the pinch. In April, after its last quarterly results fell short of expectations, it replaced the head of its hardware group. It was talking to Lenovo, a Chinese company which bought its PC operations in 2005, about a sale of part of its server business. However, talks recently broke down, apparently because IBM sought a higher price than Lenovo was willing to pay.
Of the top five vendors, only Dell enjoyed an increase in sales, of 14.4% according to Gartner; HP drooped by the same proportion. Lately Dell has been crowing that the research firms’ numbers would show that it enjoyed a bumper quarter at HP’s expense. Meg Whitman, HP’s chief executive, retorted that Dell had “completely crater[ed]” its earnings. Dell, whose founder, chief executive and largest shareholder, Michael Dell, has offered to take the company private, reported in mid-May that its profits had fallen by 79% in its most recent quarter. But it did sound much chirpier about its servers and networking business than about its PCs.
In servers, Ms Whitman added, HP had walked away from deals that did not pay enough. But Dell seems to be doing more than flogging cheap servers at daft prices: Gartner’s figures suggest that its average revenue per unit went up by 11.5% in the year to the first quarter, while HP’s rose by only 1%. Jeffrey Hewitt of Gartner notes that Dell has always priced keenly. Lately, he suspects, that has been winning it business not only at the low end of the market but also with more sophisticated products.
But perhaps the most important shift in the server business is not among the leading names, but away from them. Cisco, best known for making the switches and routers that direct data around the internet, saw its server sales jump by a third in the past year. And the giants of the internet are a new sort of customer: they are creating their own designs and buy from contract manufacturers, notably in Taiwan. Thus the huge data centres Facebook is building in America and Sweden contain servers supplied by Quanta Computer, a Taiwanese maker of PCs for Apple, HP and others that branched into servers a few years ago. Rackspace, a fast-growing American cloud-computing company, also plans to deploy servers built by Quanta in a new data centre on the east coast.
Combined, all the contract manufacturers and self-builders would be the fifth-biggest vendor of servers based on the “X86” architecture (which make up most of the market), with a share of 4.8%, Gartner estimates. Their sales went up by 34.5% in the past year. One limit to their expansion, says Mr Hewitt, is customers’ expertise. “Not everyone has the wherewithal of a Google or a Facebook,” he says. Even so, the server market has become a more crowded, more fluid place.