The differences between the first quarters of 1998 and 1999 reveal a market in transition: Unit shipments of servers are up while revenue is down. For manufacturers selling servers at the low end of the market, the forecast is chilling.
The unit growth/revenue squeeze is in many ways highlighted by the experience of Compaq. Server sales, in terms of units, were up 53 percent in the first quarter of '99 for Compaq, while revenues pushed up 38 percent. However, as in the PC market, the average sale price declined. In the end, Compaq is selling more machines for less money.
By contrast, other companies that were able to attach services or other ancillary products to server sales managed to pull in more revenue while simultaneously selling fewer severs.
Worldwide unit shipments rose 23 percent to 772,000 from 627,000 between the first quarter of '98 and the same period in '99, but revenue declined a half percent, down to $13.8 billion from $13.9 billion, according to International Data Corporation.
At the same time, the average selling prices declined 20 percent between the two quarters, and IDC predicted that the trend would continue. Because of continued market consolidation, the top five server manufacturers earned 66 percent of the revenue, up from 58 percent a year earlier.
But for many companies, revenue did not jibe with the number of units shipped.
Compaq outdistanced competitors in terms of unit shipments. The company shipped 223,000 servers, up from 146,000 in the first quarter of '98--an increase of 53 percent. But while Compaq shipped more than twice as many servers as IBM, Big Blue took in more than $1 billion more in revenue. IBM increased server shipments by 39 percent, 108,000 from 78,000, Q1 to Q1.
Comparing Sun, which sells only RISC-based systems, and Compaq, which sold mostly PC servers during Q1, reveals the kinds of price pressures manufacturers face at the low end of the market. IDC reported the toughest pricing pressure is on servers below $200,000, while prices on systems over $1 million increased overall.
Compaq's ProLiant PC server accounted for 184,000 of the 223,000 servers it shipped in the first quarter, up from 115,000 a year earlier. The server line generated $1.2 billion in revenue, up from $867 million, a 38 percent increase over the first quarter of '98.
For Compaq, and also for Dell, the issue is margins, said Jim Williamson, research director for IDC.
"Compaq's PC server business is obviously still very healthy. The question is, can they do what Dell has done, which is maintain their prices? There have been some signs Dell is beginning to lower its prices, but for the most part they've been able to keep them where they have decent margins. Can Compaq do that?"
Compaq contends that, yes, there are price changes, but that they reflect changes in the market.
"Instead of becoming more price competitive, I would say that the market is broadening out," said Andrew Clark, director of marketing, planning and business operation for Compaq's Industry Standard Server division. "The implication of declining prices means there are price wars, reduced margins, and the business is becoming less healthy. That is not the case."
Manufacturers offering larger systems and bundling services and solutions, such as IBM and Sun, look better positioned to squeeze more margin out of their systems. The difference in strength of margins at the high end can be seen by looking at Sun, which sells only RISC-based servers.
Sun sold 340 of its high-end Ultra Enterprise 10000 servers during the first quarter, generating $250 million in revenue. The company also earned $200 million in revenue on the sale of 13,000 Enterprise 450 servers.
"If you look at the RISC-Unix market, Sun is eating everybody's lunch," Williamson said. Sun "has sold a very convincing story around a whole host of applications and markets. The Internet space has just done wonders for them."
There is no question prices are competitive at the low-end, but there are a number of factors affecting prices. The average price of a Compaq PC server sold through dealers in Q1 '99 was $4,156, down from $4,488 a year earlier, according to PC Data. The average for comparable HP servers was $3,293, down from $4,351. IBM's average PC server price rose to $3,406 from $3,193. PC Data does not track Dell, because it sells direct.
IBM led in terms of revenue--$3.1 billion, up 29.4 percent from a year earlier. Compaq followed with $1.9 billion in revenue, up 54 percent over the year-ago quarter's $1.2 billion. But adjusting for the June 1998 acquisition of Digital Equipment, Compaq gained less than 1 percent revenue year-to-year. Hewlett-Packard followed closely behind Compaq with $1.9 in revenue and flat growth.
Sun Microsystems' revenue grew 33 percent--$1.6 billion, up from $1.2 billion a year earlier. Fujitsu followed, with a 23 percent revenue decline--$670 million down from $870 million. Dell pulled up the rear but posted the best growth, 73 percent, with revenue of $590 million up from $341 million in Q1 '98.
Jim Gargan, IBM's director of product marketing for Netfinity server, disagreed with IDC's conclusions about declining revenue at the low end of the market but acknowledged there is no room for error.
"In the low-end of the server market, say under $2,000, if you're off by more than 10 percent of a particular price point, you could see a significant impact on what your revenues would be."