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IBM gains in shrinking server market

Big Blue widens its lead in a drastically shrinking server market, gaining against once-feared Sun and the possible duo of HP and Compaq.

IBM widened its lead in a drastically shrinking server market during the second quarter, gaining against once-feared Sun Microsystems and the possible duo of Hewlett-Packard and Compaq Computer.

IBM server revenue increased from $3 billion to $3.2 billion, a 5.3 percent rise from the second quarter of 2000. Big Blue now controls more than a quarter of the total market, according to market researcher IDC. The growth is evidence of the success of its efforts begun in 1999 to recover from Sun's gains.

In Sun's core turf--the $5.7 billion market for Unix servers--IBM's market share increased 4.1 percent to 21.2 percent, while Sun lost 3.8 percent to drop to 35 percent.

IBM still isn't larger than a potentially combined HP and Compaq, but it has narrowed the lead dramatically over the past year--a worrisome trend for HP given its hope that its proposed acquisition of Compaq will create a company "strong enough, bold enough, and talented enough to take (IBM) head-on in the enterprise space."

In the second quarter last year, HP and Compaq combined had $4.5 billion server revenue--$1.5 billion ahead of IBM. But this year, the combined $3.6 billion is only about $400 million ahead of IBM's $3.2 billion.

IBM's gains come as a slowdown in tech spending has hammered the market for servers, the networked computers that handle mammoth tasks such as recording credit card transactions for Visa or more modest jobs such as hosting a family's Web site.

The overall market shrank 16.2 percent in the second quarter, from $14.4 billion to $12.1 billion, IDC said. It was the second consecutive loss, but the second-quarter drop was quadruple the first quarter's 4 percent loss.

"This is the biggest decline that the server market has experienced over the past five years," Vernon Turner, IDC's vice president of global enterprise server solutions, said in a statement. "Even though we knew that the server market would be affected by the economic situation, we did not expect a decline of this magnitude."

Server scene
Here is a breakdown of server sales in the second quarter.
Company Revenue Change from Q2 2000
IBM $3.2 billion 5.3 %
Sun $2 billion -24.2 %
Compaq $1.9 billion -23.1 %
HP $1.6 billion -18.9 %
Dell $844 million 0.2 %
Overall market $12.1 billion -16.2 %

Source: IDC

Unit shipments also declined 3 percent in the second quarter to 1.04 million, IDC said.

IDC has been scaling back its forecasts for months. In September 2000, the company projected a 7 percent growth in revenue from 2000 to 2001. By August, IDC had reduced its forecast to 5 percent growth, with expectations that the figure could still be at least 1 percent too high.

Dell Computer, the smallest of the top five server sellers, was the only company besides IBM to increase its revenue, but the growth was only 0.2 percent from $842 million to $844 million, IDC said. And that sliver of revenue growth also highlights shrinking profit margins: Dell's unit shipments increased 31 percent from the year-ago quarter.

In the overall market, revenue from No. 2 seller Sun dropped 24.2 percent from $2.6 billion to $2 billion. No. 3 Compaq dropped 23.1 percent from $2.5 billion to $1.9 billion, and No. 4 HP dropped 18.9 percent from $2 billion to $1.6 billion, IDC said.

Linux and Windows
In the Linux server market, Compaq is the leader, with $119 million in sales for the quarter--a 14.4 percent decrease from the $139 million in the year-ago quarter. No. 2 Dell increased 33.9 percent from $59 million to $79 million, while No. 3 IBM increased the most, 39.5 percent from $43 million to $60 million, IDC said.

IBM has embarked on a major campaign to boost Linux across its four major server lines.

The Windows server market, with $2.9 billion in sales for the quarter, remains larger than the Linux market's $415 million.

Compaq was the top Windows server seller, with $863 million in sales, a 24 percent drop from the year-ago quarter. Second-place Dell grew 3.7 percent to $618 million, while third-place IBM grew 4.2 percent to $372 million. Fourth-place HP had the deepest loss, 24.5 percent to $294 million.

Server sales shrank in all regions, but the United States was hit worst with a 25 percent loss, IDC said. Japan's server market shrank 20 percent, while Western Europe's shrank 8 percent.

Despite the drops, one area of the server market grew: the models designed to be bolted into racks, sometimes by the dozen. Rack-optimized server unit shipments grew 46 percent while revenue grew 13 percent. Revenue for the rest of the server market dropped 23 percent.