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Y2K fears weigh down server sales

Server sales drop unexpectedly during the third quarter, in part due to fears and preparation for the Y2K bug, with IBM feeling the most pain.

Top server makers 3Q 99, worldwide
% change
IBM $3.1 billion -29%
HP $1.9 billion +2%
Compaq $1.9 billion +9%
Sun $1.7 billion +18%
Dell $619 million +40%
Source: International Data Corp.
Server sales dropped unexpectedly during the third quarter, in part due to fears and preparation for the Y2K bug, with IBM feeling the most pain.

International Data Corp. today reported "significant weakness" in the worldwide server market, with revenue coming to $13.5 billion, a decline of 10 percent from a year earlier.

The purchasing slowdown apparently stems from companies with large data centers "locking down" their operations for fear of losing data or interrupting their business because of the Y2K bug. With the lockdown, purchases of mainframes and large servers dropped, according to IDC, although some companies saw growth through servers dedicated to e-commerce.

While IDC would not specifically forecast results for the fourth quarter, the current trend suggests at best a flat growth or a decline of 5 percent, largely related to the Y2K slowdown.

The Y2K technology bug is a programming glitch that could cause some computers to mistake the year 2000 for 1990, possibly affecting the functioning of the computer or related systems. Many companies are preparing for Y2K's first effects when the date rolls over to Jan. 1, 2000 later this week.

Y2K's effects are best understood by contrasting the first quarter, when sales were strongest, to the third quarter. Worldwide unit shipments in the first quarter rose 23 percent from a year earlier with revenue of $13.8 billion. Typically, companies see weak results in the first quarter and stronger numbers in the third.

Computer makers specializing in high-end servers and mainframes, such as IBM, benefited from strong sales earlier in the year only to see a dramatic slowdown approaching September. The worldwide server market grew 5 percent during the first half.

IBM in an October profit warning said S/390 mainframe sales declined 40 percent and AS/400 dropped 30 percent, after four straight quarters of record growth.

"IBM was clearly down because of the Y2K impact. Because IBM is the top of the market for high-end systems, with their revenue down in the third quarter, they pretty much pulled down the whole market," said IDC analyst Hoang Nguyen.

Although IBM led the worldwide server market with $3.14 billion in revenue, its overall sales declined 29 percent from a year earlier and 34 percent for mainframe and high-end servers.

Hewlett-Packard, which grew 2 percent, and Compaq tied for second place with $1.9 billion in sales, followed by Sun and Dell with revenue of $1.7 billion and $619 million, respectively.

Compaq benefited from a management reorganization that spurred customer confidence and reinvigorated sales, gaining 9 percent from a year earlier. Compaq may also be better positioned to weather the Y2K slowdown, as about three-quarters of its server sales are Windows NT based systems.

Entry?level servers, such as those running Windows NT, fared best overall, gaining 12 percent over the third quarter of 1998 with sales of $7.2 billion. Windows NT servers, specifically, gained 41 percent year over year. IDC attributed strong entry-level server sales to companies focusing on e-commerce initiatives and other Internet-related activities.

Top server makers 3Q 99, U.S.
% change
IBM 1.1 billion -26%
Compaq $981 million +24%
HP $893 million +5%
Sun $866 million +19%
Dell $405 million +35%
Source: International Data Corp.
Dell Computer and Sun gained ground despite a slowing market. Round Rock, Texas-based Dell saw server sales jump 40 percent from a year earlier, while Sun gained 18 percent.

But Dell's gains surprisingly show the widespread effects of the Y2K slowdown. "Forty percent may be exceptional, but it's off from previous quarters. Usually Dell grows about 60 to 100 percent," Nguyen said.

While Sun sells larger servers that might otherwise be affected by the Y2K slowdown, the Palo Alto, Calif.-based computer maker gained from sales to Internet service providers and application service providers.

IBM also topped the U.S. market, with $1.2 billion in revenue, which was a decline of 26 percent. Compaq gained 24 percent, to $918 million in revenue, followed by HP, with $893 million but slower growth of 5 percent. Sun followed closely with $866 million in revenue, or an increase of 19 percent. Dell, with 35 percent growth and $405 million in sales, rounded out the top five.

Western Europe, with $3.5 billion in revenue, posted the greatest decline of all geographic markets, 19 percent, followed by Japan, down 7 percent. The United States, meanwhile, accounted for $5.2 billion in revenue, down by 3 percent. The Asia-Pacific region overall jumped 21 percent to $1 billion in revenue.

Local manufacturers Fujitsu and NEC lost ground in Japan to Sun and IBM, which grew 27 percent and 10 percent, respectively.

The top five server makers continued to consolidate their market presence, accounting for 71 percent revenues, or an increase of 4 percent year over year.