Analysis: Server Sales Are In Growth Position

The uptick in server sales during the past quarter is the predictable result of two factors.

March 15, 2004

3 Min Read
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If what goes up must come down, then you have to wonder if the converse is true. Will what goes down always come up? Well, not really, but in the server market, that seems to be the case. And the results of International Data Corp.'s recent server market survey bear that out.

Server sales, according to the market research firm, showed a year-over year growth in the fourth quarter of 2003 of 11.4 percent, as we reported earlier. That's the best growth that we've seen in a long time. It was the third consecutive quarter of growth (the last two saw 0.2 and 2 percent, respectively). And considering that the market has been in a slump pretty much since the end of the .com boom, it looks like an even better sign. But these results were predictable, and were, in fact, not as good as one would surmise from just a quick look at the numbers.

To see what's going on, note that much of the increase in dollar sales was due to currency fluctuations, according to Lloyd Cohen, director of research for IDC. The dollar has fallen with respect to foreign currencies of late. That means it takes more dollars to equal a given amount of a foreign currency -- Euros, Yen or whatever. So when a server is sold and paid for in Euros, and that revenue is converted to dollars, the result is more dollars than would be the case if the dollar were higher. Thus, while the server revenue numbers in the last quarter of 2003 increased 11.4 per cent, to $13.7 billion, the increase with the currency fluctuations backed out is only 3 per cent.

That number sounds relatively anemic. However, it reflects the third straight quarter with growth in the server market, following nine straight quarters without growth. So, although the 3 percent is relatively small, it's still a good sign.

"We didn't call this a rebound," said Jean Bozman, research vice president at IDC, "but it does show growth."IDC also noted that there's been growth in all segments of the market, something that also had not been seen in the recent past. For example, in the high end (servers costing more than $250,000 and including mainframes) and the mid-range (servers costing between $25,000 and $250,000, such as the IBM iSeries), "there has been price pressure," Bozman said, so we haven't seen growth until now." And, she added, this quarter saw the first growth in 11 quarters in the Unix server segment, while, by contrast, the Linux market has seen eight quarters of growth. The numbers in this market are still small, less than $1 billion, but it's been growing and should continue to do so. Volume servers (those costing under $25,000) continued their growth.

Some of this is because the pipeline is empty. "In the wake of the .com bust," said Cohen, "there was a lot of equipment that didn't get used. So the channel, not the manufacturers, satisfied demand. Now most of that has been flushed through, so that manufacturers see a pickup again."

This may be part of an overall trend. Writing in National Review Online, economist Larry Kudlow sees a general trend for investment spending. " surging profits and record productivity, have led to a new capital-goods investment boom. Over the past three months alone, durable-goods shipments have [grown] at a 27 percent annual rate, a much more rapid pace than consumer-spending growth, which is still healthy at roughly 4 percent." Kudlow doesn't cite sources for his numbers, but if true, they point to better times ahead. And the server market, though it's growth wasn't as robust as the raw numbers seem to indicate, could be right in line to join in.

David Gabel is an electrical engineer who has been testing and writing about computers for more than 25 years.

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