Hyperscale is where the growth is: Cloud and virtualisation ravage enterprise server demand

But a pause in hyperscale datacentre development, plus waning demand from enterprises has hurt server sales.
Written by Steve Ranger, Global News Director

More and more datacentres are moving to the cloud.

The rise of the cloud and the increasing use of virtualisation are continuing to eat into server sales and revenues.

According to analysts Gartner, in the first quarter of 2016, worldwide server revenue declined 2.3 percent year-on-year, while shipments grew 1.7 percent: more servers were sold over the period, but at a lower price.

Across most of the world, server vendors either saw their sales or revenue fall. However, the one bright spot in the quarter was the Asia-Pacific region, which reported 9.7 percent growth in revenue and 8.4 percent growth in shipments.

Server sales were once a good indicator of the general health of the IT market: if companies were adding services or investing in software that tended to mean they were also having to buy lots of new server hardware. But virtualisation - which allows companies to cram greater workloads onto the same physical hardware - and rapid drops in price for cloud-based storage and processing, mean many companies are looking at moving their data onto Amazon Web Services and similar platforms. Indeed, giant datacentres - the so-called hyperscale installations - are now buying more server hardware, although it tends to be cheaper commodity equipment.

"The real driver of global growth continues to be the hyperscale datacentre segment. The enterprise and small or midsize business segments remain relatively flat as end users in these segments accommodated their increased application requirements through virtualisation and considered cloud alternatives," Jeffrey Hewitt, research vice president at Gartner, said.

When it comes to vendors, Hewlett Packard Enterprise (HPE) remains the top player by revenue, with a 25.2 per cent market share - and the only company in the top five to see any revenue growth.


By shipments, HPE is also number one, despite a year-on-year decline of 1.6 per cent. In contrast, Huawei and Inspur saw big jumps in their shipment numbers.


In Europe, the Middle East, and Africa (EMEA), server shipments reached 547 million units in the first quarter of 2016, a decline of 1.3 per cent year-on-year. Server revenue declined by 2.4 percent year-on-year to $3.2bn, as virtualisation and cloud services reduced the need for companies to buy their own server hardware.

The EMEA market had the weakest start to the year in terms of shipments since 2009. Other local issues - such as a sharp decline in demand from Russia - have worsened the situation.

Server shipments and revenue in the second quarter of 2016 will not to be as weak as those in the first quarter of 2016, according to Adrian O'Connell, research director at Gartner. "However, this is all relative, because if the poor performance of server vendors in Russia and related geographies continue to weigh on the market, 2016 will be a tougher year for server vendors in EMEA," he said.

Figures from IDC tell a similar story: it says vendor revenue in the worldwide server market decreased 3.6 percent year-on-year to $12.4bn billion in the first quarter of 2016, IDC said this ended a seven quarter streak of year-on-year revenue growth as server market demand slowed due to a pause in hyperscale server deployments and "a clear end" to the enterprise refresh cycle. Worldwide server shipments decreased 3 percent to 2.2 million units compared to the same quarter a year ago.

Volume system revenue increased 1.8 percent and midrange system demand increased 8.3 percent in the first quarter to $9.8bn and $1.1bn respectively. Midrange systems were helped by enterprise investment in scalable systems for virtualization and consolidation, as well as increases in x86-based mission critical systems. High-end systems saw a revenue decline of 33.4 percent to $1.4 billion on a difficult compare to the prior year, in which a major IBM system z upgrade drove a spike in mainframe system refresh, IDC said.

"The brief pause in datacenter buildout resulted in shipments declining across all form factors. The data, however, supports the continuing shift to the public cloud, especially by SMBs," said Jorge Vela, IDC senior computing platforms research analyst. Vela said sales of tower servers - often associated with small scale deployments - continued to slide. On the other hand, rack-optimized models, often considered the backbone of public cloud datacenters alongside density-optimized servers, were the only form factor to experience revenue growth for the quarter. But IDCs said in the second half of 2016 to hyperscale cloud infrastructure investments will start again with existing datacenters filling out and new cloud datacenters standing up across the globe."

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