Server Hardware Trends: A Commodity Market Plus IBM

The New York Times summarized the latest IDC and Gartner server marketshare reports, highlighting the rise of the non-branded custom-built commodity server makers that supply big Internet firms such as Facebook. "Others" is now the #3 server "vendor" on a hardware revenue basis and #1 on a volume basis. (On a revenue basis, IBM is #1 and HP is #2.)

These long running trends are fascinating, and I've described them before in various ways. I think it's important, though, to distinguish between IBM and HP because they have very different positions in the overall market. IBM is now the only remaining credible vendor of "high-end" servers. We've seen time and time again in many markets — retailing, to pick an excellent example — that getting stuck in the middle is a bad place to be because competitors are both attacking from below and above. The attack from below is based fundamentally on price, particularly acquisition price. Those are the "Others." The attack from above is based on value, sustained high levels of research and development to deliver innovation, and best-of-breed capabilities and qualities. That's IBM. In the middle is HP, the JCPenney of the server market. In a few more quarters Dell will probably be right there, too, but we'll see.

I very much like IBM's position given these market trends, and I'm not too worried about the slight hardware revenue dip IDC and Gartner reported given the structure of that dip. IBM's high-end got higher, to put it succinctly, and there's some good evidence IBM's margins improved. Moreover, most of IBM's revenues associated with its servers are not measured by its hardware revenues alone, and that's unique to IBM. When HP sells servers they typically don't include much else from HP that customers buy. In contrast, it's very rare that an IBM server gets sold without substantial IBM content that customers buy.

I don't know exactly how big the high-end server market will be, but it will continue to be a terrific business amidst the continuing explosion of information, long-term economic trends, and increasing quality demands. As long as IBM keeps finding ways to differentiate and to innovate up and down their solution set, the company will do fine, and more importantly so will its many and growing numbers of customers. However, while IBM is very much pursuing its high-end strategy with gusto, IBM is also eager to push into volume markets as well — IBM in the role of Target (and/or Costco) to offer an alternative to Walmart, metaphorically speaking. I'm referring of course to IBM's OpenPOWER Consortium with Google, NVIDIA, and others.

So these Gartner and IDC reports are really not good news for HP in particular. As I've said before I don't know how HP gets out of its shrinking box. HP's CEO Meg Whitman has a tough job.

by Timothy Sipples August 29, 2013 in Cloud Computing, Economics, Financial, Systems Technology


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