IT hardware sales poised for small recovery after disastrous 2009

IDC predicts storage and server vendors will start to grow again in the new year

Server and storage vendors suffered painful revenue declines throughout 2009, but the IT hardware markets are starting to show signs of life and are in position for a small rebound in 2010.

IDC predicts that spending in hardware, software and services sectors will all grow between 2% and 4% next year, but "hardware, which was pummeled in 2009, will show the slowest recovery."

Even 4% growth would only recover a fraction of the revenue lost in '09. Worldwide server revenue dropped about 17% year-over-year in the third quarter, while external disk storage system revenue posted a 10% decline. Believe it or not, that was an improvement over the second quarter, when server revenue fell 30.1% and storage revenue dropped 18.3%.

The server market has suffered five straight quarters of year-over-year revenue decline, but analysts see the third quarter results as somewhat positive. Server revenue, for example, was $9.8 billion in the second quarter of 2009, and rose to $10.4 billion in the third quarter.

The server market should make a comeback in 2010, but it won't be dramatic, says Pund-IT analyst Charles King.

"There will be a bit of a rebound," King says. "I think most of the vendors and customers say they will add additional data center products next year, but it's going to be done in a controlled manner. Vendors are expecting a better year, but nothing to break out the champagne and Cuban cigars."

In the storage market, IDC expects a rebound in 2010 but it will mainly occur in the final six months of the year, says IDC analyst Benjamin Woo. "There's a general consensus and feeling about a rebound, but really it's back-end loaded," Woo says. "Some of our research is indicating the first half of 2010 is still going to be a very tough six months."

Many businesses are planning data center refreshes, but will think long and hard about the best technologies to use and will not rush into purchases, Woo says.

The economy, certainly, is the biggest factor that led to massive declines in server and storage revenue this year. But there are other long-term technological trends that will have both positive and negative impacts on the bottom line for hardware companies.

Virtualization, both for servers and storage, can reduce the amount of hardware IT shops need to run business applications. Most virtual servers are created with the goal of consolidating onto fewer machines, King notes.

High-volume consolidation onto x86 servers will accelerate with the introduction of machines based on Intel Nehalem processors, he says. Ultimately, then, virtualization could spur customers to purchase servers capable of more efficient use of hypervisors, but they won't need to buy as many as they did in the days when each physical server ran just one application.

In storage, technologies such as de-duplication and thin provisioning are helping customers make more efficient use of capacity, potentially allowing them to buy less. Automated tiering software, meanwhile, helps enterprises move rarely used data from expensive tiers of storage to less-expensive boxes. Cloud storage may also deliver new efficiencies.

One might think these factors will drive revenue down for storage vendors by allowing customers to buy fewer disks, and less-expensive types of storage systems. Already, profits have fallen even as total data volume has grown.

However, Woo believes the economy is the only factor having a major negative effect on the storage industry. The amount of disk space that can be eliminated with capacity-saving technologies is smaller than the amount needed to handle the ever-growing volumes of information businesses are required to maintain, he says.

Storage spending has fallen, but not as fast as server spending.

"If you run out of servers, you look at things like virtualization," Woo says. "But if you run out of storage capacity … there is no other thing to do but make investments in more capacity."

Data creation is a self-fulfilling process, as businesses need to create new metadata simply to find data that's already been stored. "We have a saying at IDC that 'data creates data,'" Woo says.

In the server market, IBM and HP still dominate, with Big Blue pulling in $3.3 billion of revenue in Q3 2009 and HP earning $3.2 billion. Dell placed third with $1.4 billion while Sun posted $778 million in revenue.

Sun's position will continue to decline, unless the Oracle purchase of Sun is suddenly green-lighted by the European Union before the end of the year, King says. The pending acquisition, announced in April, has been delayed for months.

"There's a great deal of opportunity for both IBM and HP to get out there and poach Sun customers," King says. "They've been doing so very successfully over the last year. Unless the European Union gives Larry Ellison an early Christmas present, I would expect that to continue for a while."

While IBM leads in overall server revenue, it has suffered from large declines in its mainframe business. IBM plans to release the next version of its mainframe sometime in 2010. But it's tough to tell whether Big Blue will see anything more than a small recovery, King says.

One X factor in the server market is Cisco's Unified Computing System, which is designed to integrate blade servers with storage, networking and virtualization technology. "What Cisco is doing has a lot of people on edge," King says.

In the external disk storage system market, EMC held the lead with $US1.1 billion in third quarter revenue, with IBM trailing with $577 million and HP with $517 million. Dell and NetApp rounded out the top five.

Woo predicts trouble for IBM because its portfolio is crowded with overlapping technologies. Sun has struggled, but the pending merger with Oracle and integrations between the Oracle database and Sun hardware could make Larry Ellison a very important man in the storage industry, Woo says.

"Oracle is a dark horse," Woo says. "Oracle is going to be a data company, an information company that brings together the database as a portal into the stored information. That's the one company to be on the lookout for."

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