Boom in cloud services supercharges the server market in the first quarter

LONDON The global server market recorded the strongest first quarter on record in terms of shipments, as enterprises and consumers turned to cloud services for remote working, learning, social interaction and entertainment, according to Omdia.

A total of 3.3 million servers shipped in the first quarter of 2020, up 31 percent year-over-year.

“Beyond the surge in cloud services demand created by the lockdown, the COVID-19 pandemic impacted component availability and the broader supply chain in the first quarter,” said Vlad Galabov, principal analyst for data center IT, at Omdia. “Many vendors indicated that their efforts to reduce the number of personnel on site due to illness or social distancing actions impacted the output levels at their factories. The logistics of moving manufactured servers to customers were also significantly disrupted. On the receiving end of the supply chain, installations and customer acceptance were delayed due to personnel availability.”

Omdia observed a weakening of the average selling prices (ASPs) of servers due to two factors. First, a large hyperscale cloud service provider deployed low-cost servers, which have a lower semiconductor content. Second, there was a decline in the price of components, including memory and flash storage. As a result, server revenue grew only 4 percent year-over-year.

The 2020 outlook

Omdia has updated its server revenue forecast, baking in the increased demand for cloud services and tightening of enterprise spending due to the global COVID-19 epidemic. Omdia now projects a 0.4 percent decline of server revenue in 2020—an upward revision of 5 percentage points from the previous forecast. The forecast update increased the server market’s value to $78.5 billion for 2020, a $4.2 billion increase from the previous forecast.

“One factor that drove the update was a change in server configuration as Facebook revealed its future deployment plans,” Galabov said. “During the OCP Virtual Summit in May, Facebook released the third generation of its Yosemite server design. The update features a shift from a Xeon D CPU to a Cooper Lake CPU, which will likely have a larger number of cores and will be more costly than the Xeon D. Each of the next generation Yosemite servers is likely to be configured with six instead of four memory modules, which will have an additional impact on the average server cost and price. Facebook accounts for approximately 10 percent of server shipments, so its transition to a new server design, which has a higher component cost, will have a significant impact on the average server selling price.”

In the second half of 2020, Omdia expects server ASPs to start rising, driven by Facebook’s demand and an appreciation of memory.

From a server shipment perspective, Omdia expects 12.9 million servers to ship in 2020, an 8.3 percent growth over 2019. This number is expected to top 18 million by 2024, with server shipments growing at an 9 percent compound annual growth rate.

White Box Vendors gain share on the back of strong cloud demand

The global lockdown caused by the COVID-19 pandemic saw demand for cloud services from consumers and enterprises increase to enable remote working, remote schooling, and home entertainment. In response, communications service providers (CSPs) ramped up data center IT deployments and turned to white box vendors for their servers. As a result, white box vendors garnered a 26 percent share of server market revenue.

Dell EMC captured 18 percent of the server market and remained the single largest OEM in the first quarter of 2020. The company indicated that the COVID-19 epidemic has driven a shift in priorities at enterprises and a decline in IT infrastructure spending, impacting Dell’s revenue growth. A decrease in server ASPs due to lower component cost also contributed to the negative growth trend. Dell EMC did not report significant supply-chain issues.

HPE garnered a 13 percent share in the first quarter of 2020. The company’s revenue growth was negatively impacted by the COVID-19 crisis. HPE indicated enterprises delayed server installations. In the high performance computing (HPC) market specifically, HPE observed a delay in customers’ acceptance of installations, the final step before HPE recognizes revenue for the project. HPE indicated it was also significantly impacted by supply constraints, so it exited the first quarter of 2020 with a higher-than-expected backlog of orders.

Inspur retained the No.-4 position in the market share ranking in the first quarter of 2020. Inspur did particularly well in China where its revenue expanded by 16 percent year-over-year, gaining market share from rivals Huawei and Lenovo. Inspur continued to benefit from strong demand for servers configured with programmable parallel compute coprocessors.

Lenovo took the fifth spot in our market share ranking for the first quarter of 2020. The company reported mixed results, with weaker-than-expected demand from hyperscale cloud service providers, but good traction with enterprises. The vendor saw particular traction with enterprises setting up virtual desktop infrastructure (VDI) for remote working to manage the COVID-19 lockdown. Lenovo increased the amount of server component inventory it held, which helped it mitigate supply chain disruptions.