INDUSTRY

According to IDC's Worldwide Quarterly Server Tracker, factory revenue in the worldwide server market declined 5.2% year over year to $12.6 billion in the third quarter of 2008 (3Q08). This is the largest quarterly revenue decline since the fourth quarter of 2002 as technology spending slowed around the world. Server unit shipment growth of 2.8% year over year in 3Q08 represented the slowest increase in server shipments since 4Q06. Volume systems revenue declined 7.2% year over year in the third quarter, the first decline for this important market segment in more than 14 quarters. In the midrange, revenue for midrange enterprise servers declined 9.5% year over year while revenue for high-end enterprise servers grew 4.0% year over year, the third consecutive quarter of growth for the segment. "The server market experienced significant deceleration in the third quarter with particular weakness in September. The slow down impacted a wide range of traditional server technologies with improved demand for blades and IBM System z notable exceptions," said Matt Eastwood, group vice president of Enterprise Platforms at IDC. "Many OEMs experienced significant pricing challenges in the quarter and revenue declines were experienced in all regions except Latin America and the Middle East and Africa (MEA). Enterprise budgets continue to face increased scrutiny as IT organizations of all types look to run their hardware harder and defer acquisitions wherever possible." Overall Server Market Standings, by Vendor HP and IBM ended the third quarter in a statistical tie with 30.7% and 30.2% overall market share respectively. HP experienced a 2.0% year-over-year revenue decline in 3Q08 while its BladeSystem business showed continued strength. IBM's overall revenues declined 3.1% year over year despite strong System z sales. Dell experienced a 4.3% revenue decline in the quarter and maintained third place with 12.0% overall market share in 3Q08. Sun maintained its fourth place position by posting a 10.9% year-over-year revenue decline and holding 9.5% market share for the quarter. Top-Level Server Market Findings

• Microsoft Windows server revenue was $5.1 billion in 3Q08, showing a 5.1% year-over-year revenue decline and maintaining revenue market share at 40.8% of all server revenue in 3Q08.
• Linux servers posted a 2.5% year-over-year revenue decline for a total of $1.8 billion in the quarter. Linux servers now represent 14.0% of all server revenue.
• Unix servers experienced an 8.4% revenue decline when compared with 3Q07. All segments including volume, midrange enterprise, and high-end enterprise experienced declines. In 3Q08, worldwide Unix revenues were $3.7 billion for the quarter, representing 29.7% of quarterly server spending.
• IBM's System z servers running z/OS experienced their third consecutive quarter of growth, increasing revenue 24.8% year over year and holding 9.4% of all server revenue.

"In the face of the worsening economic climate, IBM was still able to post significant growth in their mainframe business during the quarter," said Steve Josselyn, research director for IDC's Enterprise Computing group. "While we believe some of this is based on pent-up demand after a lengthy refresh cycle before the introduction of the new z10 machines late last year, there is still a large number of customers that continue to invest in the System z platform as an integral part of their compute infrastructure." x86 Industry Standard Server Market Dynamics x86 server revenue declined 6.6% year over year in 3Q08 to $6.9 billion, which represents the largest year-over-year revenue decline for the segment in more than 24 quarters. Shipment growth also slowed significantly, growing just 4.0% to 1.97 million units as demand for x86 servers moderated. The top 3 x86 server OEMs (HP, Dell and IBM) all experienced a decline in x86 factory revenue in the quarter, with HP leading the market with 36.9% x86 revenue share and with Dell holding second place with 21.8% revenue share. "The uncertain future of the global economy appears to have affected IT budgets across the board," said Daniel Harrington, research analyst with the Enterprise Server Group. " Weakened demand for more fully configured servers, along with intense price competition, drove x86 server revenue in the U.S. to decline 12.2% in the third quarter, the most since 2001. Revenue declined across all regions except Latin America, which continued to show strong growth at 12.8%." "OEMs are being forced to become increasingly price competitive in the x86 space, and are therefore looking for margins from other value adds, such as software and services. Vendors that are able to offer reliable and comprehensive infrastructure solutions, from hardware and software, to a more complete services portfolio, are likely to be seen as a more attractive option to risk averse end-users." Blade Server Market Shows Strong Shipment and Revenue Growth The server blade market decelerated for the third consecutive quarter, with factory revenue growing 29.5% year over year. Overall, bladed servers, including x86, EPIC, and RISC blades, captured $1.4 billion and represented 11.0% of all server market revenue in the quarter. HP maintained the number 1 spot in the blade market with 54.7% market share and quarterly factory revenues growing 55.5% year over year. IBM held the number 2 position in the blade server market with 22.9% share while Dell maintained the number 3 position with 9.3% revenue share. "Blades were the only form-factor to experience positive growth in the quarter, with all major vendors exhibiting double-digit growth in blade volumes," said Jed Scaramella, senior research analyst in IDC's Enterprise Computing group. "IT customers continue to adopt blades due to energy efficiency, serviceability, and flexibility benefits derived from the consolidated platform."