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By Stephen Shankland, 26 November 2003 09:05

NEWS The server market grew faster than expected in the third quarter this year, logging a 2 per cent increase, to $10.8bn, on sales of lower-end systems, according to research from analyst IDC released today.

The server market had been in decline since its peak in 2000, with the first growth reappearing in the second quarter of 2003. For the third quarter, IDC had expected 1 per cent growth, but saw 2 per cent instead in large part because of sales of lower-end "volume" machines - costing less than $25,000 - that ship in larger quantities.

"Volume servers are generating most of the positive momentum in the worldwide server market," with 19.5 per cent growth, IDC Server Group Vice President Vernon Turner said in a statement, though he cautioned that two quarters of growth don't necessarily mean a long-lasting rebound is under way.

Servers are networked systems that handle data storage and processing tasks such as submitting credit card payments or keeping track of which airplane seats on a flight are reserved. The systems range from small machines not far removed from desktop computers to gargantuan systems costing millions of dollars.

Declines in the market have been caused by stiff competition, which forced sellers to offer deep discounts. In addition, customers grew stingy in recent years, curtailing spending that had been lavish because of the internet mania or because of upgrades to thwart Year 2000 problems.

Another third-quarter bright spot was sales of servers using the Linux operating system, which rose to $743m in the quarter, a 49.8 per cent increase over the year-earlier period and the sixth consecutive quarter of growth.

"Linux has been growing and growing and growing, both in revenues and units, rather consistently," said Jean Bozman, an IDC research vice president. Despite SCO Group's legal attacks on the open-source operating system, "It looks like people are just buying them anyway...This is accelerating," Bozman said.

The top four server makers - IBM, Hewlett-Packard, Sun Microsystems and Dell, in descending order - accounted for more than 80 per cent of all revenue in the market, IDC said. Among those, IBM widened its lead over HP, while Dell encroached on Sun.

Among the top four, only Sun saw its revenue decline, down 9.3 per cent to $1.17bn. The fastest growth was at Dell, whose revenue increased 11.6 per cent to $1.03bn. Sun had 10.8 per cent of the overall market to Dell's 9.5 per cent.

IBM grew 6.6 per cent to $3.37bn, or 31.1 per cent of the market, while HP grew 3.5 per cent to $3bn, or 27.7 per cent of the market.

Sun specialises in servers using the Unix operating system and hardware with RISC (reduced instruction set computing) processors, though it's expanded to accommodate Linux and "x86" chips such as AMD's Athlon and Intel's Xeon.

The Unix server market has been declining, but that appears to be reversing. Bozman said: "Some of the bleeding here in Unix servers may be drying up." The decline was 3.8 per cent, to $4.1bn, this quarter, a slowing from the 5 per cent in the second quarter and the 12 per cent in the first.

"There's been a lot of press and talk about how Unix servers are on their way out and Linux is taking their place, but the demand for Unix servers is still strong," Bozman said.

In the Unix market, HP took first place for the quarter with 33.8 per cent share. Sun had 28.4 per cent, and IBM 25.6 per cent. Sun has been the top Unix server seller for years on an annual basis but historically is weakest during the third quarter of the calendar year, the beginning of Sun's fiscal year.

In the Linux market, HP was number one, with $209m in revenue. IBM and Dell were tied at $144m, but IBM increased its share 0.2 percentage points while Dell slipped 0.8 percentage points compared with the year earlier.

IBM pushed to the forefront of the market for "blade" servers, thin systems that share a common enclosure. This new but small market grew at a torrid pace, expanding 763 per cent, to $164m, in the third quarter.

IBM took over HP's former lead in both unit shipments and revenue, IDC said, with $57m in sales to HP's $54m and 18,000 shipments to HP's 14,000.

Servers using Windows also grew, rising 10.3 per cent to $3.4bn, IDC said. "Even though we see this tremendous growth in Linux servers, it is not preventing the Windows market from growing," Bozman said.

Stephen Shankland writes for CNET News.com