Oracle Loses 4th Spot In Global Server Market To Cisco

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Includes: CSCO, HPQ, IBM, ORCL
by: Trefis

Summary

Cisco recently surpassed Oracle as the number four player in the global server market with a 6% market share in the third quarter of calendar 2014.

Oracle’s current share in the market stands at 4%.

We believe that Oracle’s leadership position in this burgeoning market will comfortably offset its decline in the server market.

The world’s second largest software company, Oracle (NYSE:ORCL) has lost its number fourth position in the worldwide server market to Cisco (NASDAQ:CSCO), according to recent reports by research firms International Data Corporation (IDC) and Gartner. Hewlett Packard (NYSE:HPQ) leads the lucrative $50 billion global server market with a 27% share, followed by IBM (NYSE:IBM) and Dell with approximately 18% share each. Cisco recently surpassed Oracle as the number four player in the global server market with a 6% market share in the third quarter of calendar 2014. Oracle’s current share in the market stands at 4%.

Oracle reports revenues from enterprise servers under its Hardware Products business unit, which constitutes 8% of the company’s total revenue [1]. The company has not further split its Hardware Products revenues into different sub-segments since 2008, at which time enterprise servers accounted for approximately 72% of Oracle’s sales of hardware products. However, Oracle has suggested that in the last few years it has been earning a rising proportion of its hardware product revenue from engineered systems, a term it uses for its newest, most advanced systems. At present, engineered systems account for over a third of the hardware product sales [2].

In this article we explain why Oracle lost the server market race to Cisco and why losing the No. 4 spot will not have a significant impact on its long-term growth.

Oracle’s Enterprise Server Business: The Story So Far

Oracle’s loss of market share to Cisco has been a while in the making and is all but expected. The company entered the enterprise server and storage hardware business (together, the enterprise hardware business) by acquiring Sun Microsystems in 2010. This purchase was driven by Sun’s powerful Java and Solaris-based software offerings and the enterprise hardware business was a secondary benefit. Soon after, the company shut down Sun’s OpenSolaris project and shifted focus away from the low-margin x86 servers; reinvesting in Sun’s proprietary RISC microprocessor to cater to the high-price, high-margin Unix platform instead.

Unfortunately for Oracle, this move did not pan out well. Shipments of RISC/Unix based servers have been in a steady decline, while x86 servers have managed a marginal growth on the back of better performance at lower prices. As a result, Oracle has been unable to achieve meaningful growth in its servers business.

Quarter Year-on-year growth/decline in shipments [3]
x86 Server Shipments Unix Server Shipments
2013 Q4 +1.4% –20.1%
2014 Q1 +1.7% –19.9%
2014 Q2 +1.4% –7.9%
2014 Q3 +1.2% –17.1%


The Competition

Cisco is the only major player in the global server market which is growing its revenue from servers in leaps and bounds. It achieved year-on-year growth of more than 30% in each of the last four quarters, while bigwigs like HP, IBM and Dell have struggled to reach positive territory.

Quarter Year-on-year Revenue growth/decline [4]
HP IBM Dell Cisco Oracle
2013 Q4 +5.7% –28.5% –2.4% +34.5% –2.2%
2014 Q1 –2.0% –25.4% –3.2% +37.0% +1.9%
2014 Q2 +4.0% –10.2% +0.9% +35.4% +3.9%
2014 Q3 –0.5% –17.8% +9.5% +31.2% +3.4%


It is pertinent to note that despite the severe decline in global shipments of Unix servers, Oracle has managed positive year-over-year growth in each quarter of the current year. However, if Cisco continues to grow its servers business at the current breakneck speed, it will only hasten the decline of Oracle’s server business as the former eats into the market share of the latter.

That Sounds Worrying. But is it?

No, because the company is strategically moving away from “commodity hardware” or servers, to high-value “engineered systems”. Engineered systems are integrated platforms that are delivered ready for deployment and include pre-integrated packaged software and support for cloud-services. Oracle commands 55% of this is nearly $8 billion market that has been growing at rates as high as 68% in third quarter of 2013 [5]. Perhaps more importantly, the next biggest player in integrated platforms, IBM, commands just 11.1% of the market, indicating a huge gap between the two. HP is ranked third with a mere 1.7%, while Cisco does not even make the top five. This gives Oracle a firm foothold in a flourishing market which is set to get bigger as more and more customers migrate to such pre-integrated, one-stop systems.

Oracle’s engineered systems segment includes Exadata, Exalytics and SPARC SuperCluster, which together make up for over a third of the company’s entire hardware product revenues. The company achieved double digit growth rates in revenues from engineered systems in the year so far; with hardware support margins approaching 70% because of the product-mix changing in favor of higher-value engineered systems. This performance backs Oracle’s bet on integrated platforms and has the potential to offset its poor performance in the servers market.

We believe that the integrated platforms market could well be set for a long-term positive run, since this is a win-win product that benefits both the vendor and the customer. Unlike the low-margin stand-alone servers, integrated platforms are high-priced, high-margin products which also benefit the customers in the form of cost efficiencies and time savings. Further, as stated earlier, integrated platforms are a high-growth market in stark contrast to the servers market which has stagnated in recent times.

Therefore, we believe that Oracle’s leadership position in this burgeoning market will comfortably offset its decline in the server market.