Server OEMs at risk as white box providers target cloud datacentres

Server ODMs are targeting datacentres operated by IT giants such Amazon and Microsoft, threatening traditional server OEMs

Server ODMs (original design manufacturers) are threatening the business of traditional server OEMs (original equipment manufacturers) by targeting hyperscale datacentres operated by technology giants such as Amazon and Microsoft.

Research firm Gartner predicts sales of servers by ODMs to big datacentre operators will account for 16% of global x86 server shipments by 2018, amounting to $4.6bn in revenue. 

"ODM companies are rapidly changing their business model, as they target hyperscale customers. They are expanding their business scope to include enterprises in the near term," said Naveen Mishra, research director at Gartner.

"Direct engagement with hyperscale datacentres is the biggest contributor to ODM growth," she said. 

Growth in web-based business models such as cloud computing is driving hyperscale investment, and Gartner estimates that in 2014, the hyperscale segment will contribute 82% of the direct ODM server revenue.

Technology giants operating hyperscale datacentre facilities need to scale to hundreds of thousands of servers. This means they prefer cost-effective procurement through sourcing directly from ODMs, cutting out traditional OEMs, such as Dell and IBM -- which sell x86 servers -- from the supply chain.

ODMs have the scalability and a business model that allows them to provide lower-cost platforms. They can also help tech giants reduce the total cost of ownership of servers (including power and cooling expense) compared with mainstream servers offered by traditional OEMs, according to Mishra.

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Rather than choosing mainstream OEM servers, these customers prefer ODM-supplied servers or "white box servers" due to their lower cost, and innovative and efficient design, along with the ability to customise the systems, he said. 

"ODMs have strong credentials of technical knowledge and capabilities in designing customised server solutions for varying customer needs," said Mishra. With ODMs gaining success and economies of scale, their pricing structure will become even more aggressive. 

Previously, VMware's EMEA CTO Joe Baguley predicted that datacentres of the future will not be populated with branded servers and networking products that perform individual functions because software-defined everything will make hardware irrelevant.

Speaking at Datacentres Europe 2014 conference in May, Baguley said: "Which company makes the datacentre hardware will no longer matter." He also predicted a life expectancy of three to five years for traditional, branded datacentre hardware.

"Current ODM success is primarily restricted to server technology but OEMs need to recognise this can eventually impact other technologies, especially storage," he warned.

While the ODMs' current focus is hyperscale datacentre segment, in the long term they will also target the enterprise segment, the stronghold of branded server providers.

ODMs are already shipping storage (primarily internal), along with custom-built servers. Open stack storage solutions are slowly gaining traction with ODMs, which can disrupt the established external controller-based storage suppliers, Baguley warned.

The challenge for ODMs when addressing enterprise server needs is to transition their custom-built products for these enterprises, according to the research firm. Gartner outlined other challenges, such as their limited appeal outside the smaller group of hyperscale companies, the strong lead of OEMs in the enterprise segment (60%), and ODMs' lack of enterprise sales and channel partner skills.

But increasing awareness among enterprises regarding Open Compute Project (OCP) can potentially enable enterprise decisions to partner with ODMs, as these engagements will be backed by the OCP community.

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