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White boxes set to shift server buying habits

Traditional server providers still have the lion’s share of the on-premise datacentre market, but original design manufacturers are now a major force

The latest financial results from HPE have highlighted a growing issue facing server makers – around the effects of cloud computing.

In its first-quarter 2017 results, HPE reported an 11% decline in server revenue due to what CFO Tim Stonesifer described as “a softer-than-expected core server market combined with some execution challenges”.

In a transcript of the earnings call for the quarter, posted on the Seeking Alpha financial blogging site, HPE CEO Meg Whitman said: “Revenue was impacted by a tough market environment, particularly in core servers and storage. We saw a significantly lower demand from one customer and major tier one service provider facing a very competitive environment.”

In a question-and-answer session with financial analysts, Whitman admitted that cloud computing was affecting HPE’s server and storage business, but she said the company was now focusing on private and hybrid clouds, using its Synergy product range.

“We are ramping our Synergy offering, we’ve got the power of SGI and our high-performance compute that was part of HPE,” she said. “Synergy is important because it allows us to provide on-premise private cloud alternatives at public cloud economics, both the total cost of ownership as well as the consumption-based pricing model. And we have now seen a number of customers move workloads off the public cloud back into an on-premise datacentre because it’s more cost-effective.”

One of the questions raised at the HPE fiscal briefing concerned the impact of contract manufacturers or original design manufacturers (ODMs) that produce white box servers for cloud providers. Whitman would not be drawn on whether HPE was seeing strong competition from white box server makers. When asked about the lower demand for HPE servers from the tier one service provider that directly contributed to the lower server sales in the quarter, she said: “I’m not entirely sure. What I will tell you is that they have dramatically decreased their purchasing below commitments that they had made to us.”

Reduce infrastructure costs

But it is not uncommon for cloud and service providers to choose white box servers to reduce infrastructure costs, resulting in lower sales by the major server companies. John Dinsdale, a chief analyst and research director at Synergy Research Group, said: “For traditional IT infrastructure suppliers, there is one fly in the ointment – hyperscale cloud providers account for an ever-increasing share of datacentre gear and many of them are on a continued drive to deploy own-designed servers, storage and networking equipment, manufactured for them by ODMs. ODMs in aggregate now control a large and growing share of public cloud infrastructure shipments.”

Over the last few years, the Open Compute Platform (OCP), originally devised by Facebook, has been gaining traction as a hardware specification for hyperscale datacentre computing. White box servers that meet the OCP specification can be deployed in datacentres. Benefits include lower costs for both hardware and energy, plus interoperability and compatibility, so hardware from different manufacturers can be deployed.

As Computer Weekly has previously reported, Facebook claims that using OCP kit saved the social media site about $1.2bn in IT infrastructure costs within its first three years of use, by formulating its own designs and managing its supply chain.

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In a Computer Weekly blog post, James Bailey, director of datacentre hardware provider Hyperscale IT, said that Rackspace – another founding member of OCP – had used the architecture to deploy white box servers for its OnMetal product. Microsoft is also a frequent contributor and runs more than 90% of its hardware as OCP, according to Bailey.

And it is not only server providers. Goldman Sachs is also believed to have a “significant footprint” of OCP equipment in its datacentres. Again, white box servers are being used instead of servers from the major hardware companies.

What this means is that non-traditional server manufacturers are increasingly taking market share from the established providers. In November 2016, IDC’s quarterly server tracker reported that the ODM segment (white box servers) accounted for 10% of the market is terms of value, making white box servers the third-biggest server supplier with 10.3% of the overall market, ahead of the likes of Lenovo (7.9%), Cisco (7.3%) and IBM (6.9%).

“Other than Cisco, all major US-based suppliers experienced significant global revenue declines year over year, while many international and smaller suppliers were able to find areas of growth,” said Lloyd Cohen, research director, computing platforms at IDC. “As large enterprise accounts slowed their demand for servers, small businesses and startups continued to grow their IT portfolios via non-traditional channels with innovative supply chain strategies. It will be interesting to see how this segment develops over time.”

IBM’s strategic imperatives

HPE’s rival, IBM, is already shifting its business away from on-premise datacentre computing. IBM sold its x86 server business to Lenovo in 2014. In January this year, Ginni Rometty, IBM chairman, president and chief executive officer, said the company’s shift from its core business to so-called “strategic imperatives” accounted for 40% of its earnings.

The full impact of the white box server makers is yet to be felt. According to analyst Gartner, ODMs are not particularly effective at dealing with enterprises and small and mid-sized businesses. Partnering with an organisation that could meet the needs of these customers more effectively would allow the white box server suppliers to benefit from more comprehensive sales and marketing programmes, according to Gartner’s report Lack of comprehensive go-to-market mechanisms keeps server ODMs in check – for now.

The analyst warned that the biggest risk to the major server manufacturers was if and when a major systems integrator partnered with a white box server supplier, which would provide a deep customer relationship, plus sales and marketing expertise.

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