The Server Market Under Siege

Server sales posted a small increase in 2015, but can this be sustained in 2016? We are seeing some radical changes in the way we do business that will impact the server market. The sheer volume of servers is under pressure from several technical advances, while the unit price is being diluted significantly. Let's look at the factors putting downward pressure on server sales.

First, unit volumes declines are a function of several factors. The lack of growth in processing is the key factor. The expected explosive expansion of the Internet of Things isn’t running on schedule. Common sense is prevailing over the IoT hype, as the less-than-spectacular smart watch sales in 2015 demonstrate. The lack of human resources in big data analytics is compounding the problem.

With in-memory databases becoming very common due to their much-higher performance, we will see a reduction in server units needed to complete a given job. Admittedly, these are more expensive servers, but even doubling the sales price can’t compensate for a 100x performance gain that reduces the unit count by more than 90%.

The slower growth of big data is further compounded by parallel processing using GPUs. Combined with an in-memory approach, the server count required for Hadoop and other analytics platforms  can drop spectacularly. Since this is the high growth area of IT, the impact will be very noticeable.

On top of other pressures on the server market, we have the advent of containers. This is a technology that shrinks the size of a virtual machine, removing the need to have a copy of an operating system in each VM. This means that a single server can now support 3x or more the number of virtual machines. The containers approach requires no hardware changes while the impact on existing apps and cloud processes is relatively small.

With some lingering security issues just being laid to rest, we can expect a massive move to containers in 2016. The result: Both the public cloud and private operations will delay new server buys as the existing gear handles much more workload.

The pain from unit count reduction is compounded by declining average unit prices. Here again, several factors work against the traditional vendor side of the server market.

Increasingly, migration to the cloud is replacing high-priced in-house servers from traditional vendors with low-cost units from the ODMs. These ODM servers are tightly managed and targeted configurations, but there can be no denying that the ODMs operate on razor-thin margins and severely undercut prices of  the traditional server vendors.

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This is a major drain on market revenue. With ODM pricing at between 30% and 50% of traditional vendor list pricing, this is reflected in ODM unit sales increasing at around 3X their revenue increase.  The ODMs also are moving into the mainstream markets and  making a big impression. SuperMicro is now a “major player” in the Gartner reports and Lenovo, Huawei, Quanta and others will make concerted efforts to garner US market share in 2016.

The success that AWS, Google and Azure have achieved with the ODM approach hasn’t gone unnoticed in larger companies. With COTS being so standardized, it's possible to take a white-box unit from one of the major ODMs and be confident of quality and component and software compatibility. This makes it possible for most IT operations with basic hardware skills to specify units and add in the drives necessary to fill the configuration out. There are also plenty of businesses, from small-scale to high-volume, prepared to do that fulfillment work for a fee.

The white-box model allows IT shops to buy drives from distributors at much lower prices than the traditional server vendors charge. This impacts storage appliance sales too.  Users find that solid-state drives from distributors are cheaper than enterprise disk drives from storage vendors, which should speed up the transition to SSDs in 2016.

We can also expect a surge in used equipment resale during 2016 as units dropped from current operations are given a new lease of life with containers, more DRAM and SSDs. The impact is hard to quantify, but with a lot of CSP gear reaching the end of its 4-year working lifecycle, there is likely to be a glut of used units with around four years of usable life hitting the market in 2016, coming off the cloud boom at the end of the last recession.

In sum, a number of factors will offset server unit sales by a noticeable amount in 2016 and may well lead to a decrease in units delivered. Taken together, the technical factors impacting unit sales such as in-memory databases and containers, coupled with the cloud and white-box transitions, will erode the revenue picture in servers considerably. ODMs will continue to increase revenue share, putting pressure on the traditional vendors in the process.