White boxes crushing the traditional server market

IDC says big-name server vendors, including HPE, Cisco and IBM, are struggling as no-name white-box vendors—and the cloud—take up the slack

2 data center servers
Credit: Thinkstock

It may not come as much of a surprise, but the latest numbers from International Data Corp. make it official: The server market is cratering. According to IDC, server vendor revenue plummeted 4.6 percent year over year the first quarter of 2017.

The pain was widespread, IDC said, with market leader HPE seeing revenue drop 15.8 percent year over year to $2.9 billion. Number two vendor Dell was the only bright spot, notching 4.7 percent year-over-year growth to $2.4 billion (the growth may have come from Dell’s purchase of EMC’s data center business). But Cisco revenues fell 3 percent to $825 million, IBM dropped a whopping 34.7 percent to $745 million, and Lenovo tumbled 16.5 percent to $727 million.

Blood in the streets of Servertown

There are a number of reasons for the terrible numbers, but a few culprits stand out. 

First of all, many customers may have been waiting for the deployment of new machines using Intel’s Skylake processors due later this year. But longer-term issues, like today’s server customers moving to cloud services, will not fade away so quickly. 

A statement from Kuba Stolarski, research director, Computing Platforms at IDC, put it this way, "We may be witnessing a shift in how workloads are deployed in the future, and what architectural choices will be made around modularity, operating environments, software and cloud services.”

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Basically, Stolarski is warning that the cloud is taking over many tasks formerly handled in private data centers, reducing the need to many enterprises to buy their own servers. In that world, a few hyperscale cloud companies will be the biggest server customers, and that dovetails with IDC’s note that “One customer accounted for more than 10 percent of the servers shipped in 1Q17.” 

Wow!

Revenge of the white boxes

Just as important, those big cloud companies seem more interested in buying cheaper white-box servers rather than expensive proprietary devices. IDC said revenue from the ODM (original design manufacturers) direct group of white-box vendors grew 41.8 percent to $1.2 billion. That group is led by Dell and HPE, but according to Fortune, it also includes Taiwanese contract manufacturers such as Quanta and Winstron, which make devices sold in bulk under other brand names—often using Open Compute Project standards.

Given all that, HPE CEO Meg Whitman hinted last week that the company may reconsider whether it makes sense to continue to sell servers to “tier-one” web companies.

No simple solutions

Here’s the thing, though. The Facebooks, the Googles, the Microsofts and the Amazons are taking over an increasing proportion of the world’s server workloads—and that isn’t going to stop any time soon.

Just as important, while those web giants are leading the way toward white-box servers, it may not be long before more traditional enterprises begin to follow suit. The pressure on mainstream server vendors isn’t going away. In fact, it’s likely to intensify.

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