Just five years ago, the server manufacturing industry was pretty
tight-knit. You only had HP, IBM, Oracle and Dell. Big name brands.
Upstarts might try to get into the server space, but these big brands
will only use their scale to cut their prices and put you out of
business.
Today, the landscape has changed. Quanta, Super Micro and other
hardware companies are eating away a very significant chunk of the
market that was once dominated by the Big 4. On top of that, these
kings have been distracted by other problems, such as getting sidelined
by the cloud server providers.
The Numbers
In May 2013, market research specialist Gartner delivered an astonishing report confirming that HP, IBM and Oracle are losing market share to Fujitsu, Cisco and original design manufacturing (ODM) vendors.
Dell, to their credit, saw the biggest increase in market share,
going up from 21.5% in the first quarter of 2012 to 22.2% in the first
quarter of this year. An increase of 0.7 percentage points might seem
like a small rise, but that translated to Dell’s being the second
biggest server manufacturer, next only to HP by a slight margin.
According to PCWorld, Dell raked in $2.1 billion
in revenues during the first quarter for the server segment. This
number represents a 14.4% increase year on year, making Dell the only
big server vendor that posted an increase.
On the other hand, relative newcomer Cisco reported a 33% increase in server revenues, selling more than 53,800 servers.
Meanwhile, HP and IBM took the biggest plunge both in terms of market share and server revenues.
IBM posted a little more than $3 billion in revenues for the first quarter of 2013.
HP, on the other hand, sold 580,563 servers, a decrease of a
staggering 15.2% from the previous corresponding period when it sold
685,015 units. Its share of the revenues went down to only 25%.
So even when the big-name brands are still lording over the server
space, they are weakening, except for one. Much of this is because of
the rise of ODMs.
Whitebox Servers Gain
What many people don’t know is that most of the servers and/or
assembly parts sold by HP and other top brand names are actually made by
smaller companies. Companies like Quanta, Inventec, Wistron and Compal
supply the big brands with the servers that the latter sell for a much
higher price. So the servers are made by mostly Asian companies for IBM
and HP. IBM and HP put their name on these servers and make a profit
from this.
So what happens when these Asian companies cut HP and IBM out of the deal?
At scale, it delivers tremendous cost savings for the end user, that’s what. This is what Google realized when it started building its own servers years ago, before it started doing it themselves.
This idea is illustrated in the case of Rackspace. For years, the
web hosting company has been sourcing its servers from HP and Dell. And
with more than 90,000 servers utilized, HP and Dell surely made a lot
of money with Rackspace.
Not anymore. The hosting company is now banking on Quanta and Wistron to help build the servers that it designs.
The advantage is more than just cost savings that you get by cutting
out big name brands and paying for a much-reduced price. For example,
Facebook has been using ODM
manufacturers such as Quanta to build the servers that it designed,
making these servers much more compatible to its needs. In doing so,
Facebook also got additional cost savings and energy efficiency gains.
The result? ODM server vendors altogether reported revenues of $434 million for the first quarter of 2013. This represents a 34.5% increase year on year.
The move to ODM manufacturers has created a big gain for whitebox manufacturers. Digitimes reports that both Quanta and Wistron are expected to see a 30% growth in their ODM operations for 2013.
Quanta reportedly sold a lot of servers in 2012. Timothy Prickett Morgan at The Register notes
that the Taiwanese company sold one out of every seven servers in the
past year. According to El Reg, Quanta shipped more than 1 million
server nodes during the year. Definitely not bad for a company whose
forte are contract notebooks.
Another clue as to how these ODM companies are gaining at the expense
of the big brand names may come from suppliers. As early as September
2012, Intel provided us with clues that HP, IBM and Dell might be losing
market share when it comes to servers.
Wired.com’s Cade Metz quoted
Intel’s Diane Bryant as saying that in four years, things have
definitely changed in the server market. Bryant said that three out of
every four Intel processors that were used for servers went to IBM, Dell
and HP.
But four years later, eight different companies were buying 75% of
all server chips made by Intel. Bryant related that some of these
companies were working with ODM companies for their own server
requirements.
Bryant’s revelations definitely paint a decline of IBM’s, HP’s and Dell’s server business.
What Happened?
At least for 2012, the overall server market slowed down, with
shipments weakening by 0.7%. This is likely due to the feeble economies
of European countries. As more and more companies are feeling the
crunch, they would certainly look for a more cost-effective alternative
to their server requirements, whether that’s with used servers or white boxes.
Also, more and more companies are getting into virtualization and the
cloud. As Rackspace has demonstrated, not every cloud provider is
putting its trust on the big brands.
As we have seen with both Google and Facebook, and a slew of big Web
properties, including Amazon, they are more inclined to deal directly
with smaller ODM companies rather than the Big 4. Not only do they get
save money by getting their own servers built by Quanta, Wistron and the
like, but they also get to have the hardware built their way.
The shift is very palpable. According
to Chris Gonsalves at ChannelNomics, Dell warned both Quanta and
Wistron to get out of whitebox server manufacturing. Quanta did not
heed the warning and lost some sales from Dell, which transferred to
Inventec, Hon Hai Precision and Wistron.
Will this trend signal the fall of the big brands in the server
market? Probably not yet. But if the trends continue, the combined
benefits of working with ODM manufacturers just might tilt the scales in
their favor. Much more, if Quanta, Wistron and other smaller server
manufacturers decide to bring their whitebox servers to more
distributors and maybe the broader end-user. Just keep in mind that
these whiteboxes are very similar servers to what Dell, IBM and HP are
selling, but at a steep discount.